Construction Contract Negotiation
This is an article written by me a Freelance QS about the pitfalls of signing and negotiating a construction contract. It really should not be left to chance.
Construction Contract Negotiation, Risk Analysis and Contract Management
A good contract can protect both the main and subcontractor and ensure a project runs smoothly. So why do so many subcontractors fail to negotiate or even understand the terms of the contract?
Subcontractors and contracts are not always a comfortable pair. Many subcontractors view signing a construction contract as a necessary evil, firstly to secure work and secondly to get paid on time. Thoughts on what clauses the contract may contain are noted, but fingers are firmly crossed that unread clauses do not come back to bite.
Signing a contract is a serious business, as each and every construction project has the potential to place a subcontractor into liquidation. On this basis alone, they should never be entered into lightly.
The reasons some subcontractors ignore the importance of perusing, understanding and particularly negotiating the proposed contract are culturally plausible. ‘The main contractor will get upset’; ‘the cost of employing a professional to vet the contract is too expensive’; ‘the main contractor will seek the services of one of my competitors if I come across too contractual’; ‘the main contractor said I would not be paid until I signed the contract’. However, what many subcontractors fail to realise is that main contractors see lack of negotiation as a sign of weakness and being unprofessional.
The important point to remember is that skilful negotiation of contracts in all business transactions is the key to business survival. It is imperative that subcontractors minimise their financial risks by identifying the risks of construction contracts and where necessary negotiate. Negotiation is not being to contractual, but rather a sign of professionalism. It demonstrates that your business fully understands the grey areas of the proposed contract and is willing to work with the main contractor to eliminate them. It is far better to negotiate a contract before commencing work than have a protracted and expensive legal dispute at the end. Identifying and minimising financial risk and reducing mutual uncertainty helps to avoid disputes, achieve profit and improve cash flow. This process can only lead to a smoother journey along the construction highway.
The benefits of identifying and understanding your risks are huge. Being contractual and being contractually aware are not mutually exclusive. Being contractually aware facilitates a good negotiator who knows when his hand is strong and when his hand is weak and can thus make educated contractual decisions accordingly.
There are three types of negotiation positions:
- Domination – The party knows his position is strong.
- Subordination – The party knows his position is weak.
- Uncertainty – The party has no idea if he is strong or weak.
A subcontractor should never have ‘uncertainty’, this is the worst position to be in. Understanding your contractual rights and reading and understanding the contract prevents this.
Subcontractors should also be aware of the Housing, Grant’s, Construction and Regeneration Act 1996 (commonly known as the construction act). This act was amended in 2009 to form the Local Democracy, Economic Development and Construction Act 2009
The Construction Act calls for all contracts to have key clauses such as a means to adjudicate disputes, an adequate payment mechanism which identifies when a party will be paid and how, a means to suspend work for non payment and a prior notice of intention to pay less.
All construction contracts must comply with the Construction Act, if they do not then generally the ‘scheme for construction contracts comes into effect’.
The Construction act is the most defining piece of legislation the construction industry has ever been presented with. However few subcontractors know the worth of the construction act. The construction act can help subcontractors with non-payment, late payment, under payment, late issuing of payment certificates, suspension of work and a means to settling disputes. All of which are valuable tools in the subcontractors armoury.
It is also recommended that you insist on an identifiable scope of works, a priced bill of quantities, a construction programme, a detailed trade specification, a list of attendances, and a defects liability period. These clauses are seen as the bare minimum.
Variations to the original scope of work are of course inevitable. Where they occur you need to be clear as to what action the contract demands you take. A contractually incorrect submission of a variation claim can lead to non-payment and the potential loss of a programme extension attributed to complete your extra works. Invariably most construction projects overrun their original contract programme and to loss a right to an extension of time attributed to variations through poorly administered variation submissions could have severe financial consequences. Extra time to complete your works due to variations is a lot easier to prove than trying to claw back time due to delays by other trades or by the main contractor.
Nobody disputes that if a construction project was carried out to the letter of the contract it would probably be delayed by a considerable period of time. It is essential that a good main contractor/subcontractor relationship is based on a mutually agreed understanding of the contract and its parameters and the flexibility of both parties to work within the spirit and not necessarily the letter of the contract.
Understanding the construction contract you enter into is clarity. Working with the main contractor within the boundaries of the contract is sanity.
Ten Tips for Contract Survival
- Read the contract and do not sign it if you do not understand it.
- Understand how the contract requires variations to be notified and priced and act accordingly.
- Know the payment mechanism and the key dates associated with.
- Keep the main contractor informed of costs as they occur and don’t spring any surprises on them, especially at final account stage.
- Monitor your construction programme for progress on a weekly basis.
- Take progress photos.
- Notify the main contractor of any delays to your package at the point they become aware.
- Fill out a daily diary record.
- Agree and sign a Final Account Statement.
- If necessary, take action and advice.
Have you considered our Construction Templates?