Contract Negotiation and Management for Commercial Builders 1

Wednesday, June 29th, 2016
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Here are a few insights are designed to help builders stay out of trouble when it comes to contracts.

Although they will seem self-evident to the accomplished, for those who are not on top of the sweating dynamic nature of contractual niceties, they may help demystify a very specialised area of the law.

First, do your homework on your client. Carry out a credit search on the client to determine whether the client has sufficient funding, a history of payment default, debtor inspired judgements or a poor credit rating.

  • If the client is a partnership or a company, try to get director’s or personal guarantees from the client. After all, insurers normally insist that builders provide counter indemnities or personal guarantees as a prerequisite to providing warranty cover.
  • Gain insight into the client’s track record. Find out if the client has a history of disputation or a reputation for not paying.
  • Before signing any contract, read it thoroughly. If any of the contractual provisions are confusing, seek advice from a construction lawyer.
  • Fill out the contract legibly and in an informed manner. Never sign anything that’s not understood. If the contract is for complicated or large scale work, engage a construction lawyer to carry out contract negotiations.

Don’t buy the job

  • Try not to win a job by coming in with an unrealistically low quote. If there is no profit in a job, there is little point in doing it – it would be better to by a fishing rod and go fishing.
  • Be wary of the home-grown contract (documents that are prepared by the client’s solicitors) as these types of contracts are drafted by lawyers to favour the client. Such contracts are often called “take it or leave it contracts,” code for “if you don’t want to take the job, we will shop round until we find a mug that is prepared to sign up.” Unfortunately, there is always a desperado who will sign up literally anything. That’s the other bloke’s look out, but make sure it’s not you. The building industry is littered with the carcasses of building companies that have gone belly up because they entered into oppressive building contracts.
  • Familiarise yourself with the dispute resolution clauses in the contract. Choose the option that meets your needs before you sign up. Remember, if you lock yourself into arbitration, you can’t take the matter to either a court or a tribunal, you will be paying the arbitrator anywhere between $3,000 and $10,000 a day and you will won’t be able to join third parties or co-defendants in legal proceedings.
  • If the contract does not proceed satisfactorily and you need to end it, seek legal advice before doing anything. If you wrongfully terminate a contract, you will be a repudiator and this will not bode well if the matter is litigated. Early in my career, I worked for a contractor trade association and was often handed acerbic correspondence from opposition lawyers stating that the builder had repudiated the contract. Alas, nine times out of 10 they were right because the punters had sent out termination correspondence that paid lip service to the correct contractual termination procedures. The upshot was wrongful termination of the contract which ended up costing the repudiator (the builder) dearly.

Don’t finance the project

  • Never “finance” a job. If the client defaults in payment or “drip feeds,” enforce your contractual remedies immediately. If a payment is outstanding for more than the contractually nominated payment date, react. One of the most common causes of builder bankruptcy is where the builder accumulates outstanding progress payments. The builder is forced to increase his overdraft and before long is in over his or her head.
  • When negotiating a contract, ensure it is clear who administers the contract on behalf of the client representative to avoid confusion. There needs to be a nominated person designated with the responsibility of administering the contract on behalf of the client.

There are those who survive and prosper in the building industry and there are those who crash and burn. The survivors are those who build well but equally importantly get a “high distinction” for contract administration and construction management. Unfortunately, successful contracting is as much about meticulous paper work and contract admin as it is about high quality construction.

Remember, you can be a great artisan and craftsman but if well built product comes in over budget then you will not be long for the construction industry world.

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  1. Branko Mladichek

    A very valuable article from Kim for anyone who is a builder or a trade contractor.
    As a commercial builder I fully endorse it without hesitation however I would like to add that never be desperate for a contract. I know that in practice this is hard especially if you have to let good people go bit the mathematics is: desperation = loss.
    The last paragraph is particularly relevant. The road is littered with "good builders" that have done a great job but went bust because the cost of production was higher than the cost of sales. If you want to survive you have to be neither good or bad but a "successful builder". That is always a tightrope balancing act between risk and reward.