10 tips on how to negotiate a construction contract

Confident owners are inclined to take similar approaches when discussing changes to trade association-driven standard form contracts for construction of tenant improvements, new buildings, remodels or expansions.

The following tips will help spot and negotiate suitable resolution to some of these approaches.

1. Understand the owner’s project performance requirements. Lack of attention to the owner’s objectives results in disputes. Take the time to develop an understanding of what kind of aesthetic statement the owner wants to make, how the owner will use the project, how it will function, the critical start and completion dates for construction, how long the project is expected to last, and the owner’s operational goals regarding energy efficiency and ease of maintenance.

2. Develop realistic cost estimates. There is no substitute for a good estimate. Take the time to provide one based on the owner’s performance requirements, itemizing the probable construction costs, highlighting the unknowns as allowances and contingencies.

3. Establish a realistic project schedule. Be sure to include ample time for all contingencies.

4. Sell the project team. Tell the owner about the construction project team and the relevant prior experience of each member. Highlight successful experience with similar projects. Promise team members will not change during the construction.

5. Pick risk allocation battles. Savvy owners tend to want risk allocated to the person best able to prevent it. They can consider the limit of liability clause a deal breaker. Focus on dealing only with risks that are not caused by the construction company and therefore cannot be managed by the company. If the owner objects to the liability limit for risks the company can manage, consult with an attorney to determine if the clause is worth losing the job.

6. Engage an insurance advisor. Do not agree to an owner provided insurance requirement without first verifying the company can comply. Work closely with an insurance advisor to do so. Make the owner aware of any changes necessary so both the owner and the contractor are on the same page.

7. Strive for progressive dispute resolution. Savvy owners understand the value added by mandatory negotiation, followed by non-binding mediation. Consult with an attorney for the best structure to propose.

8. Understand the owner’s team. The owner’s project team can be as important as the construction team. Find out who is on the owner’s team and whether the construction project team can work with them.

9. Encourage candid discussions. Good communication in which each party openly shares its concerns about an issue generally results in a mutually acceptable resolution. Be willing to walk away if there is not good communication.

10. Avoid interim work before closing the contract. Interim agreements can have the unintended consequence of creating leverage, reduced communication and the potential of a bad dealInterim agreements can have the unintended consequence of creating leverage, reduced communication and the potential of a bad deal