We sign contracts routinely, often undervaluing their significance until conflicts occur. Here are five crucial do's and don'ts every contractor must consider.
Pre-signing
Dos
- Review and understand each project element together, considering their mutual impact.
- Draft with a "what-if" mindset – anticipate worst-case scenarios, not just ideal conditions.
- Conduct due diligence, including tax structures and implications.
- Include a list of pre-approved subcontractors.
Don'ts
- Accept strict, onerous obligations and unrealistic timelines. Factor in local conditions.
- Rely on present cordial relationships or project scale to accept arbitrary terms.
- Accept unrealistic timelines or deliverables, tied to third-party actions, such as regulatory approvals.
Payment terms
Dos
- Set out payment milestones clearly. Require front-loaded payments to maintain cash flow.
- Specify supporting documents for invoices and require timely payment within the due date.
- Define indices/methodologies for variable obligations in non-fixed price contracts.
- Require bank guarantees to be reduced proportionately with milestone completion.
- Provide performance bank guarantees post-handover. Insist on deeming provisions.
- Include default interest and right to suspend or terminate for payment delays.
Don'ts
- Agree to set-off rights for outstanding amounts.
- Agree to onerous bank guarantee terms.
- Allow high retention amounts for punch list items.
- Link significant payments to uncertain regulatory or right-of-way approvals.
Scope
Dos
- Clearly delineate scope and responsibilities. Use scope matrices, setting timelines and penalties.
- Insist on flexibility for third-party obligations, like regulatory approvals.
- Detail project owner responsibilities and obligations. Avoid limiting to payment defaults alone.
Don'ts
- Agree to broad, onerous obligations. Do not commit to unrealistic goals.
- Leave key project owner obligations open-ended – set long-stop dates with penalties.
Termination
Dos
- Set absolute (not relative) termination fees covering actual losses, including vendor cancellation fees, demobilisation costs and lost profit.
- Aim for equal termination rights – grounds should mirror those for the owner, not be confined to payment default alone.
- Incorporate obligation-specific remedies for breach to compartmentalise risk. For instance, specify delay liquidated damages as the sole remedy for delays, excluding any other relief.
Don'ts
- Agree to immediate termination. Insist on a default cure period.
- Agree to reimbursement of government penalties on termination
- Incorporate termination clauses unrelated to contractor's scope.
- Limitation of liability
Dos
- Cap liability and delay damages. Include standard exceptions such as fraud, gross negligence and personal injury.
- Exclude consequential damage.
- Provide for clear, time-bound and cost-effective (institutional) arbitration clauses.
Don'ts
- Agree to liability exceeding 100% of contract value.
- Agree to delay liquidated damages for the entire scope of obligations.
- Accept overly complex, multi-tiered dispute resolution processes.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
