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By Duane Craig
August 14, 2016
Perhaps you are skillful at negotiating construction contracts, but why settle for that? Why not take your negotiating skills to the “artful” level? When you master the art of construction contract negotiation, you move beyond contracts that you can live with, to contracts designed for you that lean in your favor.
The most successful contracts get as close as possible to a win-win position for each party. Otherwise, someone leaves the relationship, or ends the project, with a sour taste in their mouth. This just leads to resentment, and no future business or referrals. A fair contract protects both parties’ interests while ensuring they each accept the risks over which they have control. For general contractors, there are specific contract clauses that affect risks. Knowing these, and how to negotiate terms, moves your contract negotiation skills from skillful to artful. But, it all starts before the contract award.
Make your intentions known right from the start by including specific conditions on the bid form that must be met for you to accept the contract. The broadest of these is a stipulation that you want to reach “mutually agreeable terms and conditions.” This lets the other party know you expect to have fair terms, and to only shoulder the risks you can manage. This clause also opens the door for contract negotiations, and reduces the chance that the other party expects you to sign whatever contract they place in front of you. You want it understood that you view the contract as a negotiable instrument.
Once the groundwork is laid for negotiation over the contract terms, you can address clauses that pose problems for you, even after accepting the contract. If you have the advantage of seeing a contract during the bidding stage, you can have legal counsel review it and recommend terms for modification, before submitting those with your bid. Whenever you review contracts, there are widely used clauses to focus on that traditionally stack the deck against the general contractor. But, by knowing them, and your options for modifying them, you can keep the balance.
There are key contract provisions posing risks to general contractors that need negotiation. Since the scope of work often becomes contentious as projects move forward, this is a good area to initially focus on. Ask for the owner to expressly warrant the design and construction documents, or to warrant the adequacy and completeness on the design, and include the warranty in the contract.
Many contracts include indemnification clauses that don’t necessarily provide the protection contractors are seeking. Generally, you only want to indemnify those items that are insurable. It is especially important when viewing these clauses to include legal counsel because of the differences in their enforceability from one jurisdiction to the next.
When it comes to warranties and bonds, there are many moving parts, and they often involve more entities than just yourself. One negotiation strategy is to try to set a definite beginning and ending date for all warranties. You should also be careful about how you label repairs because carelessly describing repairs as warranty work, instead of punch list work, can affect lien claims. Other strategies include having subcontractors provide equal warranties, with the largest subcontractors putting up their own maintenance bonds.
It is also vital for the general contractor to have full control over the schedule. You need to have the flexibility to change the schedule as needed, and should therefore negotiate for sole and explicit contractual authority over it.
There is also a tendency for contracts to have vague payment terms. This is especially true for payments to subcontractors, and these vague terms cause conflicts that often eventually lead to litigation. Fylstra says common payment provisions such as “pay if paid” and “pay when paid” favor different participants. Subcontractors prefer pay when paid while general contractors prefer pay if paid. Since all payments ultimately flow from the owner, general contractors are best served by a pay if paid clause so they don’t have to make subcontractor payments until owners pay.
And, to avoid conflicts with changes, contractors should put changes in writing and use a formal request process for approvals.
Insurance policies come with many variations of coverage, have variable limits of liability, and don’t always provide enough protection for unforeseen events. General contractors must closely study the insurance coverages of their subcontractors, which often don’t indemnify the general contractor.
They should also look for the risks subcontractor policies cover and the limits of liability. But even before this, general contractors should specify the exact coverage required for each subcontractor’s performance on the contract.
Other key considerations include specifying how disputes will get resolved. Arbitration is often more costly than filing a lawsuit, depending on the jurisdiction. Delays can have a large effect on the schedule, and also on the contractor’s bottom-line, making them an important item for negotiation.
The goal should be to include all possible delays not caused by the contractor, and to focus on the types of compensation and their amounts instead of just whether or not compensation should be paid. Accepting liquidated damages for delays you cause, but with set limits on the maximum number of days and dollars, is a cooperative way of handling those types of delays.
Contract negotiation involves a little give and take on behalf of both parties. You make it an art when you first understand the contract clauses that affect you the most, and then through compromise and creativity in negotiations with the other party, you end up with a contract that serves both of you, and the project.
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