While contractors are fearless when it comes to the physical challenges associated with the job, one area they are often reluctant to tackle is negotiating contract terms and conditions. They worry that by challenging some terms, they will lose work to a competitor, or they feel inexperienced in the art of negotiation and ill-equipped to successfully broker a deal. However, becoming an effective negotiator is a key to success and profitability.
The following tips explain why negotiating is so important, and how a contractor can be more successful. Some of the most common reasons why contractors typically do not successfully negotiate over impactful terms in contracts are listed below.
- “I don't know how.”—We all negotiate on a daily basis: with our spouses, children, employees, friends and many others. If you have ever purchased a house or car, you have had to negotiate—otherwise you would have paid full price and ended up broke! Everyone knows how to negotiate on some level.
- “If I try to change the contract, I will lose the work to a competitor.”—This is common excuse completely ignores the fact that good contractors build the projects and are in demand by owners. Acknowledgement of the value that the contractor brings to the project provides leverage in contract negotiations.
- “I don't have the tools to negotiate.”—This can be corrected by applying some concepts shared in this article.
Negotiations begin when contractors realize that all contract terms have consequences for profitability based on the potential for increased costs, liability through risk-shifting provisions and the possibility of additional revenues for changes or claims.
For example, a clause that allows “no damages for delays” eliminates the ability to receive extra funds due to delay damages. In another instance, terms involving the schedule, sequence or duration of work—all of which involve logical concepts decided when the estimate was made and the bid submitted—may need to be adjusted as projects encounter practical obstacles. Successful negotiation of these details could result in extra cash in the contractor’s pocket. Here are some basic tools for negotiating construction contracts:
Clearly state on the bid form a precondition for acceptance of the bid that the parties must reach “mutually agreeable terms and conditions.” This language sends a message that you intend to negotiate fair, equitable terms and will not accept conditions that shift most risks to the contractor, such as broad form indemnification.
This approach also creates a barrier to contract formation so the contractor cannot be “bullied” into signing an unfair, one-sided contract simply because the owner relied on your number.
Propose the use of the Consensus Docs 200, the standard agreement and general conditions between owner and contractor and Consensus Docs 750, a standard form of agreement between contractor and subcontractor. Although relatively new, Consensus Docs have been endorsed by leading owner, general contractor and specialty trade contractor organizations, including AGC and COAA, as a fair and equitable form for both owners and contractors.
These forms serve as a resource to allocate the inherent risks in construction projects, as well as promoting collaboration of highly-productive teams as opposed to adversarial parties. By suggesting the use of these form contracts, the contractor is signaling that the goal is a team-centric approach.
Alternate approach to negotiations
Negotiations can take many different forms. Often, a subtle approach is most effective. Some contractors use a three-step method to achieve productive contract negotiations.
- Condition bids on “execution of the Consensus Docs 200 or other mutually agreeable terms and conditions.” This begins the negotiation process by sending a message to owners that a fair and reasonable contract is the goal.
- Have a contract administrator or construction lawyer review the contract proposed by the owner and identify five or six of the most onerous terms to be modified.
- On the contractor’s letterhead, draft an addendum to be incorporated and made part of the contract. Additionally, request a meeting to review the proposed revisions to work toward a “meeting of the minds.”
This reasonable, professional approach to negotiating terms and conditions provides owners with a clear idea of which contract clauses are viewed as unfair, and it leads to meaningful discussions designed to avoid unnecessary disputes during the project. Although unlikely to obtain all desired revisions, it is possible to make several changes. This approach also informs the other party that you are knowledgeable regarding the importance of contract terms, and are willing and able to work as a valued team member.
Negotiations are a fact of everyday life. For contractors to be as successful and profitable as possible, they have to feel comfortable with the tools and opportunities available to negotiate. Most importantly, contractors have leverage in the negotiations and the ultimate choice. If unable to obtain sufficient revisions to the contract, they have the power to walk away from the project after doing a thoughtful, risk-benefit analysis.