Maximising contract value: know your contract terms

In increasingly competitive commercial markets, parties tendering to perform works for a client are often faced with a strategic dilemma when assessing proposed contract terms offered: whether to accept the contract as presented by the client, or to attempt to negotiate the terms.

In its essence, a contract is a tool used to allocate risk between contracting parties. Generally, the party procuring the performance of the obligations will stack the contract terms in their favour and to the disadvantage of the contractor. Even contracts intended to provide a balanced risk allocation between the parties, such as the suite of Australian Standards commonly used in construction projects, are often amended to reset the risk allocation in favour of the principal.

Tenderers may often feel compelled to accept contract terms as presented for fear of impacting the attractiveness of their bid, if contract amendments were proposed. This is particularly so in scenarios where the volume and nature of proposed contract amendments is a tender assessment criteria. Conversely, seeking to negotiate the contract terms may result in improved contractual and commercial outcomes, but (pricing issues aside) this approach may come at the expense of the appeal of the offer, relative to other offers being considered. Deciding on which approach to adopt is often a complex strategic decision, influenced by a number of factors.

Contracts are usually procedurally prescriptive and entitlements may only be available where procedural requirements are strictly followed. If you choose to accept a contract without any negotiated amendments, it remains critical to understand in detail how the contract works to ensure that the contractual benefits provided for, are fully realised. When considering contract terms, some questions to consider include:

1. How and when do you get paid? What are the procedural requirements to making payment claims?

2. What are the formalities in relation to making claims for additional work performed?

3. How is delay dealt with? Do all delays entitle you to claim for relief or must the delay affect critical path activities?

4. Does the contract contain indemnities and warranties and are there provisions for limiting liability?

5. Can you make claims for events occurring outside of your control, for example, delays caused by other parties?

Once a contract is formalised and proceeds to delivery stage, you need to be conscious of the how the terms are being administered. If the principal adopts a relaxed approach to administering the contract, it is still prudent to follow procedural formalities that the contract requires. A claim that has substantive merit may still be denied on a technical basis if, for example, procedural requirements are not strictly followed.

Contracts can be complex documents to comprehend. Attempting to understand the contract can be an intimidating task, and is often overlooked altogether.  However, you should always enter a contract well informed. A small investment in seeking legal advice from the outset may save you significantly in the long run.

Coulter Legal has an experienced team of lawyers that can assist you with identifying contractual risks and with implementing practices designed to ensure that you maximise the value in the business opportunity that you have worked hard to achieve.

If you require advice or further information in relation to any of the matters discussed in this article, please contact our Corporate & Commercial team on 03 5273 5273.