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Commonly negotiated terms in construction contracts – what should parties focus on and trends in 2020

02 December 2020

#Procurement, #Construction & Infrastructure

Published by:

Victoria Gordon

Commonly negotiated terms in construction contracts – what should parties focus on and trends in 2020

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:

  • most negotiated
  • most important
  • most disputed.

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 TermPercentage
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

  • This article was originally published in Sourceable.

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.

Published by:

Victoria Gordon

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