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15 November 2019

How to prepare effective contract qualifications

Principals and head contractors are normally reluctant to allow changes to their preferred forms of contract, regardless of how onerous they might be.  Consequently, the preparation of tender qualifications relating to contract terms can be a challenging exercise. This article provides some practical tips on how to approach it.


1. Make sure you understand the issues.

There are four threshold questions you should consider:

  • Do you understand all of the terms of the contract?
  • Are you familiar with the specific risks that arise out of this project?
  • Do you have a sense of your bargaining leverage for this project?
  • Are you familiar with the level of risk that contractors in the current market are generally expected to accept? 

If you can't answer each of these questions with confidence, you should consider making further enquiries before you attempt any contract qualifications.

The problem with the first question is that there is no way for you to assess your level of understanding without having it tested.  Most commercial contracts, particularly for larger projects, have been prepared by specialised construction lawyers who will have a far greater understanding of the clauses than you will.  If you have any doubt about provisions in a contract, that is a sign that you should speak to someone. (You can read more about the cost of contract reviews here.)

The second question is an obvious one, which is discussed in more detail below.  A contract review should never be undertaken without considering the details of the project in question. Knowing the context is what will allow you to highlight key areas of risk.

Having a sense of your bargaining position will allow you to determine how aggressive you can be with your contract qualifications. If you are the only contractor invited (and able) to perform a particular project, your bargaining position will obviously be greater than if you are competing against multiple bidders in an open tender. 

Finally, principals and head contractors will always have views on what the market is willing to accept. Although sometimes they may stretch the truth, there may also be occasions where some contractors are willing to accept provisions that others are not. This can be for several reasons:

  • Some contractors are more intrinsically risk averse than others.
  • Some contractors may not turn their mind to the issues at all and end up assuming risks they are not aware of.
  • Some contractors may be willing to accept specific provisions, having taken into account considerations that others haven't thought of.

You should obviously avoid falling into the second category. There is nothing inherently wrong with falling into the first category, although this may sometimes affect your ability to win new work. All sophisticated contractors aim to fall within the third category, no matter how intrinsically risk averse they might be.

2. Treat each contract on its own merits.

If you use exactly the same contract qualifications for every new contract, your qualifications are unlikely to be as effective as contract qualifications that are prepared with the specific contract and specific project in mind.

This is because you might be raising issues that don't arise out of the contract or project in question (reducing the prospects of your tender being accepted), or you might be missing issues that do (increasing your risk profile if your tender is successful).

For example, say you are faced with a contract that contains a liquidated damages clause, with no ability to claim EOTs for inclement weather. This could be a major issue on new build or external work in certain parts of the country at particular times of the year. Conversely, it might not be an issue at all if the work is entirely contained within an existing, weatherproof structure.

Including a contract qualification could be a critical part of your tender, or it could be entirely unnecessary, depending on the circumstances of the project.  This is why a project-specific approach to contract qualifications is so important.

Construction Contract Review

3. Consider the likelihood, and the potential impact, of each risk.

When considering contractual risk, you need to ask two separate questions:

  • How likely is it that this risk will materialise?
  • How big will the impact of this risk be, if it does?

This is shown in the diagram below.3 Approaches to Contract Qualifications

The most aggressive approach (Option 1 in the diagram) involves only qualifying those risks that are highly likely to materialise and are also likely to have a significant impact if they do.

The most conservative approach (Option 3 in the diagram) involves qualifying virtually all risks, no matter how likely they are to materialise, or what their impact might be. 

Option 2 in the diagram falls somewhere in the middle.

When undertaking contract reviews, most sophisticated contractors will start by trying to identify all risks that could arise. They will then review that risk to determine which of those risks they are willing to accept, and which of those risks they intend to qualify.

In terms of where you should sit on the scale between Conservative and Aggressive, the answer will be different for everyone. This is because, just like people, different companies have different appetites and views towards risk.

The more conservative you are, the more tender qualifications you are likely to have, and the less likely it is that your tender will be successful.  The more aggressive you are, the more successful you are likely to be in winning new work, however the more risk you are likely to carry across the project (and your business generally).

You can lose money by not winning work, and you can also lose money by assuming too much risk. This is why it's so important to find the right balance when determining your contract qualifications, and also having effective strategies for managing all of the risks that you do end up deciding to accept.

4. Don't seek to exclude risks that you are best placed to manage.

Contract risks fall into three categories:

  • those you are best placed to manage (eg the risk of your own negligence, or the risk of negligence by your subcontractors or suppliers);
  • those your client is best placed to manage (eg the provision of site access); and
  • those that are effectively outside the control of either parties (eg inclement weather).

If you seek to exclude risks that you are best placed to manage, your client is likely to see you as being difficult or unreasonable.  (You would feel the same way if a client, subcontractor or supplier tried the same thing with you.)  Consequently, this approach may reduce the chances of your tender being successful.

That said, there are situations in which your client may be amenable to you limiting your exposure (as opposed to excluding entirely). This is typically where the potential economic risk significantly outweighs the profit you are likely to make from the project. And this is also why some principals and head contractors, at least for particular types of project, will agree to consequential loss exclusions and/or limits on liability.

The point is simply this: to avoid appearing unreasonable, think carefully before excluding risks that you are best placed to manage.

5. Focus closely on the areas that won't be covered by your insurance. 

Provided you have the right cover in place, your insurance should generally cover you for some of the bigger risks that you are likely to encounter (for example, personal injury and damage to third party property). 

It's your uninsured risk that is likely to create your greatest commercial exposure, and there are two main areas to think about:

  • the risk of claims being made against you where you do something wrong (eg delay, damage, safety etc); and
  • the risk of you losing money because of something that is outside your control (eg delays by others, latent conditions, design defects etc).

Your ability to accurately identify these risks and to formulate effective strategies for dealing with them will be critical to your ability to prepare streamlined contract qualifications and implementing effective risk management strategies.

If you would like to know more, we strongly suggest that you look at our free, on-demand webinar series about how to review a construction contract - which you can find here.

6. Make sure your qualifications are easy to understand.

How your qualifications are written can have a big difference in terms of how well they are received.

Even if your qualifications are likely to face the scrutiny of your client's lawyers, they should be written in a way that makes sense to a non-lawyer. Your qualifications are less likely to be accepted without 'buy-in' from your client. And your client will be less likely to buy in to your qualifications if they can't understand them.

We regularly see contract qualifications where the contractor's intention is near-impossible to determine.  You should aim to be precise (unless there is a good reason for being deliberately vague).  Using precise language can be a good way to ensure that your qualifications are no broader (or narrower) than you need them to be.  You should try to be as concise as possible. 

This is all about creating the perception that you are sensible and easy to deal with.  No matter how complicated the issue, your qualification should quickly make sense to the person who first reads it.

7. Consider using a specialist construction lawyer

Reviewing contracts and preparing tender qualifications is one area where a good construction lawyer can provide real value. 

Speaking with a specialist construction lawyer will ensure that you are familiar with all of the material risks that could arise (including risks you may not have thought of), and help you identify the various ways in which you could potentially address them. 

They will also have a sense of which types of qualification are likely to be accepted, and which are likely to face greater resistance.  

They should be able to write your qualification more accurately and in fewer words than you can. 

If you haven't used a lawyer to help you prepare tender qualifications, you should give it a try. You are guaranteed to learn something and you should end up with a better set of contract qualifications than you would be able to produce yourself.

If you're not sure where to start, you can read more about what we do here. And my personal details are below, should you be interested to learn more. 

About the Author

Greg Henry | Principal

Greg is a principal at Turtons and a senior commercial lawyer who acts for a range of clients mainly in the construction and technology sectors. Greg advises on both transactional and contentious matters.


greg.henry@turtons.com | (02) 9229 2904

About Turtons

Turtons is a commercial law firm in Sydney with specialist expertise in privately owned construction and technology businesses.

Greg Henry | Principal

Author

Greg Henry | Principal

greg.henry@turtons.com

Greg is a principal at Turtons and a senior commercial lawyer who acts for a range of clients mainly in the construction and technology sectors. Greg advises on both transactional and contentious matters.


greg.henry@turtons.com | (02) 9229 2904

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