Renegotiating contracts: 5 key steps

In any company, changes can happen every day that turn a once-advantageous contract into a poor deal: services that are no longer needed, shifts in the market, and so on. In these situations, renegotiating contracts is not just advisable, it is necessary to stay efficient and protect the company’s interests.

Let’s look at the keys to renegotiating contracts well. To place it within the full cycle, start with what is contract management.

Why renegotiate contracts?

There are many reasons why a contract may need to be reviewed and renegotiated:

• Market developments. New competitors appear, conditions change, and so on. When the contract was signed it was surely a good option, but if the terms are not reviewed and renegotiated as changes come along, you could end up paying more than you need to or receiving less for the same money.
• New regulations or legal requirements. In some sectors, legal changes directly affect what has been contracted, whether for safety, sustainability, data protection or other reasons. If new obligations arise that were not foreseen, it is time to renegotiate and bring those contracts into line.
• Changes in the company’s needs. It is normal for a company’s needs to grow, shrink or shift direction. If you used to contract certain volumes or services and no longer need them in the same quantities, it is time to renegotiate to avoid unnecessary spending or restrictions.
• Underperforming suppliers. If the supplier misses deadlines, quality has dropped or service is not what it should be, renegotiation can be a way to demand improvements and even to add penalties.

1. Review the contract first

Before starting any conversation, it is essential to go through the current contract in detail. Does it include review or renegotiation clauses? What penalties or exit conditions does it set out? When does it expire or renew automatically?

A good practice is to put the contract’s critical dates in your calendar — reviews, renewals, report deadlines — so you can get ahead of them. If you work with contract management software, you will not need to note anything down: the tool will warn you automatically as each key date approaches.

2. Gather the information

Negotiation has to be backed by facts. It is important to gather information such as:

• Market comparisons: prices, terms, references from other suppliers.
• Supplier performance: delivery compliance, service quality, incidents.
• Costs: inflation, exchange rates, transport, energy and so on.
• The impact of the current contract: how much is spent, what is actually being used and what is not.

As a tip, we recommend involving every department that benefits from the contract, so you get a complete picture of how the goods or service are really being used.

3. Define the goal of the renegotiation

Not every contract needs a complete overhaul. Sometimes only one part needs renegotiating: prices, deadlines, exit conditions, invoicing arrangements, penalties…

Before sitting down to talk, you need to be clear about:

• What do we want to change?
• What are we willing to concede in return?
• What is the minimum scenario we would accept?

This analysis avoids improvising during the negotiation and keeps the focus on the company’s real interests.

4. Look for mutual benefit

An effective renegotiation is not approached as a tug of war, but as an opportunity to adjust the contract so that it keeps working for both parties.

Even where there have been breaches, you should try to handle the negotiation professionally. Taking a defensive or aggressive stance can create more problems than it solves.

5. Formalise the changes

Once the new agreement has been reached, it has to be formalised properly. That can be through an addendum to the existing contract or through a new contract.

Involve the legal team so they can review the changes, make sure both parties sign, and file the new contract where it belongs so you keep it under control.

Renegotiating contracts is essential to keep agreements in line with the reality of the business. With preparation, data and a collaborative attitude, it is possible to improve the terms of a contract without damaging the relationship with the supplier, and to put your company in a better position.