Question: Lately I have been hearing a lot—both in the news and on the job—about companies using contingencies in contracts. Given that I sometimes negotiate deals that entail a lot of risk regarding how future events will play out, I am interested to know how contingencies work and how I might use them. … Read More
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What is a Contingent Contract?
Negotiators often try to overcome their differences of opinion through persuasion techniques. A more fruitful approach might be to “bet” on your differing views with a contingent contract.
Negotiators often reach impasse because of their different predictions of how the future will unfold. By negotiating a contingent contract, they can eliminate the need to reconcile those differences.
Additionally, a contingent contract can be a highly useful, though widely overlooked, tool for creating value in negotiation.
What is a contingent contract? In virtually any negotiation, parties must make forecasts and assumptions about the future. Will materials arrive on time for the contractor to meet his deadlines? Will fuel-oil prices remain stable or rise suddenly?
In terms of deal design, a contingent contract often creates incentives for compliance and/or penalties for noncompliance, but also can take the form of insurance, bonds, and other tools designed to reduce risk.
For example, you could ask a contractor to accept a substantial discount if he doesn’t finish the work on time. If his time estimate is honest, he should be willing to take the bet.
In addition to spreading risk and surfacing deceptive claims, contingent contracts have numerous other benefits for negotiators:
- A contingent contract makes commitments self-enforcing by eliminating the need to reconvene or renegotiate when a surprise crops up.
- A contingent contract eliminates the need to come to an agreement. By allowing parties to bet on their predictions, a contingent contract enables parties to “live with” their differences.
Contingent contracts allow parties to reach agreement by managing uncertainty about the future. Just make sure that the penalties (or rewards) you propose are prohibitive (or enticing) enough that they’ll motivate the other party to stay on target.
To find out more and discover how to boost your power at the bargaining table, download this FREE special report, Business Negotiation Strategies: How to Negotiate Better Business Deals, from Harvard Law School.
The following items are tagged contingent contract:
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Negotiators often try to overcome their differences of opinion about how future events will unfold through persuasion techniques. A more fruitful approach might be to “bet” on your differing views with a contingent agreement. By adding incentives or penalties based on future performance to your contract, you protect both parties against risk. … Read More
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So, you believe you’ve done everything you can do create value in your negotiation. You engaged in logrolling, making trades based on your and the other party’s different preferences on particular issues. You brainstormed new issues to add to the discussion, added a contingent contract, and proposed multiple offers simultaneously to identify which your counterpart … Read More
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Adapted from “A Contingent Contract? Weigh the Costs and Benefits of Making a ‘Bet’,” by Guhan Subramanian (professor, Harvard Law School and Harvard Business School), first published in the Negotiation newsletter, August 2006. Contracts in professional sports are often chock-full of contingencies -“bets” that parties place on their different expectations of future outcomes – and former … Read More
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