Most projects get completed and finally paid without having to resort to outside parties to resolve a dispute. Attorneys maximize the chance of success by teaching clients from our experiences – particularly clients who don’t have a lot of in-house knowledge about the most frequent causes of disputes.

Post contract, clients seldom tell us what a great contract we helped draft. Rather, they often contact us because some aspect of the project has “gone sideways.” While there are numerous potential reasons for project problems, two themes cover a larger percentage of them: differing expectations and miscommunications between the contracting parties.

This article highlights how lawyers in contract negotiations can help clients align parties’ expectations and provide a foundation for the interactions – and for managing the inevitable hurdles to come.

Conversation Starters

We begin with some conversation-starter ideas and then address what often is going through the parties’ minds:

• “Flow Down” clauses: understandably necessary but know what’s flowing down!!

• Payment cycle: matching revenues with expenses pay when/if paid (see Wis. Stat. section 779.135(3)).

• Title company role (if any) and direct disbursement to subs.

• Agreements to continue work during dispute resolution.

• Liens/bonding requirements (see Wis. Stat. sections 779.08(1), (2)).

• Retainage (limits on “municipal” projects only, Wis. Stat. section 66.0901(9)(b)).

• Indemnities and insurance.

The First Negotiation Sets the Tone

This is a variation on the old saying that “you only get one chance to make a first impression.” This principle applies even if the nature of the client’s business is that every job is a “one-off” and then it’s on to the next one through another source. But it applies in spades for those looking for longer-term business relationships or referral sources. Almost invariably, the first contract will be the basis for each succeeding one, and often it will be used verbatim except for variable terms such as scope and price. In short, the first negotiation sets the tone for the future relationship.

In initial contract negotiations, the dynamic of the back-and-forth between the clients and their counsel can be enlightening. Often in my experience, smaller contractors will negotiate on their own to avoid the cost of engaging an attorney or out of fear that they’ll lose the job if their lawyer negotiates parts of the proposed agreement. The former often is penny-wise and pound-foolish, and the latter often is not an accurate picture of reality (see the next section).

People Your Client Actually Wants to Work with Are Usually Reasonable

Asking for the right changes is useful to downstream parties even if they are not agreed to.

Many smaller contractors fear they will lose work if they seek to negotiate any part of a proposed agreement, so they just sign any document put before them. “We didn’t have a choice,” they sometimes say. Yes, you did have a choice, and you made the wrong one.

While most upstream parties insist that their form of agreement will be the starting point and will resist significant rewrites, many will make reasonable concessions on key issues. The upstream party may not agree to all the requested changes, but I do not recall ever hearing of an upstream party responding “we’re not doing business with you” just because a downstream party asked for (reasonable) changes.

And here is the key benefit of the asks: You can gauge the upstream party’s disposition in response – which can be important to qualification of the customer.

If requested changes are reasonable and the number is modest, the counterparty’s response often will indicate whether it is someone you can work with. If a counterparty with leverage^[1] says “no changes – take it or leave it,” you may decide that it is better to pass on working with that counterparty because things are not likely to get better as time goes along.

Upstream Parties May Have Leverage, But Extensive Use of It May Cause Longer-Term Damage

As an upstream party, you often can insist on starting with your preferred form of agreement. Willingness to accept specific changes to your form from a particular vendor will depend on a number of factors. One is the expectations of the relevant market’s reputable and available vendors.

Another is the risk that the proposed change will leave or impose on you that is out of your control. For example, suppose you are a general contractor on a project likely to be hugely profitable, but despite your best efforts, you accepted the risk of escalating prices for certain materials that will not be purchased immediately. On the other side, you may have a difficult time finding a sub/supplier willing to take that risk in full, so you might have to agree to share the risk or make some other accommodation to get a reputable sub/supplier to take on some risk.

Beware the sub/supplier who is willing to take the full risk of price fluctuations in a volatile market because it may (1) be desperate (or reckless) and may not be around by the time delivery is required; or (2) someone who knows something you don’t about the market, i.e., pricing might decline in the interim.

Market due diligence is a good first step, but using contact negotiation to judge the people you hire – are they naïve or canny, honest or not? – can be the difference between a successful relationship and a disastrous one.

If the upstream party overplays its leverage, the old adage “be careful what you ask for because you may get it” comes into play. Parties who use leverage to strong-arm others might think they win in the short term, but if the counterparty can’t perform the harsh terms, there could be adverse financial consequences to all.

Use Negotiations to Decide Whether the Project and Counterparty are Good Fits

Just having a discussion with your counterparty about the contract and project can be immensely valuable – even if the discussion does not result in any document changes or the discussions lead to either party deciding not to go forward. Construction is a very relationship-based business, and using this opportunity to build trust (or decide that the other side is not trustworthy) and manage expectations will always be a plus.

In addition, a meeting to discuss a contract presents an opportunity to gauge the contract’s impact on each company’s administration of the project. Most well-run businesses’ success depends on a reasonably consistent system and manner of doing things. Contractors almost of necessity need to be flexible on scheduling, but it is also important that each participant has a plan. It might be that a project’s requirements or the counterparty will just not be a good fit, and a party may be unwilling to (or perhaps cannot) yield to the other’s way of doing business and remain profitable. It is far better for everyone to learn this before, and not after, a contract is signed.

Regardless of which side of the table you are on, the lens through which the negotiation should be viewed is the same: there will be no deal this time unless the contract is win-win. It is not necessary for a party walking away to walk away mad. Do not make a bad deal just to get the business or hope to make it up on change orders. Likewise, there is no sense in making a deal that is bad for the other party just because you can. Contract discussions bring people into play, and if you sense a bad deal for either party, it may be better to move on and wait for the next opportunity rather than making a deal that everyone will regret later.

Conclusion

Engaging in a pre-contract discussion with your counterparty serves many purposes. You are likely to find out several things that you did not know, and sometimes you may also find out enough to learn that the best deal you can make is the one you don’t.

This article was originally published on the State Bar of Wisconsin’s Construction and Public Contract Law Section Blog. Visit the State Bar sections or the Construction and Public Contract Law Section web pages to learn more about the benefits of section membership.

Endnote

[1] In general, upstream parties have more negotiating leverage than downstream parties, but there are trades where competition is limited that provide exceptions to this rule. ↩