Read this before you sign your next construction contract
What keeps you up at night?….
Risk, Liability, Cash Flow, Deadlines, Resources…..
A number of these items of concern can be mitigated by a thorough understanding of the Agreement that you’re signing up to. It is critical in this modern time that as Agreements are getting larger and more complex, you understand what you are getting your company into. There is a growing trend to pass on as much of the risk down through the project chain as possible with fancy terms like ‘back-to-back’ and ‘risk-transfer-vehicle’ becoming common terms in our industry.
With a record level of infrastructure and construction currently underway, there is a temptation to fill company order books with a lot of work to ensure resources are productive and utilised. With this comes risk; as becoming busier will require more resources and the ability to adequately administer these agreements becomes draining on profitability. Ask yourself, as a business what will it cost you if your payment terms of 30 days suddenly becomes 90 days? Can you afford to carry the overdraft of this? The costs of a review and negotiation of terms can be as little as a few thousand dollars. The costs of pursuing claims through Adjudication and beyond can run into tens or even hundreds of thousands of dollars.
It is therefore critical that YOU READ the Contract documents that are being presented to you and obtain an independent professional opinion if you don’t understand any of the sections. There are many examples of cases of companies signing up to what they thought was a good deal only to realise that there are clauses that will either delay them being paid or impose an unfair penalty on them for not being able to complete by the proposed completion date, even if it was caused by others. The ability to negotiate the terms of the Agreement is strongest at the beginning of the project, BEFORE YOU SIGN. It is critical that the concept of “Offer” and “Acceptance” is properly exercised and that you don’t find yourself providing an offer, only to be provided a counter-offer that looks like acceptance but really isn’t, where you are providing acceptance and not the Client.
After many years of being involved in Infrastructure and Construction, there are a few key items that keep coming up through our involvement in commercial works that need to be understood addressed at the beginning of the project, even after you sign which are:
- Scope – Needs to be clearly defined in the Agreement with any Exclusions and Departures also clearly stated. Ideally, if you can have your proposal added to the Annexures of the Contract and nominated in the Order of Precedence this will put you in a good position.
- Program – Ensure you obtain a copy of your client’s programme and clearly understand the critical path, ask yourself, where are their pain points going to come from?. It is then important that you prepare your own programme to reflect the Work Breakdown Structure of your scope and have this approved by the client as the baseline programme.
- Cap on Liability – Should be limited to a reasonable amount that you could be responsible for and which could be covered by insurance or some other means that won’t put your company into hardship.
- Damages – Should be a genuine pre-estimate of cost (no more that 0.25% of the contract sum per week) capped at 5% of the contract sum. Liquidated Damages should be the extend of the recourse, with Consequential Loss and General Damages clearly excluded.
- Variations – Ensure they are approved prior to commencing works. It is much easier to have them approved prior to the works than trying to chase approvals after work is complete.
- Delays – Be very clear on the mechanism for claiming these and ensure that your contract has the ability to claim not only additional time but also additional cost.
- Security – Ensure there are clear mechanisms and timeframes for its return. If you are supplying Bank Guarantees, out an expiry date (6 months after its contract term) onto it so that if it is lost it can be cancelled.
Remember, if you don’t understand something in the agreement, seek independent advice and don’t just sign because you think it is a good deal. Avoid the “relationship” trap to get the next project. Many “good deals” turn bad quickly if not documented properly and the risk will be with you if it turns bad.