3 key strategies you can use to reduce risk in the contracting phase of a project
Thanks for following my blog about how you can reduce the risk and cost of disputes in construction projects. Posts in this series explore strategies for each phase of a project's development ending with tips for reducing the prep time, cost and duration of a formal dispute. Today's post explores strategies to apply during the contracting phase.
Note: The opinions shared in this post are not legal advice. This post shares lessons learned and practical strategies gleaned through my 25+ years of negotiating and administering contracts for development and construction projects.
In the prior post I shared a philosophy about why and how decisions made in the pricing phase relate to the likelihood of dispute later in the project. The basic strategy to avoid a future dispute was to ensure effective communication of the scope of work and demonstrate agreement that the scope can be done for the price. The idea here is that if the price is correct, it is also achievable. This is important in the contracting phase for two reasons:
If you already did the work to demonstrate alignment on scope and pricing, the contract will be much easier to negotiate, execute and interpret when necessary.
If you cannot get the contractor that priced the work under contract, you have a much better chance of getting a replacement contractor for a similar price.
If those goals were not achieved in the pricing phase, do not pass go! it is critical that the scope and price are aligned prior to signing the contract - even if the contract is iron clad (in your favor).
The bid and contract both say "per plans and specs"- what could go wrong???
Spoiler alert: even a perfectly structured or punitive contract will not make you whole for the money and time lost in a dispute. Why?
Contracts necessarily include notice requirements and cure time before you are entitled to charge for supplemental labor, take over the work or enforce liquidated damages. You won't get that time back.
Liquidated damages, by design, do not mitigate the entire cost of any delay. They are more motivation than mitigation. Actual damages are almost impossible to agree to and even more difficult to document and collect.
Writing formal notices, tracking the cure periods and making contingency plans / agreements to augment or take over work robs you of your team's most valuable asset - bandwidth.
Don't get me wrong, written contracts are required and the terms will be important when prosecuting dispute resolution through a lawsuit - they just aren't very effective at mitigating delays or fairly compensating damaged parties. And remember, the goal here is to prevent the dispute before the carnage ensues. So, let's explore a couple of options:
There are two schools of thought I want to highlight about how to best document the scope for a lump sum contract. The approach I was first taught is to use the broadest definition of scope and strictest terms for procedure. In that approach, the scope is a list of specification sections that apply to all of the plans. The contract terms would include detailed claim documentation and short deadlines to file. However, this "Where's Waldo" way of defining the scope, is a petri dish of dispute potential - comprised of inherent optimism / opportunism, variable sophistication and limited bandwidth.
The second school is the approach I have been advocating in this blog series; strategic preconstruction practices that result in a well-defined agreement, complemented by clearly communicated and practical change procedures. This strategy does not eliminate risk but illuminates it so that informed business decisions are made. A predictable and structured path to reduce risk and earn profits for work done well.
Key Strategy #1 - Talk (and write) it out...
The best way to make sure you are on the same page is to conduct a formal interview to confirm the scope and demonstrate agreement - a best practice even if the pricing phase included these efforts but is absolutely crucial if the pricing documents are not well executed. Not only will an effective interview clear up miscommunications and bad assumptions, but it can also be used to get important commitments for the level of effort and resources the project requires.
Here are the basic components to ensure the formal interview is effective at reducing the risk of disputes:
At a minimum, include the estimator from both parties to confirm the scope and pricing and an owner or project manager from both parties to confirm the agreement. Try to keep the meeting small with equal participants for both parties.
Prepare a formal agenda, list the participants in the meeting and take notes. This will help keep the meeting on track, make sure you cover everything and help you establish trust.
Your agenda should include your written instructions, a list of documents that define the scope, pricing detail, pricing clarifications, scope exclusions, special conditions or specifications, production requirements, and last but not least - company and project capacity / track record.
Ask the contractor what they think the most common source of cost increases and delays are. Talk about how you could work together to avoid those pitfalls.
Key Strategy #2 - Plan for changes
The one thing you can count on in a project is change. Projects almost never start when anticipated. Weather happens. Scope adjusts. Sequencing changes. Staff members come and go. And now pandemics, wildfires, global supply chain interruptions?!?!
Amongst the most common subjects of disputes are change orders and delays. In both cases, the term "time kills all deals" applies. The nature of our agreement is based in time. When a change is not timely processed or executed, the agreement is placed in jeopardy. While we cannot accurately anticipate the timing or magnitude of changes in the future, we can reduce the risk of them spiraling into a dispute by documenting our baseline assumptions and optimizing procedures so that we can efficiently react to changes as they arise.
Document baselines. Most scopes have a predictable work progression starting with mass production and ending with detailed or finish work. Based on the initial contract scope, establish the crew size and number of days it should take to accomplish each major phase of the contract work. Not only is this useful in preparing schedules, but you can also revisit these estimates if and when a scope changes to validate a change in price or delay.
Establish scheduling procedures and policies. Review initial schedule expectations and establish how and when schedules will be updated. Review how production delays will be communicated and mitigated.
Confirm change procedures and policies. Most contractors struggle to comply with the format and timing of change claim requirements. But regardless of the efforts to document (or lack thereof), if a contractor does extra work, they are going to want extra money. Establish the minimum procedures to communicate and document changes and a fail-safe way to mop up or keep your foot in the door for change claims that comply with the contract.
Key Strategy #3 - A good back up plan
Despite the practical limitations of contract remedies, it is still a good idea to refine the mechanisms in your contract that deal with delays, defaults and dispute resolution. Like all businesses, contracting involves good and bad actors, unforeseen circumstances and sometimes, plain old bad luck. But if your prices are achievable and your contract terms are actionable, you are in a good position to move through a dispute efficiently and with considerably less emotional expense. Here are 4 specific tips to make your contract more actionable:
Include contract exhibits for change request templates that include the level of information detail you need to process a change request upstream. Set a day each month for all claims to be filed or specifically waived.
Leverage your production schedule to double as mitigation notice and response request.
Allow electronic methods (email) for official delay and default notices.
Revise the dispute resolution section of your contract to allow motions for summary judgement, show cause obligation for liens and time limits for discovery, deposition and hearing.
If the pricing phase is like dating, the contracting phase is like marriage. Extending the same metaphor, you don't want to marry under false pretense. Getting on the same page as to the scope and price was largely achieved in the pricing phase. A successful contracting phase puts this deal into a document that can be easily interpreted, managed and, if necessary, enforced.
Perhaps these efforts can change the perception of contracts from enforcement documents to revenue conduits. After all, both owners and contractors sign contracts because they want to make a profit. That is also the goal of the operations team. But in the rare circumstance that a dispute must be litigated, all parties benefit from a clearly defined scope and price with a path to expedite resolution and limited exposure to legal expenses.
Thank you for your time today! Did I share something that you can use to improve the outcomes of your contracting efforts? If so, please like, share and comment. If you want to know more about specifically how to implement some of these strategies in your business, I would love to help.
See you next week for Phase 4 - Contracting Administration...