Dr Bader ... the more preparation and due diligence performed, the better the results obtained.
The finer points of contract negotiation
DR BADER AL BUSAIES* outlines a number of points that are crucial for safeguarding the interests of parties during contract negotiations.
01 November 2018
The most skilled and successful contract negotiators achieve results not by communicating effectively and understanding the dynamics of negotiations, but by arriving at the negotiation table fully prepared and taking objectives and measurable steps to maximise their negotiating interests.
There are two fundamental issues in contract negotiations. Each party wants to make a good deal, and each party wants to mitigate the risk as far as possible. The contractor wants to maximise its profit, receive payment fully and on time, and avoid key risks such as delays; and the owner is looking to get a quality project at the lowest cost, in a timely manner and within budget.
For the negotiation process, the contracting party should consider the following:
• Control the document: The party that prepares and revises the drafts has an advantage. Words should be selected carefully and thoughtfully. A party that drafts the language has major advantage over the party that merely comments on the language.
• Select the most appropriate contracting model: It is important to thoughtfully select an appropriate contracting model (whether or not to ‘wrap’) and the appropriate pricing model (that is, fixed, firm or target pricing).
• Establish a realistic budget: Disputes frequently arise because the budget was unrealistic. If a contractor underestimates its cost or an owner underestimates the budget, the likelihood of disputes increases dramatically.
• Establish an achievable schedule: The project schedule must be realistic and achievable. EPC contracts that include overly aggressive and unachievable schedules are destined for trouble.
• Check project teams: The quality of the team members cannot be ignored as a factor affecting the success of a project. Disputes often arise because of interpersonal conflicts, ineffective management skills, divisive personalities and poor communication practices. Thus, it is in each contracting party’s interest to identify and agree on their respective project teams before the project commences.
• Define the scope and division of responsibilities: There must be a clear definition of the scope of work and a clear matrix of the division of responsibilities. Hazy descriptions of scope and undefined divisions of responsibility are sure to result in added cost and project delays.
• Identify technology risks/mitigation: Projects involve complex systems and equipment. Each contract participant should identify any technology risks associated with the project and ensure strategies for mitigating or managing those risks are reflected in the contract.
• Know the regulatory requirements and restrictions: It is critical that the contracting parties identify and understand applicable governmental and regulatory requirements and develop a compliance programme.
• Obtain financial, performance and security guarantees: The contracting parties should ensure that the content of any guarantees (for example, parent guarantees, performance and payment bonds, lien waivers, letters of credit) are negotiated and agreed to upfront. The sufficiency and validity of these instruments is important and should be finalised as a part of any EPC contract.
• Plan for the unexpected: There is no such thing as a negotiation without surprise. The more preparation and due diligence performed, the better the results obtained.
* Dr Bader Al Busaies is an international lawyer and managing partner of Al Suwaiket & Al Busaies, a Saudi-based law firm, which has a remarkable record in rendering legal services to the construction sector. It has set up a dedicated department for contract negotiation and dispute settlement in the construction sector. The firm provides legal consultation in the following sectors: construction, oil and gas, foreign investment and company set-up, corporate law practice, energy, mergers and acquisitions, legal due diligence, insurance, intellectual property, international law, real estate, banking, family business, inheritance, labour and employment, mediation, arbitration and litigation, drafting and reviewing contracts and other agreements, and debt collection.
