Contracts require an escape route

Every June, that tiny window of opportunity to climb Everest passes for another year. At high altitude our brains are less effective, so it is critical to have a simple plan that categorically defines the walk away point, however close the group is to the summit. Climbers talk of summit fever when simple plans get ignored and overriden.

When negotiating a contract, it is critical to have a simple plan too. You have a short window of opportunity to agree terms or decide not to do business together. You should agree and understand your walk away position and stick to it. Otherwise, your company can get slowly dragged into a situation you would never have agreed to at the start. Once you have committed time and effort to a project, it becomes harder and harder to stop.

A good example of this is when letters of intent are used. Would you really agree to that type of contract in the cold light of day?

A letter of intent typically follows a long series of processes such as pre-qualification, tendering, evaluation and selection. You are so close to signing the contract you can nearly see it. As you really want to be part of the project team – like planting your flag on the top of the world – it’s hard to say no and walk away.

However, if you behave objectively and stick to a simple plan of ‘contract first’, then walking away is exactly what you really should do.

As designers, Hyder found that starting work without a proper contract in place can be very costly. Throughout the negotiations, Hyder insisted that it wanted to limit its liability, but never quite closed the deal. Hyder bet its business on this project because it started work under a letter of intent and is now facing a claim for £40m. Its simple plan to limit its liability was ignored as Hyder focused on the doing the work. This is equivalent to reaching the summit but not returning safely.

Contracts are tools to help you do business, but they can’t help if you don’t get them agreed. If you can’t negotiate a fair deal, don’t start work with your fingers crossed that the contract will somehow magically sort itself out (it won’t) … just walk away.

It’s about time the construction industry adopted a more mature contract strategy. Next time you are negotiating a contract, decide your walk away position before you take the first step to a bad contract.

Originally published in Construction Manager, June 2017

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