3 key strategies you can use to reduce risk in the contracting phase of a project

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.

• 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:

1. 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.

2. Leverage your production schedule to double as mitigation notice and response request.

3. Allow electronic methods (email) for official delay and default notices.

4. 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.