02 December 2020
3 min read
#Procurement, #Construction, Infrastructure & Projects
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Contract negotiation typically involves some degree of compromise on both sides to achieve a final contract that is acceptable to all parties.
So what are the commonly negotiated terms in construction contracts, and which clauses really matter in project implementation and completion to justify the party’s attention in negotiations?
In this article, we first examine commonly negotiated terms in construction contracts before turning to look at current trends in 2020, including force majeure and the concept of 'owning the float'.
Most Negotiated Terms 2020 Report
The World Commerce & Contracting Report on Most Negotiated Terms (Report) is an annual report that sets out the terms in commercial contracts that are the:
The Report breaks these categories down by sector, including ‘Engineering / Construction’.
According to the most recent 2020 Report, the Top 10 most negotiated, most important and most disputed terms in engineering or construction contracts are listed below.
Most negotiated terms
| No | Most Negotiated Term | Score 0-4 |
| 1. | Limitation of liability | 3.2 |
| 2. | Liquidated damages | 3.2 |
| 3. | Price / Charge / Price charges | 3.1 |
| 4. | Scope and goals / Specification | 2.9 |
| 5. | Payment / Payment options | 2.9 |
| 6. | Responsibilities of the parties | 2.9 |
| 7. | Indemnities | 2.8 |
| 8. | Invoices / Late payment | 2.8 |
| 9. | Performance guarantees / Undertakings | 2.8 |
| 10. | Delivery | 2.8 |
Most important terms
| No | Most Important Term | Score 0-4 |
| 1. | Limitation of liability | 3.2 |
| 2. | Liquidated damages | 3.2 |
| 3. | Price / Charge / Price charges | 3.2 |
| 4. | Responsibilities of the parties | 3.2 |
| 5. | Change management | 3.2 |
| 6. | Scope and goals / Specification | 3.2 |
| 7. | Delivery | 3.1 |
| 8. | Payment / Payment options | 3.0 |
| 9. | Invoices / Late payment | 3.0 |
| 10. | Performance guarantees / Undertakings and Force majeure (= 10th) | 2.9 |
Most disputed terms
| No | Most Disputed Term | Percentage |
| 1. | Change management | 44 |
| 2. | Invoices / Late payment | 31 |
| 3. | Price / Charge / Price charges | 30 |
| 4. | Liquidated damages | 30 |
| 5. | Delivery | 28 |
| 6. | Scope and goals / Specification | 26 |
| 7. | Amendments to contract | 24 |
| 8. | Force majeure | 22 |
| 9. | Payment / Payment options | 17 |
| 10. | Limitation of liability | 16 |
As can be seen, while there is some overlap, the most negotiated terms are not always the same as those that parties say are the most important to the project or those that end up being the most disputed.
The Report notes that, across all sectors, the data shows that priority is given to terms dealing with risk consequence, rather than risk prevention.
Accordingly, the Report notes that contracts are often designed to deal with failure rather than to facilitate success – which rings true in the negotiation of traditional adversarial construction contracts where the parties often focus on liquidated damages, indemnities and limitations of liabilities, rather than early warning clauses or incentives for early completion.
Force majeure
A key trend in 2020 has been the focus on force majeure and frustration clauses, following the bushfires and COVID-19 (which we looked at in our previous article here).
Interestingly, the Report notes that despite the focus of force majeure clauses in the legal sector during COVID-19, across all sectors, force majeure remained relatively low in the data, ranking 27th in Most Negotiated Terms, 17th in Most Important Terms and 10th in Most Disputed.
Owning the float
Another trend we have seen during 2020 is the increased focus on 'owning the float' during construction contract negotiations.
The 'float' is the buffer or additional time included in a construction program to allow for unforeseen risks such as wet weather or delays caused by government action, i.e. COVID-19 restrictions.
Either party can 'own the float' (depending on how the contract is drafted). However, we are seeing contractors increasingly negotiating for ownership of the float as it gives them an additional risk management tool to mitigate delay risks, including from COVID-19.
Conclusion
Effective negotiation of the construction contract helps drive a successful project outcome as the parties’ obligations are considered and then documented into the final contract once agreed.
The focus of negotiations will inevitably change depending on the project, the interests of the particular party and the broader market circumstances (i.e. current impacts of COVID-19), which all impact on the risk profile each party is willing to accept.
Parties can use the 2020 Report to reflect on their own ‘most negotiated’, ‘most important’ and ‘most disputed’ to see if they align with their entity’s current risk appetite.
Author: Victoria Gordon
Disclaimer
The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this newsletter is accurate at the date it is received or that it will continue to be accurate in the future.
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