Last updated on Feb 20, 2024
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Define your objectives
2
Research the other party
3
Analyze the market
4
Review the legal and regulatory aspects
5
Assess the impact of the contract
6
Here’s what else to consider
Due diligence is a vital step in contract negotiation, as it helps you assess the risks, benefits, and feasibility of the deal. It involves gathering and analyzing information about the other party, the market, the legal and regulatory environment, and the potential impact of the agreement on your business. In this article, you will learn how to conduct due diligence in contract negotiation, and what to look for in different areas of interest.
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- Ravi Nishant ProcurementProfessional ,StrategicSourcing, Contract Management, CIPS Level 4, Certified Procurement…
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- Alex Teodorescu ● Chief Daddy Officer 🦕 ● Business Lawyer ● Teodorescu Partners ● Sochi 2014 Olympics ● JCI European Academy ● Happy
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- Mickael Viglino French Brazilian corporate lawyer (Barreau de Paris + OAB/RJ) | Businesses | Contracts | Aviation
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1 Define your objectives
Before you start your due diligence, you need to have a clear idea of what you want to achieve from the contract negotiation. What are your main goals, priorities, and expectations? What are your deal-breakers and alternatives? How will you measure the success of the contract? Having a well-defined set of objectives will help you focus your due diligence on the most relevant and critical aspects of the deal, and avoid getting distracted by irrelevant or minor details.
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- Aneesh J. Director @ Infrastructure Ontario | Technology Advisory | Business Transformation
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Focusing on Outcomes first aids in the definition of Objectives. In this hierarchy, Outcomes are reflections of what success means for the business i.e., what is the end result that the negotiation will deliver. Objectives provide a more tactical lens - what mechanism will help deliver the outcome. In this dichotomy, Objectives become a topic of negotiations, where during the Joint Solutioning process, both parties can determine the optimal Objectives to achieve Outcomes. However Outcomes are the key anchor points that are inflexible as they reflect the broader desires and vision of the business.
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- Dushyantha Janith Piyadigamage Avocat/Attorney-at-law
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In my experience, the best way to start is with a blank piece of paper. As stated, you start listing your objectives with in a priority order. Afterwards, for each objective, you can add (or not) a suitable alternative. With the listed objectives and their alternatives, start marking those which are essential to you (or your client) and those which can be modified in order to understand where you need to stay firm or concede.
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2 Research the other party
The next step is to research the other party, and learn as much as you can about their background, reputation, financial situation, strengths, weaknesses, and motivations. You can use various sources of information, such as their website, social media, annual reports, press releases, industry publications, customer reviews, and testimonials. You can also ask them for references, samples, case studies, or testimonials from previous or current clients or partners. The aim is to verify their credibility, reliability, and suitability for the contract, and to identify any red flags or potential issues that might affect the negotiation.
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- Ravi Nishant ProcurementProfessional ,StrategicSourcing, Contract Management, CIPS Level 4, Certified Procurement Professional(𝗖𝗣𝗣™) ,Google Certified Project Management Professional.
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Understand in detail the cost drivers of the product or service under discussion. This includes raw material costs, overheads, labor, packaging, transport costs, and profit margin. Have a 360 deep-dive into category or supplier expenditure and spend trends.Try to get as much information on their interests, goals, and pain points in advance. Understand whom you are negotiating with and how their negotiation team is formed.Supplier performance history on quality, delivery, risk, and sustainability can promote discussion around improvement opportunities.
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- Alex Teodorescu ● Chief Daddy Officer 🦕 ● Business Lawyer ● Teodorescu Partners ● Sochi 2014 Olympics ● JCI European Academy ● Happy
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When conducting due diligence in contract negotiation, it's imperative to thoroughly vet the other party by examining their online presence, financial reports, customer feedback, and legal history. This includes analyzing their website, social media, and industry publications, as well as reviewing financial stability through annual reports and insolvency scores. Additionally, consulting legal case file portals offers insights into any legal challenges they might have faced. Soliciting references or case studies directly from the party can further validate their credibility. This holistic approach ensures a well-informed negotiation, mitigating potential risks and identifying strategic advantages.
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- Justin McNaughton Partner @ CAS | 🗡️ Lawyer for Emerging Tech Companies | Photographer / Mountain Biker / Dad
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How I recommend researching the other party:🏛️ Check Legal Status. Verify the other party's standing at the Secretary of State. If it's lapsed, something is wrong.📂 Litigation History. For significant deals, consider a litigation search. This can reveal crucial insights.📄 Pose Critical Questions. In complex agreements, ask pointed questions. M&A deals have formal requests for info about contracts, employees, IP, past disputes, etc.🔎 Seek Full Disclosure. Aim for information from various sources. 🗣️ Consult Former Clients. For smaller contracts, past clients can offer real-world insights.
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- Robert Cogan Continuum Law - Business, IP, Patents - We listen to you and work to provide effective solutions for your business.
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An often-overlooked resource is the Dun & Bradstreet report. It contains more than credit information. A business credit report for one company ranges from $61.99 to $189. One interesting feature is D&B's prediction as to whether the company will remain viable and whether it will be out of business in a year. D&B says that their predictions are reliable. The report also lists business history. The report may often be easily cost-justified.
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3 Analyze the market
Another important aspect of due diligence is to analyze the market conditions and trends that might influence the contract negotiation. You need to understand the supply and demand dynamics, the competitive landscape, the customer preferences, the legal and regulatory framework, and the economic and social factors that affect your industry and niche. You also need to benchmark your offer and expectations against the market standards and best practices, and determine your competitive advantage and value proposition. This will help you set realistic and fair terms and prices, and negotiate from a position of strength and confidence.
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The 3rd important step is to analyze market to study market dynamics, market trends, regulatory framework changes etc.We need to study market for:•Exchange Rate Fluctuations•Brent Crude Oil Prices & Futures•LNG & other fuel prices•Steel & Cement Prices•Import/Export policies•Free Trade Agreements•Labour salary trendsIn case of Oil & Gas industry, for Drilling Rigs, we can subscribe to reports which provide data on rig availability, Client, Contract period, Day Rates etc. For Steel, we can subscribe market intelligence reports like CRU-SPI Report, Preston Steel Tubes Report etc.There is information available on the web. We can gather information & arrive at meaningful conclusions based on study & analysis of market.
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- Akhil Mishra Supporting Businesses with Contract Solutions | Your Go-To Business Lawyer | 400+ Projects Completed
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Understanding the market is akin to studying the battlefield before a strategic move. Analyze market conditions, competition, and industry trends. This insight helps you contextualize your negotiation terms. Benchmark your expectations against industry standards to ensure they are fair and competitive. Recognizing your competitive advantage positions you confidently in negotiations. It's not just about the deal; it's about where you stand in the broader landscape.
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4 Review the legal and regulatory aspects
One of the most critical areas of due diligence is to review the legal and regulatory aspects of the contract negotiation. You need to ensure that the contract is compliant with the relevant laws and regulations, that it protects your rights and interests, and that it does not expose you to any liabilities or risks. You need to check the validity, enforceability, and scope of the contract, as well as the clauses regarding warranties, indemnities, liabilities, termination, dispute resolution, and confidentiality. You also need to verify the licenses, permits, certifications, and insurance policies of the other party, and ensure that they have the necessary authority and capacity to enter into the contract.
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- Mickael Viglino French Brazilian corporate lawyer (Barreau de Paris + OAB/RJ) | Businesses | Contracts | Aviation
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Avoid surprises, take a forward-looking view of due diligence work.It's not just a question of assessing the past situation or current regulations. Think about the future and the purpose of the deal. A short-, medium- and long-term vision is essential. Future risks and liabilities will determine important clauses in the contract, and may have a adverse impact on the deal's economic viability.For example, when buying land (residential or industrial), it is not enough to check regulatory compliance and licenses on the day of the transaction. It is also necessary to verify the potential existence of risks to the use or exploitation of the land.
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- Justin McNaughton Partner @ CAS | 🗡️ Lawyer for Emerging Tech Companies | Photographer / Mountain Biker / Dad
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How I approach legal and regulatory due diligence:📚 Understand Industry Regulations. When entering a new industry, familiarize yourself with its specific regulatory landscape.⚖️ Identify Legal Requirements. Each industry has unique legal obligations. 🔍 Assess Compliance Needs. Highly regulated industries demand more compliance. 📱 Example: Software Development. Buying a software company, like an app developer may have fewer regulatory hurdles.🏦 Contrast with Other Industries. In contrast, industries like financial services or healthcare face more stringent regulatory demands.Don't enter a new industry alone.
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A thorough understanding of the contents of the contract along with its implications is essential.Be precise about the dispute settlement clause(s) with details regarding the Jurisdiction and the Law. If there is an Arbitration Clause, in such circ*mstances one should cautiously opt for the law applicable, the seat of the arbitration and the number of arbitrators and understand its consequences
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5 Assess the impact of the contract
The final step of due diligence is to assess the impact of the contract on your business operations, performance, and goals. You need to evaluate how the contract will affect your cash flow, profitability, growth, reputation, and customer satisfaction. You also need to consider the costs, benefits, risks, and opportunities of the contract, and compare them with your alternatives and objectives. You need to ensure that the contract aligns with your strategic vision and mission, and that it supports your long-term plans and values.
Due diligence is a key component of successful contract negotiation, as it helps you make informed and confident decisions, and avoid costly and damaging mistakes. By following these steps, you can conduct due diligence in contract negotiation effectively and efficiently, and achieve your desired outcomes.
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- Dushyantha Janith Piyadigamage Avocat/Attorney-at-law
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In order to understand the impact of the contract, it is essential to keep in mind that one contract often leads to another if done successfully. Moreover, one partner may also have untapped or unknown ressources (contacts, other fields of intrest, etc.) which they might be inclined to share if everything works out.
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6 Here’s what else to consider
This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?
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In addition to studying market, researching other party, I also suggest the following due diligence:•Study about the history of contracts for same services. Do research about contracts awarded in last 3 years for same services & their performance. Also analyze all the change orders issued & any contractual failures. •Also, analyze the price trends & study any published prices. •Check if same contractor is providing any other services to the company. If they are, check their performance history & if there were any red flags. Also, speak with your contracts colleagues who handled these contracts.•Do Due diligence with other clients of this contractor. With this due diligence, we will be well prepared for contract negotiations.
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- Korinna Poblete Construction Contracts Specialist | CCMAP | MIEAust
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Another important point to consider is to contextualize the contract to the actual works or deliverables you’ll be doing. I’ve been asked to review bulky and long-winded contracts that could have been a simple purchase order; or a major works subcontract that could have been a minor works subcontract. On the flip side, on rare occasions we’ve had clients who did not have any templates of their own and had asked for our own templates to contract upstream. The time and effort wasted in negotiating for significant changes to an irrelevant form of contract could have been avoided by choosing a suitable form of contract in the first place.
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