No matter what your role is in construction, good negotiation skills are essential to ensuring a profitable outcome for contractors and a satisfactory price for clients.
But in a market that’s known for being volatile, this can prove challenging. How can both parties win during negotiations?
We show you how with our top eight construction contract negotiation strategies.
Why Is the Negotiation Stage So Critical in Construction?
The negotiation stage in construction is crucial because it allows all parties involved to form conditions, compromise, and ultimately reach an agreement that is acceptable to all parties.
Negotiations start before a contract is awarded, and each bidder makes their intentions clear by outlining the conditions for accepting the contract.
Depending on the stage of construction, the negotiations may be coordinated by the contract administrator and led by the project manager, architect, or cost consultant.
Outlining the contract’s structure and plan is also an essential step that requires the knowledge of a skilled negotiator and helps avoid conflict and save money.
While construction negotiation has its challenges, good negotiation skills help move a contract toward a resolution that suits all parties. The Maker Group can help. We are a team of skilled negotiators with decades of experience across every industry.
Our customized workshops, training, and consulting services are offered across the country and focus on the specific pain points of your construction company. Give us a call and let us take your negotiation skills from good to great.
What Elements Are Involved in Negotiating Construction Contracts?
Contract Sum and Payment Schedule
The price the contractor agrees to before entering into a contract is called the contract sum. All parties are involved in negotiating the contract price, while also agreeing on fluctuations, change orders, statutory fees, expenses, and losses.
Factors that may affect the contract price include:
- Timing of payment
- Project delivery method
- Losses
- Expenses; and
- Statutory fees
A skilled negotiator will identify these price points and potential variances and negotiate accordingly.
Scope and Schedule of Work
The scope of work refers to the expected outcome of a project by outlining significant milestones, the program of work, deliverables, and the end product.
Negotiators must consider plans and specifications during this stage of the contract and identify the qualifications for additional work if needed.
The schedule of work will identify the timing of construction milestones and what may warrant an extension. Schedule negotiations will also affect the payment schedule, so all parties must determine a clear work and payment schedule within the terms of the contract.
During this process, the negotiator should also consider change orders and how they may affect the schedule of work, shift risks, and prices.
Risk Allocation and Insurance Clauses
While most clauses cover the expected risks in a project, contractual clauses are necessary to address any uncommon risks in a project.
This may include:
- Indemnity clauses that address physical injury or risk of property damage
- Unexpected site conditions; and
- Insurance clauses
Risks are negotiated to ensure an acceptable level for all parties in the contract. Insurance clauses may also be included.
It’s also necessary to negotiate insurance clauses to protect workers and insurable items as not all contracts automatically include these clauses.
Conflict Resolution
In larger projects, especially those that take years to complete, conflict is inevitable and often leads to lawsuits. The main causes of conflict are delays and payments, but by discussing these possible conflicts during negotiation, legal action may be avoided.
However, arbitration may prove more costly than filing a lawsuit so all possible factors that may cause a delay and the compensation for these delays should be discussed and agreed upon in the contract.
Testing and Inspection
Testing and inspection ensure the finished quality matches the agreed-upon specifications in the contract.
All parties must agree on:
- Testing procedures
- Compliance regulations
- Defects liability period; and
- Schedule and rectification of defects
The contract should identify who is responsible for the inspection, what the contractor is responsible for, and any terms of engagement that may lead to court action.
8 Construction Contract Negotiation Strategies for a Winning Outcome
#1: Know Your State Laws
Before you begin negotiation planning, it’s critical that you know your state laws, especially as a contractor.
Clients or property owners may not be as well versed in these matters, giving contractors the upper hand with regard to contract language.
State laws also govern certain aspects of a contract, such as:
- Warranties
- Bonds; and
- Insurance.
#2: Assess Your Risk
Where construction projects are concerned, risk is an inevitable factor that must be considered early in negotiations. Usually, the owners want to shift risk to the contractor and the contractor wants to shift it to the subcontractor, but neither wants to pay the sub to assume all that risk.
Address risk as a priority in negotiations. When all the risk is placed on the subcontractor, the job may move along far slower as every decision will have to be carefully weighed and considered.
#3: Understand the Owner’s Needs
Pay attention to the owner’s needs and wants. Misunderstandings and miscommunications are very likely to result in disputes.
Critical start and end dates, the end goal, and ultimately the maximum budget are critical to the success of the project and can be used as tools in negotiation.
Steer the owner toward realistic timelines and prices — while ensuring they are going to be happy with the end result — and make sure you’ve got it all down in the contract.
#4: Confirm the Change Order Process
Change orders are a given and they can be a major point of contention if not handled properly. The change order process must be negotiated and fully understood by all parties involved and then explicitly stated in the contract.
Because many companies make a good portion of their money on change orders, especially for larger projects, contractors must ensure that owners understand expectations to avoid disputes down the road.
#5: Brainstorm Alternative Solutions
An inexperienced owner may not understand the entire construction contract negotiation process.
This is where contractors have an opportunity to shine. Not only will an experienced contractor know whether a concept is feasible or not, but they should also be ready to offer alternatives on the fly and without judgment.
Using their expertise, contractors should think ahead when bidding on any job and come up with unique ideas and solutions to potential problems. It’s much easier to get owners to agree to a change in their initial plan if it was addressed in the initial negotiations.
#6: Keep Communication Open
Like any good relationship, communication is one of the most important functions during construction contract negotiations.
Everyone wants to be heard. When you spend less time talking and more time listening, the conversation will develop naturally and with a better understanding of what the client wants.
Active listening is an extremely helpful tactic during construction negotiations. Not only do you build better rapport with your client, but you’re able to ask clarifying questions that may just save you from future disputes.
#7: Aim for a Win-Win Outcome
Negotiation should never focus on winning or losing. All parties would walk away feeling like they’ve been heard and that they are well-represented within the agreed-upon contract.
The best way to achieve a win-win outcome is to ensure collaboration throughout the entire process.
First, consider what you have to offer the other party and how it may benefit them. This can be used as a leveraging tool when making compromises.
Additionally, you may consider ways to incentivize the owner to accept your terms by making compromises of your own.
When you consider the purpose and end goal of all parties involved, you’re far more likely to reach a mutually satisfying agreement.
#8: Agree on a Dispute Resolution Method
In larger, multi-year projects, especially, disputes are common — almost inevitable. Consider negotiating dispute resolution methods ahead of time to avoid costly lawsuits after a project is complete.
Delays in a project can be costly and affect the overall bottom line of a project. All possible delays and possible compensation amounts must be identified ahead of time. You may also want to include a lawyer’s fees clause.
Always consider the worst-case scenario and an exit strategy and include it in the contract.
When all stakeholders understand the value of mitigation and mediation, you’re better able to develop a dispute resolution structure that’s suitable for all parties.
When Is a Memorandum of Understanding Needed?
A Memorandum of Understanding (MoU) in construction can be used in situations where parties involved in a construction project want to establish a preliminary agreement or framework for their collaboration — before negotiating a contract.
Here are some common scenarios where an MoU may be used in construction:
Joint Ventures: When two or more entities come together to undertake a construction project, they may sign an MoU to outline their respective roles, responsibilities, and the terms of their joint venture. This document can help establish the basic principles and objectives of the collaboration before moving forward with detailed contracts.
Project Development: In the early stages of a construction project, before finalizing all the contractual details, parties involved may sign an MoU to express their intention to work together. This can be useful for clarifying the project scope, major milestones, anticipated timelines, and financial aspects. It serves as a precursor to the formal contract and helps ensure a shared understanding between the parties.
Collaborative Research and Development: In construction projects involving innovative technology, materials, or methodologies, multiple organizations or research institutions may collaborate to develop and test new solutions. An MoU can be used to define the objectives, responsibilities, intellectual property rights, and financial arrangements related to the research and development activities.
International Projects: When construction projects involve parties from different countries, an MoU can be used to establish a preliminary understanding and framework for cooperation. This document can help define the roles and responsibilities of the parties involved, address legal and regulatory compliance, and facilitate communication and coordination across borders.
However, an MoU is a non-binding agreement and is typically considered less formal than a contract. But, it can help lay the foundation for the subsequent contract negotiations and formal agreements.
Parties may choose to involve legal counsel to ensure that the MoU accurately reflects their intentions and protects their interests.
The Maker Group: Negotiation Training and Consulting for Construction Negotiators and Stakeholders
With the right construction contract negotiation strategies, you can accomplish anything.
The Maker Group is a dedicated team of professional and experienced negotiators ready to train your cost consultants, project managers, or contractors to do just that.
With our bespoke negotiation training, workshops, and consulting, we can equip your negotiators with the tools needed to succeed in any negotiation — no matter how big the project is.
If you’re ready to take your construction contract negotiation skills from good to great, contact The Maker Group today.
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