Last edited 20 Jul 2016

Contract negotiation

Contract negotiation is the process of discussion between the parties to a contract to finalise the terms of the contract. Parties to construction contracts, may include clients, consultants, contractors, subcontractors and suppliers, and they will often have different, and sometimes conflicting, interests and in the form and content of the contract. Contract negotiation will usually involve some degree of compromise on both sides to achieve a final contract that is acceptable to all parties.

Construction contracts will generally specify the cost, obligations of the parties and the programme for the works. As contracts are legally binding agreements, the terms of which can be enforced in the event of non-compliance by one of the parties, it is important that negotiations are thorough and detailed

Projects may succeed or fail as a direct result of the terms and conditions in the contract. Effective negotiation can help protect against time-consuming and costly claims and dispute resolution procedures.

Some of the key factors of a contract that may require negotiation include:

Preparation is a vital part of negotiation. It is crucial that the right people are taking part in the negotiation, and that they have full authority to reach agreement, otherwise is may be necessary to continually adjourn and reconvene whilst approval is sought. Where the negotiating parties are acting on behalf of someone else, they must be clear what the limit of their authority is.

Typically on construction contracts, the contract administrator co-ordinates negotiations with the preferred tenderer(s). Negotiations may be led at different stages by the cost consultant, contract administrator, lead designer, architect or by a client representative such as a project manager.

Methods for effective contract negotiation might include:

  • Understanding the required elements of a valid contract.
  • Understanding the objectives that need to be accomplished.
  • Analysing all the negotiable terms to be included in the contract.
  • Collecting documentation to support negotiation position. This includes tender submissions from other tenderers that can act as a basis for comparison.
  • Creating a checklist of items to address during negotiations.
  • Setting a timeframe within which to reach an agreement.
  • Identifying where there might be leverage for flexibility or compromise on both sides.
  • Identifying what a mutually satisfactory contract could be.
  • Adjusting language and approach to mirror that of the other party in an effort at building trust – a technique known as ‘leveling’.
  • Preparing a counter-offer to a draft contract.
  • Knowing the cut-off point at which it is best to walk away from negotiations.
  • Having an alternative contractor available in the event that negotiations fail. This can also put pressure on the contractor to reach agreement.

The record of the agreements reached needs to be carefully drafted and signed off by both parties as it will form part of the contract documents.

Typically, following the negotiation, the contract administrator will co-ordinate the preparation of a tender report. The client considers the tender report; and if necessary instructs changes to the tender documents (for example if the proposed price is too high). If instructed the contract administrator co-ordinates adjustments to tender documents and requests a revised tender from the preferred tenderer(s).

There are many attributes that are considered to be important for a skillful negotiator to possess. These may include:

  • Having a good memory.
  • Being persuasive and quick-minded.
  • Able to ‘level’ and gain the trust of the other party.
  • Good at handling stress.
  • Efficient at preparing information.
  • The ability to listen effectively.
  • Good intuition in terms of being able to gauge the other party’s approach and opinion.
  • Willingness to concede or be flexible if necessary.

[edit] Find out more

[edit] Related articles on Designing Buildings Wiki

[edit] External resources