The negotiations at the outset of a project, are often seen as a game of ‘one upmanship’; one party seeking ‘wins’ at the expense of the other.

The simple allocation of risk that obtains from the acceptance or transfer or one obligation or another, is simply just another notch on the bedpost, a gain that is absent of any realisation of what is truly occurring.

Whilst the above is a frequently held view, I have for a long time, seen this phase of a project very differently.

The two entities involved, client and contractor are often, for the first time embarking on a lengthy and complex relationship, governed by terms and conditions of contract that will have a significant bearing on how things progress at that most crucial stage of any project, i.e. when things go wrong.

Oftentimes, the client will be lay, unused to terms and conditions, unused to the process and seeing themselves as the all powerful ‘he who pays the piper’.

The reality whether the client is lay or experienced is very different.

Lay clients often see transfer of risk as a goal to be sought whereas more experienced clients understand the broader view.

Firstly, equitably, simply because the client pays, does not make them the arbiter of all issues that arise under a construction contract, for several reasons; one, it is a contract, there are two way obligations extant on each party for the duration of the project and often beyond its physical completion.

Two, the relationship and those obligations are governed by law, settled case law in most instances, i.e. you can have your own way as long as the judge agrees with you!

Thirdly, payment provisions are now prescribed by robust legislation, The Construction Contracts Act here in NZ and similar in Australia and the UK and late or non payment is swiftly dealt with.

It’s also worth bearing in mind that the contractor is at an inherent disadvantage; the company has undertaken work, largely these days through sub contracts, typically on a tighter payment timescale than the one they might be on with the client, and payment for those goods and services is in arrears.

There aren’t many supermarket chains that will allow you to buy your food and pay for it 20 days later!

Ego can often play a part in these discussions and clients’ views can be subverted by other advisors however well intentioned the client might be and it can be difficult for a client to challenge the view of experienced advisors. Notwithstanding a genuine intent to protect clients, at the start of this relationship contractual and legal advisors frequently adopt an adversarial approach both in word and subsequently in deed, which can ultimately backfire.

I have yet, on a large complex project, not had to rely at some point, on the contractor to get me/client out of a hole but to be able to have that discussion, or call upon that favour, it’s a bit a like a bank, you have to put your currency in before you can take it out.  The NEC (Engineering and Construction Contract) puts is quite succinctly whereby it obliges the parties to adopt a spirit of ‘mutual trust and cooperation’. It is by far the better way to approach both a project and contract negotiations.

I would also advocate that the parties look beyond the immediacy of the contract to the point in time at which the risks allocated may materialise and the context in which they are initially priced.

Ground risk is a big one. Or rather unforeseen ground risk. This is one that contractors frequently seek to avoid and which the client frequently seeks to transfer but working on the assumption that the contractor is competent and the administration (and terms and conditions) are fair and reasonable, I’d argue it is better that the client takes the risk.

If the ground conditions are uncertain and the risk is allocated to the contractor, then the risk will be priced and priced high and should it not materialise, then it equates to windfall profit.

However, if there has been a reasonable site investigation undertaken, then the contractor can price the work based on the known entity and unforeseeable changes, are typically a ground for a variation so he is protected and the risk lies with the client. In the end it’s the client’s risk to bear and transferring it doesn’t really advance the cause.

It’s arguable that the contractor can, knowing the risk is the client’s, still load the price but in so doing it embraces the risk of tendering itself out of the job!

The risk of not finishing on time is typically one that belongs to the contractor, not unreasonably, being it is they who are (predominantly) in control of the drivers of this risk and most contractors accept this fact. The debate therefore hinges on the magnitude of the cost they bear should they deliver late, i.e. the liquidated damages figure.

For a long time it was settled case law that the damages had to be a genuine pre estimate of the loss or they would be disallowed as penalties. That is no longer the case but, in the interests of a good working relationship the level of damages sought, should be in some way proportional to the loss and it is a risk that if not reasonably allocated will result in mitigation in terms of $$$ being added somewhere in the tender.

Some are a bit easier to agree.

Most contractors boast of their commitment to quality so the stringent imposition of standards of test, inspection and acceptance of work is a hard argument to resist.

Another negotiating nugget is the staged awards of contracts, the latter predicated upon satisfactory performance of the former, either based upon measured metrics (KPIs or KPAs) or simply just a subjective view.

However it goes, it’s not a zero sum game, both parties should feel they have a balanced contract, reflective of their respective abilities to manage risk and with a bit of luck and some collaborative behaviour, that should see them through to a conflict-free resolution.