I attended a convention last week whose attendees were primarily general contractors in the commercial side of the industry. These contractors generally build vertical structures on both publicly bid and privately negotiated work. I had discussions with contractors in both arenas about the fact that their subcontractors and suppliers were changing the way they dealt with contract terms. The general contractors identified a stronger need for representation because of these changes and an increase in the way subcontractors and suppliers have been negotiating the term of their subcontracts and purchase orders.
In the past, some of these contractors would rarely have to negotiate terms with subcontractors and suppliers. In most cases, those entities would simply accept the terms offered. Now, contractors are finding that many subcontractors, and especially suppliers, are pushing back on the terms offered. These groups are being more assertive in their negotiation techniques and that has created a need for additional vigilance and care in contract negotiation.
Why is this worthy of discussion? To me, a construction lawyer, it means that parties throughout the chain of procurement for construction services and materials are becoming more sophisticated and aware of the fact that the agreements they enter into are vitally important to their operations and overall success.
Reading and understanding contract terms before signing contracts is something I preach whenever I am asked to speak about contract drafting or related topics. This move towards diligence in negotiation is a sign that parties have heard this lesson from me and other construction lawyers and are paying attention.
While the negotiations may have become more time-consuming for general contractors, the time spent by both parties will likely lead to reduced disputes later. If a contact is particularly onerous, the weaker positioned party may be forced to litigate disputes seeking exemption from contract terms through common law defenses. But, if the terms are fairly negotiated, then the parties can adjust their pricing and risk accordingly and may be better positioned to negotiation a solution to a dispute rather than resort to litigation. An absence of litigation means savings. Litigation is expensive. Negotiation at any stage is a more effective allocation of resources.
That subcontractors and suppliers are being more diligent in negotiations means that contractors also need to be more diligent. The added attention to contractual terms and obligations will likely result in more balanced contracts. Parties to these negotiations should be mindful that courts are likely to enforce contractual provisions that were freely negotiated by sophisticated parties, and thus, care should be given to obtain contract language that, as best as one can secure it, allocates risks to the party best positioned to accept that particular risk.
Negotiation, generally, is a good thing and the more care and thought that parties give the front end of a contractual relationship, the more predictable the back end of that relationship should be. Having contract terms you are familiar with and can count on to govern a relationship will allow for a more predictable and efficient allocation of resources throughout the relationship.