Key Takeaways:
- Reading the contract all the way through at least once before you begin to redline will give you a roadmap to follow as you begin your review.
- Having a specific framework for your approach to reviewing, redlining, and negotiating your construction contracts removes the intimidation factor that lengthy contracts full of legalese can bring.
- Categorizing your proposed redlines based on priority can help you get clear on your goals and objectives, as well as inform your negotiation strategy.
Construction contracts can be not only overwhelmingly long but also intimidatingly detailed. Add to that the too-common narrative that construction contracts are non-negotiable and you are left with a lengthy, high-stakes contract that the parties may have skimmed at best. Or not read at all at worst.
Having a simple, defined, repeatable methodology for approaching construction agreements reduces intimidation and provides clarity. Though the overall goals are different depending on your role on the project, the method for achieving those goals through true OWNership of your contracts is universal.
The OWN Method: A Framework for Construction Contract Review
It should go without saying, but I will say it anyway: every contract review should start with reading the contract in its entirety, from beginning to end, at least once through. Not only will this give you an idea of the structure, organization, and layout of the contract, but, most importantly, it will give you a sense of the tone of the contract. Overall, do the terms seem generally fair and balanced or are you left with a clear sense that it favors one side or the other? Does it shift an unreasonable amount of risk to one party? Knowing this provides valuable information as you start to apply the OWN Method to your review and redline process.
Step 1: Optimize
Now that you’ve read the contract at least once all the way through and have an idea of the tone, organization, and risk-shifting of the contract, it’s time to optimize. Beyond simply understanding key contractual provisions (which, of course, is paramount), this step involves identifying critical terms that shift risk onto you, evaluating the terms and provisions as drafted, and crafting your redlines to align with your business goals.
Is the risk allocation within your comfortable and acceptable parameters? For example, does the warranty period align with the warranties you can secure from your vendors and suppliers or does it require an extended warranty that you will be solely responsible for? This is also your opportunity to review the contract for clarity. Are the terms clearly defined and not overly vague? How are days defined in the contract? Is it calendar days, work days, or is the contract silent on the definition?
Step 2: Weigh
Step 2 is about analyzing each contractual provision’s potential impact, deciding which changes are critical, and prioritizing your redlines. You will find objectionable provisions and unacceptable risk-shifting clauses in every construction contract you review. That is just the nature of the beast. And while you can’t eliminate all risk through redlines, you can prioritize and rank the changes you want to make based on three categories: yellow flags, orange flags, and red flags. Yellow flags are the low-hanging fruit of redlines.
These are either the changes the other side is likely to accept or if the other side doesn’t accept them, these are not deal-breakers for you. Orange flags are reserved for areas of concern that are high priorities in terms of getting your redlines accepted or negotiating a compromise. Alone, any one orange flag provision may not be a deal-breaker, but collectively, they could culminate in a contract that you are unwilling to accept. Finally, red flags are reserved for true deal-breaker provisions. These are provisions that you cannot and will not accept, even if it means walking away from the project.
Step 3: Negotiate
The most successful negotiations in construction result in maintaining strong, collaborative relationships. With that end-goal in mind, my number one rule for negotiating construction contracts is to craft a well thought-out strategy before you start the negotiation. Creating your strategy actually started in Step 2 when you weighed and prioritized your redlines based on the colored flag system. This step laid the groundwork; now it’s time to build the bridge. I like using the bridge as a metaphor for your negotiation strategy because it symbolizes the relationship between the parties and the goal of creating a win/win final contract (or, at least, as close as you can get to win/win): through your negotiation, you’re building a bridge to bridge the gap between you and the other party created by the contract in its original form.
When crafting your strategy, consider things like the reputation of the other party to the contract and your history with them, if you have one. Do they have a reputation for negotiating their contracts or are they known for banging the infamous “the contract is non-negotiable” drum? Have you ever successfully pushed a redline through with them in the past? If so, how were you able to get those redlines accepted? Finally, your strategy should consider the pitch for each redline you plan to propose. Are there redlines that are easy yes’s for the other side? Maybe they clear up an ambiguity in the contract that, if left as-is, could cost you both money in the event of a dispute.
Construction contracts are the backbone of every construction project and their importance and significance should not be downplayed or ignored. Reviewing, redlining, and negotiating them does not have to be intimidating or overwhelming. By having a systematic and methodical approach that you can use over and over again, contract management can and will become second-nature. Optimize, Weigh, and Negotiate, and you can OWN all of your construction contracts to maximize profits, eliminate claims, and win more projects.
