Construction contracting is a very risky business. It’s one of the few arenas where the financial rewards can come very quickly. However, it’s also an undertaking where even large, established companies can go out of business just as quickly!
There are several reasons for this, among them:
- Contract amounts are based on estimates for the work created from incomplete bid documents.
- Contract language that can create risks and unforeseen obligations, without a corresponding opportunity for recovery.
- On most projects, the contractor (primarily the lower-tiered ones) is financing the cost of the work – especially for changes that typically don’t get approved until well after the work has been completed.
- Numerous other variables that change over time and add to costs and time of performance for the work.
All of the above have the effect of stacking the deck against you, diminishing your chances of success.
In my opinion, the most serious of the reasons is that of the terms and conditions of the contract. The failure to negotiate fair terms and conditions in contracts has the potential all by itself of producing devastating results for your company when things don’t go the way you planned on a job. Let’s face it, there is always the potential for that!
A long time ago, when I was working as a subcontractor, I was involved in a project that had gone bad. I had just finished attending a bitter all-day mediation session in which I had settled my company’s modest claims for additional compensation. My customer, the general contractor on the project, had not fared as well, having lost a significant sum of money despite years of hard work.
During the car ride back to our offices I observed that he was understandably upset over the outcome, yet relieved that his ordeal had finally come to an end. I took the opportunity to ask him what he would have done differently, now that he had the benefit of looking back. Without hesitation, he stated “we should have walked away from the contract when we were in negotiations.” He informed me that his company had spent a great deal of money in legal fees over several months in order to be able to execute the contract.
He went on to explain that his customer (a developer) was run by a group of lawyers who were intent on crafting a deal which was as one-sided as possible. His company’s desire to build the project had overshadowed the need to have a fair contract that could have provided the foundation for a workable relationship with his customer.
The “lesson learned”; he should have just walked away!
Learn more about contracts and their risks in my book Document to Reduce Risk. There, I explain how the contract contains “the rules for construction” and I demonstrate how to apply those rules to the job of project management. You will also find numerous examples to help you prepare construction documentation in ways that will allow you to minimize the risks that are inherent in all projects when dealing with various conditions (sample letters included in Appendix B of the book). You can obtain a print or e-book copy through my website. The e-book version will allow you to cut and paste the sample letters you need.
“A wise person does at once what a fool does at last. Both do the same thing; only at different times.” – Lord Acton
A THANKSGIVING MESSAGE
At this time of year I am always reminded of how fortunate I am to have a very loving family, friends, and good health. I want to take this opportunity to wish all of you a very Happy Thanksgiving. Please take the some time to appreciate one another, and to give thanks for all of the blessings you have in your life.
With my best personal wishes, Paco Farach.
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