As a general contractor, how can you be sure that you are getting the best deal possible with your clients? It may be easiest to agree to whatever contractual stipulations your client offers, but that can pose a huge risk to your company. Though you want to provide the best deal for your client and secure the job, you have to keep your company’s needs in mind too.
Here is a step by step guide to negotiating the best contract with your clients in order to get a good deal for yourself, as well as minimize risk of unfair financial responsibility.
1. Define scope of work
Before you can move forward with other aspects of the negotiation process, you have to first establish the purpose of the contract. Your client hired you to do a job, and it is your responsibility to lay out the details of of your obligations in regard to that job. These details can consist of a design plan, estimates, milestones, expected delivery dates for materials, the responsibilities of each individual worker, and much more. During this step, allow your client to voice any concerns or changes they would like to make to the scope of work. Clients tend to want to have greater control over the project’s timeline. As the expert, you should try to negotiate for the sole authority to create and adjust the work schedule, so that you can allow extra time for unexpected delays.
2. Define payment terms and schedule
The next step is to solidify how and when you will be paid. You are entitled to a down payment before work begins and to be paid in full given that all contractual agreements have been fulfilled on your part. You may consider negotiating for a set schedule where you are paid every month or a plan where you are paid as you and your team completes certain milestones that are listed out in the contract. This step will be one of the most important, as it not only determines when you will get paid, but also when your subcontractors will get paid. There is a tendency to leave payment terms vaguely established, which almost always ends up in conflict or litigation. To further protect yourself, negotiate for a “pay if paid” provision, so that you will not be responsible for paying your subcontractors until your client has paid you first.
3. Discuss insurance and liability concerns
Given that construction work is a risky and dangerous business, you should have an insurance policy that protects you and your business from any accidents that may occur. When negotiating your contract, you should inform your client on who the insurance provider is, who it covers, and to what extent the coverage is offered. The insurance amount requested by your client should make sense for the work that you are being hired to do. If the client is requiring several millions of dollars in general liability insurance for a project that only costs a few thousand dollars, you should negotiate for a lower amount, as that is excessive.
Avoid agreeing to an indemnity clause. An indemnification states that even if your client’s negligent acts cause harm or damage, you will assume responsibility. There is no law that states that you must agree to an indemnity clause. However, if you do agree to one, negotiate a separate limitation of liability clause into the contract. This clause will place a monetary limit on your financial liability.
4. Offer a warranty
Even though problems may arise during the process of completing a project, your client expects you to ultimately deliver a a finished project that is free of design and functionality defects. To ensure your client’s satisfaction, you should offer a warranty of some type. This will let your client know that they are in good hands and will also build your company’s reputation. A one-year warranty is the standard, and is what is generally expected by most clients. Be cautious of a client negotiating for an extended warranty, as many people do this to try and get free maintenance out of their contractors. You are not required to offer an extended warranty for free. It is appropriate and recommended that you negotiate for an extra fee to extend any obligations of your contract.
5. Establish a contract changes clause
It is a rare occurrence in the world of construction that a project will ever fully pan out from start to finish in the exact way it was planned to. If changes do occur with either the scope of work or project schedule, you are fully entitled to be paid for those changes. You need to negotiate a changes clause into your contract. This will require you and your client to discuss and agree on changes as they happen and properly document those changes. Most importantly, it will require your client to approve and sign off on any cost and schedule adjustments before any changes happen.
6. Establish a dispute resolution clause
Even with a well-negotiated contract that is clear-cut and comprehensive, some unavoidable conflicts can still occur. You will need to have an established system for dealing with conflicts so that things don’t get out of hand too quickly. Negotiate a dispute resolution clause into the contract that is straightforward and transparent. The clause should list out the steps that need to be taken to resolve an issue. The best way to do this is to first try and work it out with your client, then attempt to have a mediator help resolve the issue, and lastly, proceed with arbitration or litigation if all else fails.
Negotiating a construction contract can be a time-consuming process that may cause frustrations for you and your client. However, this is necessary to ensure that you avoid as many issues as possible down the line. Remember that a negotiation is not about “winning.” It’s an opportunity to establish an agreement that will yield the best deals for both you and your client.