Contract Negotiations: More than legal words.
Projects are often complicated and require many parties in order to be orchestrated for success. Those parties frequently consist of independent entities, so it’s best to hire them through written contracts. While some see contracting as a laborious procurement task that has lawyers bantering over language, smart project leaders see this process as a perfect time to discuss the details of the relationship and memorialize expectations in order to avoid pain later.
If done well, the process of negotiating an agreement benefits both parties, as it is an opportunity to explore questions, define expectations and protect against poor performance. On the contrary, a hurried and/or poorly crafted contract can result in confusion at the very least, and often escalates into unnecessary tension, unexpected costs and even project failure where only lawyers have something to gain.
At Real Projectives®, we’ve spent over two decades helping real estate buyers (owners, investors and users) negotiate productive contracts with providers (consultants and contractors). Working with lawyers and other advisors when needed, our unique approach focuses on discussion and agreement rather than filling in blanks on a form contract. We think ahead on various scenarios and facilitate adult conversations between the parties. Below are four minimum areas every contract should address for a healthy relationship and successful project.
Carefully define the scope.
Defining the goals and parameters of the project and coordinating a specific scope of services or specifications on products to be provided by each vendor is a most critical first step in contract negotiations. This step should pick up from a prior request for proposal/quotation by referencing a scope of work document or list of relevant documents. Furthermore, it is important to describe expected deliverables, quality standards and where the boundaries of responsibilities and interactions lie – this last part commonly is overlooked and results in many frustrations and claims. How well the scope can be defined will also guide the selection of the appropriate contract form (see our other article on contract types).
Create a sound schedule.
Time is almost always important. In order to measure whether something or someone is late, you must first be clear about what is due when. While this sounds simple, delays can result from slow performance as well as poor scheduling and bad milestone dates, especially when phasing or partial completion is anticipated. Additionally, defining within the contract when deliverables or handoffs need to be completed is essential to accountability and project success. We suggest that timelines factor in reasonable steps and durations for reviews and approvals by you, governing authorities and others. If key dates are so critical that harm is possible to either the business or the relationships, it may make sense to establish incentives and/or damages tied to such dates to reinforce their importance. For efforts that have sensitive interactions or take a long period, it would be wise to include a requirement for the vendor to prepare and update a formal schedule, with obligations to correct promptly when tasks stray away from the plan.
Establish prices that account for variables.
This element normally gets the most attention in a contract, but sometimes isn’t as clearly written as people think. First, state if the price is furnish (supply only), furnish and install, or turn-key (design, furnish, install complete). Next, it is important to define whether the contract price is a firm and fixed amount (lump sum) or variable (cost plus, percentage of cost, unit, etc.). Lump sums are based on a set scope of work and an understanding – so make sure you have affirmed them within the contract and anticipated what issues might arise that would lead to an additional cost or credit (change order). For variable prices, the contract should include solid descriptions of the scope, quantity, assumptions, and unit costs along with the method for calculating the price. We highly recommended setting a cap (sometimes described as Not to Exceed or Guaranteed Maximum Price) on those costs, and designating when and how adjustments will be timely made. There should also be written clarification on whether the price includes costs like transportation, storage, insurances, taxes, and approval fees. We’ve seen instances where responsibility and costs for approvals (permits & inspections) were not well defined and caused busts to both budgets and schedules.
Detail payment terms.
Along with establishing clear expectations and coordinating scope for each vendor, we believe the other primary responsibility of a buyer is to pay vendors on time for performance. We believe there is no better way of keeping the best people on your team than paying them in a prompt manner. While knowing the price is one thing, determining how much is due and when payments will be made are equally important to most engagements. Negotiations should discuss methods for determining the value of work performed/delivered. (a schedule of values broken down to easily track monthly or other milestones is most helpful.) Contracts should also state whether there are any holdbacks (retainage), and what paperwork needs to be included with each invoice (i.e. delivery receipts, work tickets, subcontractor/supplier invoices, lien releases, updated schedule, etc.) More complicated contractor invoices (known as payment applications commonly using a version of the AIA G702/703 forms) should be submitted in draft form (known as pencil copy) and allow time for the design team and owner to visit the site, review progress and ask questions before finalizing.
Upon acceptance and approval of invoices, the contract should clarify whether these will be paid directly by the buyer or be funded from another source (equity partner or lender/bank or government agency) as well as note payment time frames. There are often special requirements that should be spelled out for making final payments, such as statements that work is completed, warranties put in place, documentation of installations submitted, and approvals garnered. If there are lenders or bonding companies involved, the contract should list the requirements for making final payment.
Anticipate and account for risks.
Scope, schedule, price and payment are core elements of a contract. However, no construction or renovation project is without risk. So while discussing scenarios and negotiating each contract, the parties need to define how and who will be responsible for differences – what is insured or bonded, what contingencies should be factored in, or what would be outside the agreement. Common issues to clarify include hidden conditions, changes to design, increases in quantities, supply cost escalation, and new demands from authorities. Again, to protect the interests of our clients, Real Projectives® examines every contract and highlights areas that are not clear or may pose problems for either party. Then we offer suggestions and language to confirm expectations for success and reasonably reduce those issues left to chance. We believe having the occasional difficult conversation up front is much more productive than dealing with a dispute or claim later when stakes and tensions are much higher.
We invite you to learn more about our procurement, contract negotiation and project advisory services. Please comment below, send us an email or give us an old-fashioned call. And feel free to share our post on social media.