As counsel to companies involved in construction at all levels, I routinely participate in the negotiation of the terms and conditions of my clients’ construction contracts. I consider this a smart business practice because a small amount of time and resources invested in discussing the terms before a project begins can avoid much larger – and more expensive – conflicts after the project starts. Practically speaking, this should be the last step though. Consideration of a number of other interrelated things is often necessary before the contract negotiation even begins.
Contracts are nothing more than an attempt to allocate risk on everything from non-payment to work site injuries. Any intelligent plan or contract will properly address the risks for a particular job, so companies should start the process by identifying them. Next, figure out what entity or person is in the best position to control those risks and determine who actually controls them; and understand there is a difference. The party that controls the risk is not always the one most able to do so. Typically, the company that has the greatest ability to control a risk should bear it.
After the risks are catalogued and quantified, companies can more easily decide how to allocate them. Distribution of risk is primarily about control. A company taking responsibility for a certain part of a project must determine how to best mange that potential exposure. This dynamic is, in part, why identifying those who are in the best position to control the risk is so important. It is also why consideration of how the risk can be controlled should be part of that same discussion.
The contract language is only one part of risk management. Bonds and insurance can be purchased to address completion, payment, and casualty loss issues. Sound internal safety practices and corporate controls on procedure and finances also help. Even things as simple as the nature of the relationship with others on the work site, the personnel chosen for the project, and the equipment to be used can impact how risk is managed. These considerations are some of many that impact the contract and how you negotiate it.
Every worksite presents its own challenges and should be treated accordingly. Don’t be lulled into thinking there is a “one size fits all” plan for every project. Variations of prior plans can be a good place to start, but the same structure should not necessarily be used on every occasion. When you start preparing for the next project, think bigger. It will help you plan your project better and avoid the trap of thinking that your “good contract” is all you need.