The current construction market is tough, so play the long game.
There's a lot of contractors, fewer projects, tighter margins and bigger risks. It’s a recipe for disaster.
So how should you respond? Should you sign harsh contracts in order to win jobs, and simply hope for the best? It is tempting.
This strategy might pay off in the short term. But it’s not the blue print for a profitable construction business long term.
It’s akin to seeing how long you can survive without paying any of your insurance premiums. In the end it will catch up with you.
Unfortunately, we see it too often, and plenty of construction contractors have gone under in the past because of it. They sign a harsh contract. Then the project goes bad. Delays, cost blow outs, you name it. Maybe it’s because of union issues on the site, latent conditions, delays by authorities or something similar. At their time of need, the contractor refers to the construction contract – their last refuge - and find out they signed up to those risks and have no right to claim for their additional costs. What then?
In the worst case, they can’t pay their debts and they go into liquidation. And everyone is left scratching their heads, wondering where it all went wrong.
With that in mind, here are four easy steps to keep in control of your construction contracts.
1. You are in control of the contracts you sign
For those contractors still in the race, it’s not all doom and gloom.
All financial and contractual risks can be managed.
Maybe it’s during contract negotiation.
Ask yourself: Do I really want this job? Is the risk reflected in the financial reward on the project?
Spend time considering how the job will be delivered and think about the circumstances which could put your profits at risk. Do this before negotiating the contract terms with your client. Ask yourself: If this project went badly, how much could it impact the profitability of the construction company? Could we survive?
If you want the job, but are uncomfortable with the contract terms submitted by your client, then propose some changes.
But keep your proposed changes tight and realistic.
If appropriate, explain to your client why you cannot accept the risk. Perhaps you can only sign the contract on their terms if the price is revised upwards to account for the risk. If the client is the type you want to work with, they should appreciate a contractor who understands the project’s risk profile.
2. Manage contract risks after you sign
Fast forward. You’ve signed the contract. Now get to know and understand its terms.
Reading and understanding a contract is a critical part of owning a construction business or running a construction project.
Read the entire contract and identify the time, payment and cost risks that could impact your bottom line, or worse, put your construction business at risk.
Prepare a contract administration roadmap for the delivery of the contract.
A properly administered contract can help improve profitability.
In fact, a harsh contract, managed well, can be better than a good contract managed poorly.
So be sure to educate yourself and your team on the key rights and obligations in the contract.
Have a plan on how you will manage these rights and obligations – so your business can maximise your entitlements and minimise the risk of liability.
Consider the following risks:
- Extensions of time;
- Time bars;
- Liquidated damages;
But this list is not exhaustive. There are many others. And what might be a critical risk in one project may not be for another project.
3. Keep good records and good client relationships
Keep a good paper trail. Confirm key discussions in writing. No verbal agreements. Take photographs. Describe them. Date them. If a project goes pear shaped and you are owed a lot of money, the documents and photographs will be your lifeline.
Don’t be apologetic about following the contract. You are just following the rules set by your client.
Equally, you don’t need to be aggressive. Just be matter of fact. If appropriate, soften the impact of contractual notices by making phone calls to clients to let them know the notices are on their way.
Good contract administration should be seen as a form of good communication between the client and contractor.
4. Set your construction business up for long term success
Make good contract and risk management a part of the everyday activities in your construction company.
Set up policies and procedures around proper contract reviews, preparation of contract roadmaps and periodic project reviews.
Decide upon your company’s risk appetite and then set up a “contract review checklist” which reflects that appetite.
These steps will help future proof your business, and greatly improve the prospects of your construction business being around for the long term.