Settle the terms before the price: what to agree while suppliers are still competing

Eighteen months into a three-year IT support agreement, a practice manager asks the provider a reasonable question: can we have a monthly report showing every ticket, how long it took and which ones are still open? The answer is no. Not out of hostility. There is simply nothing in the agreement that provides for it, the account manager has no authority to add it, and changing the contract would cost more effort than anyone wants to spend.

The business could have had that report for nothing. During the fortnight between shortlisting two providers and choosing one, the preferred provider would almost certainly have agreed to monthly reporting, a named technician, a response time with a consequence attached and a clean exit with the business’s data handed back. In that fortnight the provider had one objective, winning the work, and the business had a credible alternative.

What happened instead is what usually happens. The negotiation was about price. It went well, a discount was agreed, and everything else was left to the standard terms. The standard terms were the provider’s. This article explains why the window before award is the most valuable moment in any significant purchase, which terms to settle in it, how to bring supplier departures into the open early, and how to make sure the terms you agreed are the ones that actually apply. It is general information, not legal advice.

Your bargaining power is a wasting asset

Bargaining power in a supply relationship follows a predictable curve, and few businesses plot it:

• Low while you are still working out what you want. You cannot negotiate well over a requirement you have not defined.
• Rising while suppliers compete. Several parties want the work, and each knows the others are in the room.
• Highest between shortlisting and award. One or two suppliers want the work badly, and you can still choose the other.
• Collapsing at signature, then falling further. Staff learn the supplier’s systems, data builds up in their environment, processes are built around them, and the cost of leaving rises every month.

Terms are therefore not equally available at all times. They are cheapest at the peak and often unobtainable soon after. A business that reaches award without a list of what it wants besides price has not saved the negotiation for later. It has given it away.

There is a commercial logic to this. Price is the term a supplier can concede fastest and recover most easily, through volume, variations or the next renewal. Reporting obligations, named people, service standards with remedies and exit arrangements are structural: they change how the supplier must run your account. A supplier will trade structural terms for winning the work while it is still competing, and has little reason to afterwards.

Price describes the good year; terms describe the bad one

When a business hands work to a supplier, it hands over responsibility for achieving part of its own objectives, and it stays accountable to its own customers for the result. The agreement is the main mechanism by which it keeps any influence over that result. Everything it will be able to see, require, escalate, correct or exit is in the agreement, or it is nowhere.

Price describes what the arrangement costs if everything goes as the specification assumed. Almost every other term describes what happens when it does not. It is the second set that decides whether the arrangement survives its worst quarter.

What the terms buy

Grouped by what they protect, the list becomes usable:

Exit terms deserve special mention. Before award, a supplier is being asked to describe how it would hand over if the relationship ended, and most will agree to reasonable arrangements. After award, it is being asked to price its own replacement.

Other matters on the list include warranties and maintenance, payment terms and deposits, cancellation, insurances and guarantees, and liability. Liability caps and exclusions need careful reading: the losses your contracts make you keep article covers reading them as decisions about what your business absorbs.

Settle quality and terms first, price last

The usual order is: compare prices, pick the cheapest acceptable offer, then sort out the contract. A better order is to evaluate quality first, settle the important terms, and only then negotiate price. Price is often seen as the starting point, but negotiating it first wastes the moment when everything else is still available. The choosing between quotes and tenders article covers setting up the comparison so that quality is judged before price is opened.

Before you negotiate anything, write down your alternative: what you will do if this supplier does not agree. A negotiating position without a stated alternative is a request.

Bring departures into the open before you choose

A common problem in larger purchases: the buyer sends out its preferred terms with the request for quotes, and suppliers respond with their own standard terms or a list of changes. If nobody looks at those differences until after the technical and price comparison, the business may choose a supplier and only then discover that the parties were competing on different assumptions. At that point the options are poor: accept weaker terms, go back to the second supplier, restart, or delay.

The fix is to ask suppliers, in the request itself, to state their departures:

1. Issue your preferred terms with the request.
2. Ask suppliers to list every departure, with a reason and proposed alternative wording.
3. Ask them to separate deal-breakers from preferences, so you know which matter.
4. Sort the departures by consequence. One change to liability, intellectual property ownership or acceptance testing can matter more than twenty drafting points.
5. Weigh material departures in the decision, alongside price and quality, rather than scoring every deviation mechanically.
6. Record who accepted each material departure and why.

Be proportionate. The aim is to remove uncertainty that could change which supplier you choose, not to finalise every word before selection. And if you are running a formal tender, the process must stay fair: clarifying a supplier’s offer is different from giving one bidder a private chance to improve it. Where rules apply to the process, follow them and take advice.

Make sure your terms are the ones that govern

Even after careful negotiation, a business can end up with a different deal from the one it thinks it has. A supplier sends a quote with its conditions on the back. The business sends a purchase order with its own conditions. The supplier acknowledges the order on a form with its conditions again. Goods are delivered and paid for. Months later a fault appears, and the two businesses discover they relied on different rules. This is often called the battle of the forms.

Which terms apply in that situation depends on the facts and the law, and the answer is not always which document was sent last. It is not something to work out after a dispute. For any significant purchase, the practical steps are simple:

• Read the supplier’s terms, including the fine print on quotes and order acknowledgements.
• Identify where they conflict with yours, and which conflicts matter.
• Agree in writing which set governs, ideally in a signed agreement with a clause saying which document wins if they conflict.
• Keep the evidence of what was agreed.

Routine low-value purchases do not need this treatment. Purchases that involve safety, critical equipment, sensitive data, intellectual property, unusual warranties or large potential losses do. The matching the contract to the work article covers document precedence in more detail.

If your business is the smaller party signing a supplier’s standard form, the Australian Consumer Law’s unfair contract terms protections may apply to some small business contracts. The ACCC publishes guidance, and a lawyer can advise on a particular agreement.

Three tests before you sign

• The walk-away test. What is our alternative to agreeing, and has anyone written it down?
• The worst-quarter test. Describe the quarter you would least like to have: an outage, a surge in demand, a key person leaving, a regulator’s letter. Then read the draft agreement and mark every clause that would help. If the marks cluster around price and payment, the arrangement is built for the year you expect, not the one you might get.
• The exit test. If we needed to leave in year two, what would it cost, how long would it take, and would we get our data and records back in a form we can use?

A worked example

This is an illustration. An online retailer selling homewares is moving its storage and dispatch to a third-party logistics warehouse on a three-year agreement. It ships about 3,000 orders a month and has shortlisted two providers.

Provider A quotes $4.10 per order and Provider B $4.35. At 3,000 orders a month, the difference is $750 a month, or $9,000 a year. The owner’s first instinct is to negotiate A down further and sign.

Instead, before opening price discussions, the owner and the operations manager spend an hour writing a terms schedule: what they want, what it protects, who will use it, and what they will do if the provider refuses.

• Sight: daily stock reports and read-only access to the warehouse system.
• Standards with consequences: orders received by 1 pm dispatched the same day, with a fee credit when the rate falls below an agreed level.
• People: a named account manager, with notice of any change.
• Time: an agreed go-live date, with the old arrangement kept running until stock counts reconcile.
• Exit: 90 days of transition help, stock released promptly, and order and stock data returned in a standard file format.

They send the schedule to both providers with their preferred terms and ask for departures. Provider B accepts almost everything. Provider A accepts the reporting, the named manager and the exit terms, but its standard terms limit liability for lost or damaged stock to a small amount per carton, far below what the cartons are worth, and it will not change that.

The owner runs the worst-quarter test: a damaged pallet or a stock count that does not reconcile in the busy season. Under A’s terms, most of that loss would stay with the retailer. The owner asks the business’s insurance broker whether stock held at a third party’s premises is covered, and what extending cover would cost. With that figure, the comparison changes: A’s saving is still real, but smaller than it looked.

The owner chooses A, records the decision to accept the liability position and the extra insurance, and signs an agreement that states it overrides the provider’s quote and order forms. Two years later, when a dispatch backlog appears, the daily reports show it within a week and the fee credits apply automatically. None of that would have been available if the negotiation had only been about the price per order.

How this applies to a small Australian business

• Write a terms schedule before the shortlist is issued for any significant purchase.
• Group terms by what they protect: sight, standards, people, time and exit.
• Evaluate quality and terms before negotiating price.
• Write down your alternative before you negotiate.
• Ask suppliers to state their departures from your terms, and weigh the material ones.
• Agree which terms govern in a signed document, and keep the evidence.
• Check your insurance where you accept a supplier’s liability limits.
• Take legal advice on significant or unusual agreements.

Signals worth watching

• Negotiations that consist entirely of price.
• Service levels with no remedy attached.
• No agreed way to get your data back.
• Supplier departures discovered after the supplier is chosen.
• Quotes and order acknowledgements with conditions nobody has read.
• Requests for basic reporting that the supplier can refuse.

Common mistakes

• Treating negotiation as a price discussion.
• Leaving exit terms until the relationship is in trouble.
• Scoring every departure the same, or ignoring them until after selection.
• Assuming your purchase order always wins.
• Accepting liability limits without checking what they leave with you.
• Negotiating without a written alternative.

Frequently asked questions

Won’t asking for extra terms make suppliers raise their price? Sometimes a term has a genuine cost and will be priced. That is useful information. Many terms, such as reporting you can already produce or a named contact, cost the supplier little.

What if the supplier will not change its standard terms at all? Then you know what you are buying. Decide whether to accept the position, cover the gap another way, such as insurance, or choose the alternative.

Is this only for large contracts? The bigger and longer the arrangement, the more it matters. For small routine purchases, standard terms are usually fine.

Can I add terms after signing? You can ask, but the supplier has little reason to agree, and changes usually cost something.

Do I need a lawyer? For significant, long or unusual agreements, legal advice is worth the cost. This article is general information only.

Questions to ask

• What do we want from this supplier besides a price?
• Which of those terms will be unobtainable once we sign?
• What is our alternative if they refuse?
• What departures has each supplier made from our terms, and which matter?
• Whose terms govern this purchase, and where is that written?
• How would this agreement help us in our worst quarter, and how would we leave?

Bringing it together

The interval between shortlisting and award is when a supplier will agree to almost anything except a lower price, and most businesses spend it discussing price. Write down what else you need, grouped by sight, standards, people, time and exit, and settle it before price. Ask suppliers to state their departures early and weigh the material ones in the choice. Make sure the terms you negotiated are the ones that govern, and test the agreement against your worst quarter and your exit. Price matters, but it describes the year you expect. The terms describe the year you might get.

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Source: KEVOS notes, drawing on teaching material on procurement, negotiation, contract types, tender departures and the battle of the forms. Examples and figures in this article are illustrations. This article is general information, not legal advice; refer to the ACCC or a lawyer for advice on a particular agreement.