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
Discover step-by-step techniques for avoiding common business negotiation pitfalls when you download a copy of the FREE special report, Business Negotiation Strategies: How to Negotiate Better Business Deals, from the Program on Negotiation at Harvard Law School.
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:
Written by some of the nation’s foremost experts in negotiation, Business Negotiation Strategies: How to Negotiate a Better Business Deal gives you the tools you need to navigate even the stickiest business deals. … Read
“A huge mistake.” “A shot in the dark.” “An audacious move.” Those are a few of the media’s characterizations of wireless carrier AT&T’s acquisition of media and entertainment firm Time Warner, announced on October 22, 2016, for $85.4 billion. … Read
Discover how to boost your power at the bargaining table in this free special report, Dealmaking: Secrets of Successful Dealmaking in Business Negotiations, from Harvard Law School. … Read
Increasingly, business negotiators recognize that the most effective bargainers are skilled at both creating value and claiming value—that is, they both collaborate and compete. The following 10 negotiation skills will help you succeed at integrative negotiation. … Read
Like a contingency, a condition to a deal is a related though far less common deal-structuring technique. A condition is an ‘if’ statement like a contingency, but, whereas a contingency depends on unknown future events, a condition is entirely within the control of the parties involved. … Read
The National Football League’s Pittsburgh Steelers faced a dilemma. Mid-contract, the team’s star wide receiver, Antonio Brown, asked the team to improve upon the six-year, $42.5 million deal they negotiated back in 2012. Brown had risen to become the best receiver in football and believed he was underpaid. … Read
“ABC: Always Be Closing.” That’s the sales strategy that actor Alec Baldwin’s character Blake shared in the 1992 film Glengarry Glen Ross as he tried to motivate a group of real estate salesmen. In his verbally abusive, profanity-laced speech, Blake presented a ruthless model of closing a business deal that ignores customers’ needs and cuts … Read
In negotiation, all the goodwill, trust, and cooperation you create can seem useless if you and your negotiating counterpart disagree about how future events may play out. In such cases, a contingent contract can be a highly useful, though widely overlooked, tool for creating value in negotiation. … Read
I am trying to buy a smaller company in my industry, but the negotiations have stalled over price. It probably won’t surprise you to hear the seller thinks his company is worth a lot more than I think it is. So far we have been talking about doing a straight cash deal, but now I’m contemplating … Read
Start-ups and individual entrepreneurs often encounter challenging conversations when negotiating with potential partners and investors. When you are trying to sell others on your big idea or venture, you face the daunting challenge of convincing them that it’s worth their time, money, and effort. And even as you’re drawing on all your powers of persuasion … Read
“A huge mistake.” “A shot in the dark.” “An audacious move.” Those are just a few of the media’s characterizations of the business partnership agreement between wireless carrier AT&T and media and entertainment firm Time Warner (now known as WarnerMedia). It was the biggest merger of 2016, with $85.4 billion in cash and stock transferring … Read
When two sides seem far apart on a contract dispute, careful and creative deal structuring and negotiating can often result in a winning agreement for both sides. Here’s an example of how that might look in a business deal, based on a question we recently received. “My company, a large multinational, contracts with an outside vendor … Read
Promoting ethical negotiation is one of the steps we can take to reduce the odds that someone will try to deceive you, and is likely to be a more fruitful strategy than trying to improve your ability to detect lies. Negotiators tend to view lies on a spectrum ranging from marginally acceptable to egregious. Certain types … Read
What are business negotiators responsible for in contract negotiation? Many would say they’re in charge of building relationships and new business, crafting creative solutions, and fighting for the best deal possible. Few, however, would say they’re responsible for ensuring that the deal holds up well over time. … Read
There’s usually only one hard-and-fast rule for brainstorming sessions: Don’t be critical. So entrenched is the belief that negative feedback stifles creativity that at product- design firm IDEO, team facilitators have been known to ring a bell when a team member throws cold water on another person’s idea. In negotiation and dispute resolution, the idea-generation stage … Read
In 2017, all eyes were on Washington as a president with a reputation as a dealmaker entered the White House. The following negotiations from the past year, both inside and outside of politics, caught our eye due to the broader lessons they offer business negotiators. … Read
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
Our notable negotiations of 2017 includes hits and misses from entertainment, sports, business, and especially politics, due to a new rough-and-tumble era in Washington. … Read
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
When times are tight, contracts are often broken. These days, parties on both sides of sales agreements are struggling to fulfill their promises, and contract workers are having trouble getting paid by their employers. … Read
These article offers some negotiation tips for negotiators attempting to reconcile two disparate estimations of future events during the course of a negotiated agreement. … Read
Dissatisfied with her first book contract, comedian Amy Schumer canceled it and negotiated a different one. A better strategy? Lessen your odds of disappointment from the start. In 2012, David Hirshey, senior vice president and executive editor of publisher HarperCollins, saw Amy Schumer’s stand-up comedy act and was so impressed by the rising star that he offered … Read
To reach agreement, negotiators sometimes postpone the resolution of certain issues until a later date. We look at how this practice plays out in the real world. Remember the federal debt ceiling talks? In mid-2011, congressional Republicans insisted on significant spending reductions from their Democratic counterparts in exchange for voting to raise the nation’s debt … Read
Help your agreement go the distance If your deal doesn’t work in the real world, it’s not worth the paper it’s printed on. Here’s expert advice on increasing the odds of successful implementation. … Read
Does anyone down there know how to cut a deal?” Senate Republican Mitch McConnell said to Vice President Joe Biden. It was Sunday, December 30, 2012, the day before the “fiscal cliff ” deadline, and the minority leader had phoned Biden out of a sense of desperation, report Patrick O’Connor and Peter Nicholas in the … Read
The problem: You and your negotiating counterpart express differing opinions about the future success, performance, or timeliness of an item or service. A homeowner might be skeptical of a contractor’s promise to complete an extensive remodeling project within six months, for instance. Differing forecasts can breed suspicion and stand in the way of agreement. The tool: … Read
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
Adapted from “Should You Get the Kinks Out?” by Ian Larkin (professor, Harvard Business School), first published in the Negotiation newsletter. You may have heard about the power of contingent contracts in negotiation. As an example, imagine that a supplier has proposed you pay a bonus of 10% if the fault rate for its products is … Read
Adapted from “The Brett Favre Trade: A Win-win Deal in a Win-lose Game,” first published in the Negotiation newsletter. In the middle of the National Football League’s off-season, as legendary quarterback Brett Favre weighs for the third year in a row whether to return to football or accept retirement, it’s worth revisiting the negotiations behind his … Read