Focus on the contract – another aspect for construction industry staying power.
We can agree that the construction market in South Africa and across the globe has become more tough in recent years, the margins are very tight and risks have grown. With all this in mind, it would be best not to lose focus of the contract as the management team on a project so as to keep costs contained and avoid diminished returns. Our thought is that the notion of focusing on the contract applies to big and small projects, for big and small companies too.
2022 – GloQ Director’s Review Preview
Ms Qaqamba Selikane:
Considerations to keep a construction contract in control.
The financial and contractual risks can be managed and the project management team remains in control of the contract signed. Take time to think about how the project will be delivered and take note of the different situations that could put your project margins at risk. Perhaps even before starting the negotiation of contract terms, ask a question of whether the business would be able to endure the impact of profitability if that particular project were to fail.
At times, it’s the contract terms proposed by the client that make the project team uneasy, if there’s an interest for the project – negotiate the terms and propose some changes to the Client. However, make sure that your proposed changes are realistic and watertight.
If possible, give reasons to your client as to why your company cannot accept certain risks. You might find that the both parties could meet each other halfway where you accept the terms if your client agrees to a revised price which would factor in the risks that you have raised. Most clients appreciate a contractor who understands the risk profile of projects that they intend getting into.
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After signing, manage the contract risks.
It’s important to know and understand the terms of a contract for your project and to keep going back to reading it to refresh your understanding of this contract. Ensure that you’ve taken note of the time, payment and cost risks that could have an impact on the bottom line or even worse, an impact that could have an effect on the whole business.
Take time to prepare a roadmap for contract administration for the delivery of a project, although this may seem time consuming it has become clear over time that a contract that is administered properly does help improve profitability. As a matter of fact, a hard contract that is managed well can end up being better than a good contract that is managed poorly.
As a project or business leader, educate yourself and your team on key factors when looking at rights and obligations of a contract.
There must be a guideline plan for the whole team as to how these contract rights and obligations will be managed. This way, your business is able to maximise on entitlements of the contract and minimise on the risk of liability. The risks to be considered could range from variations, extension of time, time bars, security and liquidated damages. There are many more other risks. Remember that what could be a critical risk on one project may be no risk at all on another project.
Keep good client relationships and good records.
Keeping a good paper trail is vital with contracts. Don’t rely on verbal agreements but rather make sure to confirm all key discussions in writing. Take photos as often as possible and describe scenarios around those photos noting to date these as well. All of this becomes the lifeline for your business should things turn bad and you are owed a lot of money on a project.
This doesn’t warrant that you or your project team must be aggressive towards a client, but rather to be frank with facts. What we should always remember is that our client will be consistent about following the contract – so must we. There’s no need to be apologetic as you follow the rules set by your client. At the end of the day, good administration of a contract is seen as good communication between a client and the contractor.
Set up your organisation for long term success.
Be intentional and make it part of the daily activities to exercise good contract and risk management in the company. Take time and ensure to have management systems in place like policies, procedures on contract reviews, preparation of contract roadmaps and periodic reviews from time to time.
The organisation needs to be decisive on it’s risk appetite and ensure to have a checklist for review of contracts which reflects that appetite. With just a shift and incorporating these principles into an organisation will definitely help future proof a business and give sustenance in this construction industry.
