Understanding and Negotiating Construction Contracts: Top Tips and Considerations
It’s hard to negotiate a construction contract in a way that does not leave a bad taste in your mouth.
Negotiating a construction contract may feel overwhelming.
It doesn't have to be.
Here we will talk about some top tips and considerations before you sign a formal construction contract that will set you up for success.
Flexbase: Keeping Track of Construction Contract Negotiations Is Easy With Construction Management Software
Much of the work in contract negotiation is done long before the negotiations begin.
Flexbase manages your cash flow so you can focus on growing your construction business.
You can send your construction invoice and paperwork to your customers in 2 minutes. Fully compliant with state laws, Flexbase can help you resolve late payments with intelligent reminders to your customers.
By integrating with ...
- Construction ERP
- Project management software; and
- Every accounting software
... you can be organized and ready before the contract negotiations begin and throughout the life cycle of your project.
Can You Negotiate Construction Contracts?
The end goal in any contract negotiation is mutually agreeable terms and conditions.
To come to a resolution, there are many parts of a construction contract that can be negotiated. You have flexibility in the negotiation process to come to an agreement that, ideally, benefits both parties.
Some parts of the contract that can be negotiated include but are not limited to:
- Risk clauses
- Warranties and bonds
- Indemnification clauses
- The schedule and payments
- How disputes will be handled; and
- Inspections
With some give and take, creativity, and preparation, many parts of a construction contract can be negotiated.
How Are Contracts Negotiated in Construction?
The negotiation process begins with the initial bid for the project. Clearly defined roles and responsibilities in the bidding documents set the foundation for a smoother contract negotiation.
It's important to understand the contract clauses that affect you the most.
For example, which contract provisions pose risks to general contractors? These clauses become the focal point during contract negotiations.
If you have the opportunity to see the contract during the bidding stage, you may want to have an attorney review it. They may recommend modifications before submitting the contract with your bid.
Before Negotiating Construction Contracts, Keep These Things in Mind
Understand State Laws
Arbitration and litigation processes vary by state. Before you can start negotiating a construction contract you must understand the state laws regarding construction contracts in the state in which you’re working.
Figure Out What Your Intentions Are
The first step in any contract negotiation is your mindset.
This needs to be defined before jumping into the negotiation process. Make a list, metaphorical or literal, of conditions and provisions that must be present for you to accept the contract.
What is most important to you?
Successful contract negotiation is one where both sides compromise to come to mutually agreeable terms and conditions.
Top 5 Tips for Negotiating Construction Contracts
Here are some construction contract negotiation tips you can keep in your toolbox as you hammer out a refined contract.
#1: Make Your Intentions Known
While you may have an understanding of your own intentions, these intentions need to be made known.
This is the groundwork for contract negotiation.
You are letting the other party know that you expect to have fair terms and that you can only accept the risks that you can manage.
This is also your opportunity to demonstrate that you view the contract as negotiable.
#2: Address Basic Elements Like Cost, Time, and Scope
This is a basic element in construction contracts that often gets overlooked. Many construction disputes revolve around these key issues:
- The project is delayed or over budget
- The scope of work is in question; and
- Payment provisions
To thoroughly review pricing provisions you may want to look for or include these details in a contract:
- Overall contract amount
- Who will be paid
- When it will be paid
- When payment can be withheld; and
- Consequences for improper nonpayment
Contracts should include provisions for project timing. Here are some details that quality contracts should include:
- Provisions detailing relevant dates and timelines for projects and services
- Consequences for late work; and
- Protocols for getting late work back onto schedule
Project scope, or a statement of work, is difficult to define in the contract. When defining the scope of work, break down the project by the who, what, and when, to bring clarity to the scope of the project.
Be sure to use clear and concise language. If construction jargon is used, include a glossary. This ensures everyone has a clear understanding of the terms used in the contract.
One way to define the project scope is to use SMART goals:
- Specific - You may want to think about the answers to the “W” questions: who, when, what, where, and why?
- Measurable - How will you track tangible progress? What milestones and quantifiable goals will indicate if the project is on track?
- Achievable - Are your goals attainable with your team's capabilities?
- Relevant - Do your goals align with a broader objective?
- Timely - Is there a start and end date to different stages of the project?
Requiring sign-offs on individual goals and milestones strengthens the contract. When people sign off and agree to benchmarks, this protects parties in case of disputes.
Changes are bound to happen on any project. A quality contract anticipates changes in detail how they will be handled and priced.
It is important to make sure the contract states that all changes must be made in writing. They must be signed by each party, and the contract should detail that no changes will be made or paid for without a written and signed change order.
#3: Make the Construction Process Feel Collaborative — Both Parties Should Feel Included
Both parties need to feel like they have a say.
Building and maintaining that relationship between the contractor and the client allows both parties to better understand the other. Each side can appreciate the other's risk. When that happens, that risk is factored into the contract and is shared between each party.
#4: Negotiate the Risk Clauses
Indemnity clauses, or risk clauses, deal with the allocation of risks for claims made by third parties.
Indemnification clauses address who will be responsible for claims and damages or whether responsibility will be shared. A well-written contract should address which parties are responsible for what kind of claim, and who is in a position to prevent certain risks.
#5: Negotiate Warranties and Bonds
A lack of warranty and correction provisions can have unexpected consequences for contractors.
One negotiation strategy is to carefully choose how you label repairs. Labeling repairs as warranty work instead of punch list work can affect lien claims.
You may also want to:
- Set a definite beginning and end date for all warranties to limit the warranty scope
- Make sure this warranty limit is set in writing
- Have subcontractors provide equal warranties; and
- Have the largest subcontractors put up their own maintenance bonds
Something else to consider is any separate manufacturer and supplier warranties, and how these will be passed along to the appropriate party.
Top 3 Considerations When Negotiating Construction Contracts
#1: Dispute Resolution
It's important to specify how disputes will be resolved.
Delays in a project are costly and affect the project's bottom line. Identify all possible delays to the project and add in details about the types and amounts of compensation needed.
Here are a few things you can add to a contract to ease the difficulty in dispute resolutions:
- Accept liquidated damages for delays that you cause
- Set limits on the maximum number of days and dollars that you will cover; and
- Add details about the types of compensation and their amounts
Only adding in details about whether or not compensation should be paid is not enough for a thorough contract.
You may want to also incorporate a lawyer’s fees clause.
Construction contracts are best written when they consider worst-case scenarios and have an exit strategy. A breach of contract should be clearly defined and the rights of all parties should a breach occur should be clear.
If your party decides to pursue litigation, you’ll want to recover attorney’s fees and costs.
#2: Contract Termination
Terminating a contract is sometimes necessary.
To ease this process identify possible grounds of termination and procedures to be followed within the contract.
Be sure to include whether one or more parties has the right to terminate for convenience. Perhaps there is no fault of the other party such as the failure to obtain financing. Include in the contract how the final payment, if any, is to be made.
#3: Insurance Policies
This is one of the most common methods of managing and allocating risk in construction projects. well written contracts include provisions addressing what types and limits of insurance each party is required to carry.
Also be sure to include important issues such as waivers of subrogation and additional insured requirements. Insurance provisions, when possible, are best reviewed by a qualified risk management advisor.
Struggling to Negotiate a Construction Contract? Consider Using a Memorandum of Understanding
There are certain situations when it’s just not possible to negotiate an equitable contract before work must begin. In those situations, you can use a Memorandum of Understanding (MOU) to mark the terms to commence work rather than signing a contract that doesn’t benefit you.
An MOU is a preliminary document used to note the approach of the granting of a contract to a party. It is typically drawn up between a general contractor and subcontractor or a project owner.
If you are on a tight timeline, an MOU can be used as a placeholder agreement. In this instance, the MOU will be a one or two-page document that outlines the general terms of the agreement. This allows each party to come to a more formal agreement later.
Flexbase Allows You to Manage Construction Contracts and Communicate Negotiations with Contractors and Customers Effectively
Through clear communication with your customers, you can collaborate throughout the project process.
You can easily and effectively stay on top of your part of the contract demands by using the Flexbase app.
Paperwork and compliance documents are automatically created for you and can be sent to customers in 2 minutes or less which includes but is not limited to:
- Insurance documents
- AIA forms
- Schedule of values
- Lien waivers
- Notarizations
- Prevailing wage
- Insurance documents; and
- Legal notices
Streamline your communication with your customers and better prepare for contract negotiations. Feel confident in understanding your business needs and cash flow.
Ready to save hours of your life? Make your life easier with Flexbase.
