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contingent contract

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.

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7 Tips for Closing the Deal in Negotiations

Posted by & filed under Dealmaking.

“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 7 Tips for Closing the Deal in Negotiations 

Entrepreneurs: Prepare for Challenging Conversations in Key Negotiation

Posted by & filed under Negotiation Briefings Articles, Negotiation Skills.

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 More 

Taking the Plunge: How a Controversial Business Partnership Agreement was Born

Posted by & filed under Business Negotiations.

“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 More 

Dear Negotiation Coach: How Can I Use Deal Structuring and Negotiating to Resolve an Impasse?

Posted by & filed under Dealmaking.

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 More 

Negotiation research you can use: When Criticism Helps— and Hurts—Brainstorming

Posted by & filed under Negotiation Skills.

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 More 

A Contingent Agreement Can Allow Negotiators to Agree to Disagree

Posted by & filed under Negotiation Skills.

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 

Promoting Fair Outcomes in Negotiation

Posted by & filed under Negotiation Skills.

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 Promoting Fair Outcomes in Negotiation 

To Reduce Post-Deal Regret, Take an Analytical Approach

Posted by & filed under Dealmaking.

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 More 

Negotiation Skills: Should Put Off What You Could Negotiate Today?

Posted by & filed under Negotiation Skills.

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 More 

Negotiator toolbox: Capitalize on differences

Posted by & filed under Business Negotiations.

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 Negotiator toolbox: Capitalize on differences 

Don’t rush into a flawed contract

Posted by & filed under Business Negotiations, Daily.

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 Don’t rush into a flawed contract 

Get the Kinks Out

Posted by & filed under Business Negotiations, Daily.

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 Get the Kinks Out 

The negotiating QB

Posted by & filed under Business Negotiations, Daily.

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 The negotiating QB