The Paradox of Commercial Contracting

In my experience through 40 years in this business, there is far too often a temptation to rush into a contract and settle it out later.

Even if the pre-contract risk assessments have been properly carried out, the urgency to make commercial commitment forces a certain ‘leap of faith’ that prompts even the most sophisticated commercial organisations to rush in putting ‘pen to paper’.

My adopted countrymen here in Australia have a perfect saying for this situation; she’ll be right! Both parties defer on the upfront scrutiny, hope that they can be a bit cleverer than the other party later in using claims – essentially, that the imperfect situation will right itself with time.

Let’s walk through how this plays out through variations and change process.

The client’s representative issues a direction.

The contractor responds with a notice resplendent with as many contract references as possible, regardless of actual relevance, but little or no detailed explanation as to why it is in fact a change.

The client’s representative then rejects the claim with some vague reference to company standards or good engineering practice, but again little or no detailed explanation as to exactly why it has been rejected.

In most cases it is unlikely either party is properly risk assessing their respective positions and runs the risk of falling ‘in love’ with the resultant claim. At this point, a stream of increasingly expensive consultants and lawyers are drafted in to support the position, the fees begin to mount and so the runaway train has been set in motion.

Don’t let your contract become a runaway train!

This situation seems to have become so commonplace in the bigger organisations that it is sometime difficult to remember that there is any other way.

One of my first experiences with arbitration provided me with a very salutary lesson. The disputed sum was around $35m and both sides were spending around $800k per month on fees. This prompted a director for the contractor to visit his counterpart and point out that each month they were moving $1.6m further apart. The dispute was settled within days!

Now of course, most of our everyday experiences are more complicated or nuanced, but it does serve as a useful reminder that there are alternative approaches and sometimes more sensible ways to ‘win’. These can be counterintuitive or paradoxical, but bear with me.

What’s the alternative?

In my experience, one effective way to reduce costs and friction over the life of the contract is to invest in your position early i.e. proactive vs. reactive contracting. This may be the moment when one least wants to incur the costs, but we have achieved incredible results with our clients taking this proactive approach. This fresh, objective perspective early on can yield great benefits in decision-making and commercial approach throughout the project contract.

One of the services we provide is a risk assessment of tender terms and conditions for a competitive flat fee, but we understand the commercial realities, so emphasis is always on management of risk rather than merely rejection of a clause.

Another service we offer is a project commercial ‘health check’ to identify key risks and provide strategies to manage them moving forward.

Some years ago, whilst in the Middle East I prepared a comprehensive risk report for a large work package on an airport expansion project. The main areas of risk were associated with works coordination, interface issues, works access, schedule, and design responsibility. The latter involved an analysis of over 100 specialist supplier packages. However, mindful that such things need to be practical and user friendly, the report we provided, included several flowcharts and matrices which sat on the wall above the desk of each management team member. The upfront investment by the contractor gave us a fantastic working case study in the significant benefits in taking this approach – it paid dividends for them and helped them to complete a large and complex project without recourse to the contract dispute mechanism.

The commercial team on that particular project estimated that their savings from this approach totalled well in to 8-figures – a great vindication for us and one of the many reasons we believe in this proactive contracting approach.

So, the morale of the story is, get on the front foot with a proactive approach and do something different to your fellow contractors.