Contract Negotiation and Redline Contracts – Step 3 of the Contract Lifecycle
If you’ve ever had a bad experience trying to redline a contract, you might prefer to steer clear of the process altogether. Unfortunately, this is almost always a necessary step in contract negotiation.
So let’s look at how to redline contract details effectively. Or at the very least, how to avoid endless rounds of versions, and discussions!
Basics of Redline Contracts and Documents: What is Redlining?
A redline contract is one that has been edited by one or more parties. That change is made with a different color ink (red, black, or blue) than the original one. Redlining includes making changes to terms, the order of each section, whether a section should be omitted, and grammar edits.
Redlining is the stage in the contract process that occurs before any party signs a document or contract. However, contract negotiation terms can occur before and while you’re drafting a contract.
The process is not unlike researching, outlining, and writing a large report. If you want to avoid a lengthy redlining process, prepare the details and workflows first.
Contract negotiation and contract redlining are the third stage of the contract lifecycle.
Here are all the stages of the Contract Lifecycle:
- Drafting a Contract
- Internal Approval of the Agreement
- Contract Negotiation (this article)
- Signing the Contract
- Securely Storing the Agreement
- Tracking Contracts and Documents
The redlining and contract negotiation process falls just after the contract drafting phase and the internal approval workflow. After a redline contract and negotiation, you’ll manage the contract through electronic signature, contract storage, and lastly in tracking deadlines and contract renewals.
How the Contract Redline Process Works
At times, redline documents can be complex. Redlining can involve multiple parties, multiple changes, and multiple versions.
Software such as Microsoft Word is a common choice for working on a redline contract, but not necessarily the easiest solution. A more efficient option for contract negotiation is contract management software.
Redlining in the modern era is mostly done with two side-by-side versions of the same contract. One is the original, and one is the edited version with redlining. Parties then collaborate on the edited version to reach a clean, final copy.
Tips for Success in Contract Negotiation
The best way to limit unnecessary redlining is to take these four steps before you dive into drafting the document:
- Gather specific details for key terms
- Ensure all parties review these details
- Review terms with Legal
- Agree to the terms
Unfortunately, once a document is signed, errors that aren’t caught — but that are still legal — can be upheld. So, software with features like version tracking and real-time editing that works to solve some of these oversights is invaluable.
According to upcounsel, it’s a good practice to have your Legal team draft the contract. But using contract management software can help lower risks and keep you compliant.
Seek to keep the process streamlined to one to two designated editors that represent each party.
Who helps to redline contracts?
The Contract Drafter
The person who actually draws up a contract is typically either your attorney, a contract manager, business owner, project manager, or the person responsible for landing the deal. This is the main editor, alongside Legal. This person should be responsible for editing grammar, and assuring the terms are agreed to and correct.
Legal should only be responsible for reviewing whether the contract is enforceable, and revising any terms that are not legally viable. They are crucial to the contract redline process.
The executive team, business owners, or department leads can all be decision makers in the process. Determine who has final decision making abilities first. This is a crucial step to making negotiations smoother and faster.
Stakeholders include everyone listed above, as well as team experts, such as procurement analysts, financial analysts, or researchers.
The most important aspect is how you manage the workflow between these parties. The process should be clear, and allow enough room for all parties to offer feedback.
Additionally, always communicate the expected time commitments for each party to provide revisions.
Do’s and Don’ts in Contract Redlines and Agreement Negotiation
The biggest risk in contract negotiation can happen in the redlining process.
Redline contract risks include:
- Formatting problems
- Information Security issues
- Version confusion
- Tracking errors
Formatting issues crop-up when one party has made a change, but compatibility between versions changes the format.
In addition, tracking and accepting changes with a redlining tool can result in data security problems. If you’re not careful to delete internal revision information, you can send sensitive information to other parties.
To add to this, using email with software like Word can result in a lot of confusion about which version is correct.
Finally, with a redlining tool, you should make sure you’ve tracked all the changes, so every party can easily see the revisions.
All of these issues can result in a long negotiation process, and make the contract hard to read too.
- Track formatting changes
- Use contract management software that ensures proper version control
- Make sure to omit sensitive data before you send a revision
- Use email for sending versions
- Work with incompatible document formats
- Make it hard to read with multiple revisions
Step-By-Step Contract Redlining
Okay, so we have covered some general recommendations for contract negotiations. Now, let’s get a little deeper and go over the five steps of redlining in detail.
First, do your preliminary research.
As with any negotiation, each side wants the best deal. Both parties want to ensure the terms are clear and beneficial, the right amount of risk is assumed. A well-negotiated contract is also the foundation of a strong, lasting relationship, an added bonus to a smooth negotiation process.
Before the negotiation even starts, doing preliminary research is crucial. Knowing the regulations, best practices, basic industry practices, and the history of the other party elevates the level of professionalism. Further more, it gives an organization the reputation of being knowledgeable and easy to work with. Coming to the negotiations prepared with reasonable requests promotes good relationships both now and for the future.
Involve your Legal team early.
Obviously, Legal needs to be included in any redline contract process early and often. While many organizations think of the legal team as the “rule-keepers” of the organization, Legal can actually be one of the greatest allies in the negotiation process. Legal can look at contracts to ensure they are compliant and contain all the necessary information to avoid liability down the road. They can advise on wording, be a second set of eyes, and provide valuable legal knowledge that will help create the best contract possible.
Another important aspect of legal advisors is their ability to understand and identify what areas might have been left out of a contract or even just inform on the contract redline or negotiation discussions. With their unique perspectives and legal knowledge, they can keep an eye out for any missed clauses or terms throughout a contract.
Collaborate with others.
In addition to thorough collaboration with the legal team, involve the rest of the team as well, whether it is Procurement, Operations, or Sales. With multiple people reviewing one document, it decreases the likelihood that it will contain mistakes or compliance issues. Additionally, it gives team members the ability to share and weigh in when they have more expertise in a subject than others.
However, keeping all these inputs organized can be difficult. As stated earlier, it’s important to make sure there is a system in place to receive feedback and edits. With everyone commenting and collaborating in one tool, rogue documents are less common, edits and changes are instantaneous, and the final version is more easily consistent.
Communicate contract redlines and negotiations effectively and efficiently.
After internal edits and Legal review, the negotiation really starts. Communication is key in this phase of the process. A change may seem unreasonable or even offensive if it’s not clearly explained. In the past, larger changes often involved phone calls or in-person meetings. However, in today’s global economy, this isn’t always an option.
With centralized negotiations in the Cloud, entire teams can view and add to discussions and edits. It’s much easier to explain reasoning through comments where everyone can see the original draft. More than that, the entire record of every conversation is in one place. Obviously, this makes it easy to go back and see exactly who said what, eliminating any vague questions or disagreements. Communication in the Cloud is efficient, as each team can review the document when it is most ideal for them. With the growth of international business, it is likely in the middle of the night for the other party.
Finally, be prepared to walk away!
It may seem counterintuitive that after this entire process, there’s a potential for no deal to be made. Yet it’s true in every negotiation. Sometimes the redlining may start to get increasingly unfavorable, or both parties simply can’t agree.
Before signatures, negotiations can still come to a halt and either party can walk away. While it may not seem ideal, breaking off negotiations and walking away from a contract is beneficial. At any rate, it is better than getting into a deal that would only cost a company money, time, or resources in the long run!
Helpful Contract Redline Tools
What happens if multiple parties, revisions and redlines are unavoidable? Fortunately, these days there are much better tools for that!
Redline tools can help you identify multiple party’s revisions by color coding. That way, you can see each version alongside the next.
Helpful tools also include the ability to comment, publicly or privately, to keep from too many redlines directly on the document. Likewise, easy version tracking is also a must.
What’s more, redline tools can allow you to upload any kind of document format to curb formatting errors, so everyone’s working on the same format type.
If you’re more comfortable working offline, you can continue with offline redline contract capabilities! Then, you can upload the version and continue to track changes within the system.
Redline tools make it easy to accept changes, or reject them, and track these changes. Even better, you can authorize who is able to make these changes, and allow an unlimited number, or a designated number of parties to view the process.
You can do all of this in real-time, to collaborate remotely, but also privately and securely.
Conclusion and Free Resources: Contract Negotiation and Redlining Made Easy(-er)!
Hopefully, our step-by-step instructions and recommendations have you prepared to redline contracts. There is a lot to consider in these negotiations!
Redlining a contract might always include some degree of difficulty. But knowing your software, and using effective, connected tools, results in fewer errors, and faster time-to-signature.
In summary, remember:
- Keep all versions in the same secure place with contract management software. Clients don’t need to remember which version was which because of the comparison tool.
- In many negotiations parties never meet. Contract management software provides you with all the tools for successful remote negotiation.
- Speed up your sales cycle with pre-approved clauses and a clause library.