By David Bowser, AttorneyThis article originally appeared in the May 24, 2019 edition of the Daily Journal of Commerce Oregon.
As my construction/design professional practice has developed over the years, I find myself receiving frequent requests to help my clients negotiate contracts. These requests include representing owners, designers, contractors, subcontractors, and suppliers. Negotiating a contract is not something that can be easily taught in school. It takes experience. Those new to the process should work with someone who has been around the block more than a few times. Observe the process and ask questions.
With that being said, negotiating any particular contract, especially in the design and construction industry, requires a general knowledge of those practices at issue in the contract. For example, if you do not understand the design process, it is difficult to understand contractual terms applying to the usual and customary design steps (such as programming, schematic design, design development, construction drawings, and contract administration). You do not need to be an expert, you just need to know what is going on in general. As an attorney, I have never designed a building in my life, but I know the process from living it vicariously from representing design clients. That knowledge gives me an edge in negotiating contracts for my design professional clients.
Another helpful piece of information is a basic understanding of the economic realities of the industry. This information helps you understand how heavily you can negotiate on behalf of your client’s position. As an example, the recent Great Recession and its impacts (and continuing impacts) on the construction industry caused a shift in how construction contracts were negotiated. Before the recession, there were many owners, many general contractors, and many subcontractors. Owners could choose from lots of general contractors. General contractors could choose from lots of subcontractors. This abundance of those to whom you could give work caused a top-down power dynamic. During the recession, private owners seemed to dry up. Public owners funded with free-flowing public dollars had much more competition from generals, many of whom had never done public work, resulting in lower bids in the winner-take-all process. Many generals did not survive the lean years. The subcontractors were fighting for a much smaller pool of money. This gave the generals even more power to demand contract concessions. Subcontractors had a lesser ability to negotiate. As the years passed, there were simply fewer and fewer subcontractors vying for the work. Then, when the economy improved, private owners came back, and there was more work to be done. The combination of more work and fewer generals and subcontractors gave the generals and subcontractors more power to negotiate upward contract terms in their favor, basically reversing the prior top-down system. If you do not understand the economic realities, you may overplay or underplay your hand.
Once you have the necessary background information, the next step is to understand the position and desires of both your client or employer and the other parties to the contract. Is there an existing relationship? How much does your client or employer need and rely upon the other party? How many options are available? The answer to these questions are important as they define your leverage. You need to understand the leverage that both parties have. The more leverage one has, the more they can shape the contract terms to their advantage.
Last, but not least, you then actually negotiate the terms of the contract. By far the most important terms are the scope of work and the price to be paid. The work to be done must be clearly identified and defined. Look out for exclusions and inclusions. Owners should watch out for allowances‒basically undefined work for an undefined price. Contractors should clearly define what they are promising to provide, the quality of work, what assumptions are used, and clearly identify exclusions from the bid price. Generals and subcontractors must determine who bears the risk of owner non-payment. Is it guaranteed payment, pay-if-paid, or pay-when-paid? Is payment lump sum or cost plus time and materials? Is there a guaranteed maximum price? How you are paid, when you get paid, and who is not going to get paid is important. Cash flow is the life blood of business.
After you leave scope and payment, the rest of the contract is really about allocation of risk. You could write countless articles about each of the material terms in the contract. The terms that get the most attention usually deal with schedule, delay, changes, insurance, indemnity, damages, and dispute resolution. In order to adequately protect yourself while negotiating these minefields, you need to understand what is at stake and how the language can be modified to offer you more protection. That comes with experience.
Another important truth is that you will not (except with significant leverage) be able to get everything you want. That's why they call it negotiation. It's okay to assume some risks as long as you understand what you are doing and the reward justifies the assumption. Ask for more than you want as that allows you to give something up. It takes time and experience to develop the necessary understanding and how to put it into practice. It is recommended you work with an attorney you trust who understands your business to maximize your ability to negotiate the best contract possible. A good contract term in your favor before an issue comes up will easily justify the expense in the long run.
David Bowser is a construction design professionals lawyer at Jordan Ramis PC. Contact him at email@example.com or (503) 598-7070.