The problems are well known to anyone who has had the task of rescuing a troubled project or administering a contract. Most projects run into trouble for two core reasons:
(1) Rushing the design or planning (including the contract) phase of the project; and
(2) Ineffective communication between the parties throughout the project.
These factors cause trouble because they lead to parties inadvertently taking on a number of avoidable risks:
(1) Risks to Quality and Schedule: Customers will often compare tenders on their upfront cost only, rather than their full life cycle cost. The cheapest tender is chosen, often not considering that this involves increased risk of contractor insolvency from paper-thin margins, delays for rectification or selection of replacement contractors, reduced useful life of the project, and high ongoing maintenance costs arising from workmanship issues and cheap substituted materials.
(2) Risks to Performance: A rush to contract signature encourages re-purposing of contracts from previous projects, without assessing their suitability. For example, if quality is a high priority, a contract that incentivises cutting corners to make a profit is unlikely to see the project completed to the standard envisioned. It is not uncommon to find well intentioned incentive clauses that actually incentivise against the factors that will govern the success of the project.
(3) Ineffective Communication: Any reasonably sizable project will require effective communication to stay on course. The unexpected will occur and flexibility will be needed. Contract negotiations will stress-test the ability of the parties to resolve issues and avoid them spiralling into disputes. Far better to find out upfront that you can’t trust the other party, than to find out later when money has been spent and your lawyer tells you that the contract puts all the risk on you.
(4) Litigation Risks: As a good rule of thumb, if there are sizable payments or liabilities attached to contractual clauses, and those clauses are ambiguous or uncertain in their operation, that’s a litigation risk. Once the contract is on foot and money has been spent, you will have a difficult time getting the other party to adopt your understanding of an ambiguous contract clause when they have a strong financial incentive not to.
It is always important to remember that hope is not a strategy. When push comes to shove any pre-contractual verbal assurances and niceties will count for little. Your ability to protect your interests will come down to the terms of the contract, the depth of your pockets, and the degree of commercial leverage you can bring to bear on the interests of the other parties.
It is therefore highly advisable to take full advantage of negotiations to arrive at a contract that is designed to head off disputes and promote the successful delivery of the project.
Effective contract design:
(1) Starts with a sound understanding of what the parties intend to do, how they intend to do it, and what they’ll require to succeed. Good drafting thinks ahead to how the project will actually be carried out in practice;
(2) Works backwards, identifying the interests of the parties, the objectives of the project, and identifying the measures that need to be in place to align those interests with the objectives; and
(3) It treats the contract as a system or machine that takes events as inputs (e.g. milestones, dates, disputes, accidents, defects etc) and produces outputs in the form of rights and rewards (e.g. payments, dispute resolution, indemnities, rectification, liquidated damages etc).
The aim being to ensure that the interests of the parties will be served, and certainly not undermined, by achieving the project objectives.
Ultimately, all projects have problems. Through thorough disciplined planning, most problems can be flushed out and solved before they have the chance to disrupt the project and put the parties to significant expense. The key is having the experience to realise this, the insight to identify professionals who share your values, and the discipline to work backwards from the result you are after to ensure that you have what you need to achieve it before you start.
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