Negotiating for Success in Construction Contracts
As an engineering or construction contractor, are you getting a fair deal in the contracts you sign with your clients? Negotiating better commercial terms and conditions is crucial for both securing a more favorable financial deal and reducing your company’s exposure to unnecessary risks. Here’s how you can negotiate for success in your next construction contract.
Why Negotiate?
There are two key reasons to negotiate the terms of a construction contract:
To improve the financial outcome for your company.
To lower your commercial risk and avoid unfair financial liability.
Let’s explore some strategies for negotiating the most important aspects of a construction contract.
Scope of Work
A well-defined scope of work minimizes disputes and claims, leading to better planning and execution. Take the time to clearly outline:
What you, the contractor, are responsible for.
What the client is responsible for.
The obligations of the client’s engineer or project manager.
The responsibilities of third parties involved in permits, goods, or services.
Including a detailed scope in the contract is essential because poorly written scopes are the primary cause of contract disputes.
Terms of Payment
As a contractor, you’re entitled to fair payment terms. Ensure you negotiate:
A downpayment or early payment.
On-time payments according to your terms.
Full payment for agreed-upon changes without retention.
You’re running a business, not a charity—never settle for payment terms that put your cash flow at risk.
Schedule and Float
If your contract includes float (extra time in the project schedule), remember that it belongs to you, not the client. If the client wants to take ownership of that float, negotiate compensation in return.
Indemnification
Indemnity clauses are designed to shift the client’s risks onto you, the contractor. Common liabilities they may try to transfer include:
Damage to property caused by the client’s negligence.
Bodily injury or death caused by the client’s negligence.
The client’s defense costs in claims related to their negligence.
You are not legally required to assume responsibility for the client’s negligence. Try to eliminate the indemnity clause entirely, but if it must stay, negotiate limits, such as:
Only indemnifying the client for your negligence, not theirs.
Limiting the scope to property damage, bodily injury, or death.
Applying the indemnity only while you’re physically on-site.
Restricting the indemnity to events during your on-site work.
Indemnity clauses can be complex, so always work with someone experienced in these matters.
Limitation of Liability
If you must agree to an indemnity, make sure the contract includes a separate limitation of liability clause. This clause should cap your financial liability to a specific dollar amount or the proceeds of your insurance coverage.
Insurance
Insurance is another form of risk transfer. Make sure the types and amounts of insurance required by the client are appropriate for the project’s value. For example, a $10 million general liability policy on a $250,000 job is excessive—negotiate for a more reasonable amount.
Additionally, be cautious about client-supplied insurance policies like OCIP or "Wrap-Up" policies. Ensure you fully understand the terms, deductibles, and gaps in coverage, and consider obtaining additional insurance to cover any potential risks.
Additional Insured Status
When the client is added as an additional insured on your general liability policy, they gain access to the benefits of your coverage—often without paying for it. This can leave you exposed if the client has a large claim, which could raise your premiums or even cause your policy to not be renewed. You may want to reject this requirement or negotiate for a project-specific liability policy.
Damages
Liquidated damages clauses can penalize you for failing to perform on time. Try to eliminate or minimize these clauses, and always negotiate a cap on damages. Also, be sure to exclude consequential, indirect, and special damages, including loss of revenue and damage to adjacent properties, in a separate contract clause.
Warranty
Clients expect contractors to deliver defect-free projects, which is fair and helps build your reputation. However, be cautious with extended warranties, as they can turn into free maintenance obligations. It’s appropriate to charge extra for extended warranties beyond the typical one-year period.
Contract Changes
You are entitled to be paid for legitimate changes to the scope of work and schedule. Stay on top of changes as they occur—don’t wait until the end of the project to settle. Always document changes and negotiate a clause that requires the client to approve costs and schedule changes in writing before the work begins.
Disputes
Disputes will happen. Negotiate a clear dispute resolution process that requires both parties to attempt negotiation, followed by mediation, and then involve senior executives if necessary. If all else fails, the parties can agree to arbitration or litigation, though arbitration should be a last resort.
Conclusion
Negotiating a fair construction contract can be time-consuming, but it’s well worth the effort. Clients who see value in your offer are often willing to negotiate terms that are fair to both parties. By following these guidelines, you can secure contracts that provide better financial outcomes and reduced risk for your business.
