Today’s construction market is tough, so plan for the long term.
There are many contractors, fewer projects, narrower margins and higher risks, these conditions are a recipe for disaster.
So how should you respond? Should you sign risky contracts to win jobs and just hope for the best? It is tempting.
This strategy may pay off in the short term, but it is not the ideal plan for a profitable construction business in the long term. Applying this type of strategy would be like waiting to see how long you can survive without paying any of the insurance premiums, in the end an accident or illness will come.
Unfortunately, too often we see the wrong contract management applied and many construction contractors have gone under in the past because of it. They sign a risky contract, then the project goes wrong: delays, lost costs, etc. Perhaps it is due to union problems at the site, latent conditions, delays by the authorities or something similar. In a time of need, when he needs resources to cover certain expenses, the contractor turns to the construction contract, his last refuge and learns that he has taken those risks and is not entitled to claim his additional costs, so what?
In the worst case, you can’t pay your debts and go into liquidation. Everyone is stumped and wonders how it all went wrong.
Taking this landscape into account, here are four essential tips for executing successful contract management and maintaining control of construction contracts.
1. Having control of the contracts you sign is essential for successful contract management
For contractors still on the run, it’s not all doom and gloom. All financial and contractual risks can be managed during contract negotiation.
Ask yourself: Do I really want this job? Is the risk reflected in the financial reward of the project?
Take time to consider how the job will be delivered and think about circumstances that could put your earnings at risk. Do this before negotiating the terms of the contract with your client. Ask yourself: If this project goes wrong, to what extent could it affect the profitability of my construction company? Could it survive?
If you want the job, but are not comfortable with the terms of the contract presented by your client, then propose some changes but keep the proposed changes tight and realistic.
If appropriate, explain to your client why you cannot accept the risk. You may only be able to sign the contract on your terms if the price is revised up to account for risk. If the client is the type of company you want to work with, you should appreciate a contractor who understands the risk profile of the project.
2. Manage contract risks after signing
You have already signed the contract, now you should know and understand its terms. Read and understand the contract is a fundamental part of owning a construction business or run an infrastructure project that provides security to finance for builders.
Read the entire contract and identify the time, payment, and cost risks that could affect your bottom line or, worse, put your construction business at risk. Prepare a contract management roadmap to deliver.
A well-managed contract can help improve profitability. In fact, a risky, well-managed contract can be better than a good, poorly managed contract. For this reason, be sure to educate yourself and your team on the key contract rights and obligations.
Have a plan for how you will manage these rights and obligations so that your company can maximize your rights and minimize the risk of liability.
Consider the following risks:
- Time extensions
However, this list is not exhaustive because there are many other risks. Furthermore, what may be a critical risk in one project may not be so in another.
3. Maintain organized records and good customer relationships
Keep a good record of documents; confirm key discussions in writing, no verbal agreements; take pictures, describe them and put dates, these tasks are essential in the management of infrastructure and construction projects. If a project starts to go bad and you are owed a lot of money, documents and photos will be your lifeline.
Similarly, you don’t need to be aggressive; you just need to be realistic. If appropriate, soften the impact of contractual notifications by making phone calls to customers to let them know that notifications are on the way.
Good contract management should be seen as a form of communication between the client and the contractor.
4. Establish the construction business for long-term success
Make good contract and risk management part of the day-to-day activities of your construction company.
Establish policies and procedures around the proper review of contracts, preparation of roadmaps for them, and periodic reviews of projects.
Decide on your company’s risk appetite and then establish a contract checklist that reflects that appetite.
These steps will help prepare your business for the future and greatly improve the prospects that your construction business will continue to operate in the long term.
Posted by: Abdul Rimaaz