eBusiness Weekly
Innocent Chatikobo
A contract is an agreement entered into between two or more people with the intention of creating legally enforceable obligations. The document lays out the details of a transaction in clearly understood terms, with both parties having set obligations that they must meet or face possible legal action.
Contract negotiation is the process through which the parties deliberate over the contents of the contract to reach a legally binding agreement.
During the negotiation, parties discuss issues such as scope of work, pricing, start and end dates, payment terms, etc. in construction, the blueprint (plans / drawings) are the guidelines through which all discussions are based.
Therefore, it’s imperative that all parties are able to clearly interpret the drawing to create an equal footing in the discussion process.
Construction contract
It is an agreement between a client / owner and a contractor or specialist to construct, repair, modify, renovate or even demolish something in an agreed time frame for an agreed price and to agreed standards.
The obligations of both parties must be put in writing, so the client knows what they should expect as far as work is concerned and the construction contractor knows what to expect in terms of payments. A prospective contractor can participate as:
a) Main contractor: where the contractor himself gets into an agreement with a client to build/construct something
b) Joint venture partner: contractor forms an agreement with one or more other contractors on an equal footing and they jointly sign a contract for a construction project
c) Subcontractor: the subcontractor has an agreement with the main contractor to complete a part of the works, and will not have any contract or obligations or relationship with the client
Elements of a construction contract
Scope of work – client need to be clear about what the contractor is going to do for them. This is usually based on the project blueprint as produced by specialists such as engineers and architects
Cost of the project and payment terms
Insurance information, warranties and bonds – to mitigate against risks at all times
Parties to the agreement
Authority to make decisions for example flexibility to modify the building program or the design details should any need be
How long the job is expected to take to complete – the start and finish dates
What will be done if either party defaults
Challenges in negotiations
a) The owner already has what they are willing to offer clearly outlined and may not be prepared to push back or compromise
b) Clients might threaten to go elsewhere and you may lose customers
c) Very lowly priced services usually from novices and those not very skilled in the work
d) Labour has very low bargaining power and this threatens viability
Risks in construction contracting
Risks are possibilities of something happening or not happening, which can result in additional liability arising for either or both parties. Risks can be absorbed, avoided, shared, transferred or mitigated under the terms of the contract. the biggest risk is financial loss due to the following among others
Errors in calculations – contractor should ensure that material and labour costs calculations are done completely and accurately. Include a contingency for any losses that might be suffered e.g. through calculation errors and changes in prices
Delays – main contractor should ensure that materials are delivered in time and that employees perform the work timeously to avoid delays. As we stated in last week’s issue, delays increase the amount of overheads or the contractor might be subject to delay damages
Poor management – contractor must ensure that he or she manages the project especially when subcontractors are involved to guard against any financial consequences
Penalties – contractor should be aware that he might be liable for penalties should he fail to meet some set deadlines or fail to meet some performance guarantees
Insolvency of client – the contractor is at risk of this occurring especially when the client is a private individual or a small company. This can be mitigated by the contractor acquiring bank guarantees from client guaranteeing payment of the amounts owed
Tips for construction contract negotiation
Ensure that you have read the entire contract and understood the terms and conditions contained therein before signing. Understand the project scope, budget and timelines. Thoroughly study the project drawings / blueprint to negotiate on a well-informed position
Listen and ask questions – understand the other party’s interests, priorities and concerns. Identify areas of potential compromise. Iron out all grey areas.
Be flexible and creative – this helps to reach a mutually beneficial agreement. Parties should be willing to explore alternative solutions and compromise where necessary.
Maintain a professional and respective demeanor – negotiation can be emotionally charged but maintain a professional and respectful attitude by avoiding personal attacks, maintaining a positive tone, and treating all parties with respect.
Put everything in writing – have a comprehensive documentation of the terms and condition of the agreement to ensure clarity, transparency, and accountability for al parties involved. Documentation serves as a point of reference in case of any misunderstandings or disputes that may arise later on
Know the laws of the country – be aware of the laws governing contract language to be able to interpret.
Innocent Chatikobo is an engineer by profession with AtroServe Engineering Zimbabwe. He has extensive knowledge and experience in structural engineering and construction. For your comments, views, questions and feedback he can be contacted on the following platforms. Cell: +263 777 950 224; +263 712 376 037; +263 782 502 732. Email: [email protected] . Facebook: AtroServe Engineering Zimbabwe.
