Let’s put ourselves in the position of a Contractor, whether big or small. We are at the tendering/pre-award stage in a public tender or a direct negotiation. When receiving the Contract draft from the Employer, from what I see, there are two types of behaviors when it comes to the power to negotiate contracts corresponding to two very distinct profiles:
- “Too big to fail”,
- “Fail to be big”.
For the moment, just words, but let’s dig a bit deeper into the subject:
“Too big to fail”
This is the attitude we find in big contractors (unless they are desperate and close to bankruptcy). They consider that each-and-every-contract should be taken individually to contribute to the results of the company. Also, the individual contracts should not endanger the health of the whole portfolio. While Customer see them as “big, powerful companies”, they work on a project-by-project basis.
To do this, they have an “army” of internal Subject Matter Experts (SMEs) on all issues from technical to commercial (including legal, tax, insurance, financial etc). Their problem is that these SMEs are very good at identifying the risks for their specific subject but not to look at the overall picture. They usually have “golden rules” or contract standards, training programs, risk review processes etc.
The result is that the Commercial & Contract Manager (CCM) is overloaded with good recommendations that she/he cannot implement, all at the same time, even with power to negotiate. This would upset the Customer, show a lack of focus and make the contract negotiation extremely time consuming. The challenge is to find strong CCMs that can interact with the SMEs. They need to challenge the SMEs on the need for all those comments, to find “lean” solutions that can be acceptable for the Customer.
Sometimes contracts are lost because of excessive deal-breakers and not only due to price or technical issues.
“Fail to be big”
On the other hand, we have small and medium size companies who don’t have any of these specialized resources and lack the power to negotiate their contracts.
They often deal with the big companies of the preceding chapter. Most probably with their procurement department. The legal department of these big companies, in spite of the “good contracting standards” for their own sales, has taken pleasure in producing completely biased procurement contracts. The small and medium companies are “invited not to change anything” to these contracts.
Accepting these standard terms means no rights for the Contractor (no suspension, no termination, no limits of liability) and excessive rights for the Employer (broad indemnification rights). When things go well, the parties will not even look at the contract. But when things go wrong, the contract aggravates the situation by a pure “attack” and “defense” situation.
If it would come to a dispute, arbitrators and judges, in application of the law, may not have a lot of sympathy for contracts that are not the result of mutual agreement but were forced by one strong party on the other weaker party (“take it or leave it”). Unfortunately, smaller companies often “fail”/go bankrupt before they reach that point. And then, the boomerang of unbalanced contracts comes right back at the big companies.
Usually, these small companies do not have any “red flag” mechanisms like a risk review meeting (before tender submittal) or a contract risk scoring process leading to well-informed decisions.
Conclusions
If your company is in either of the above situations, the challenge is to find the personnel that can handle this and identify those commercial & contractual comments that are worth fighting for, will create balanced contracts and that will make a serious difference in case things go wrong.
I strongly recommend that you think about your situation and keep moving/improving: setting up a contract risk scoring to rank the issues in order of priority, taking informed decisions by well trained staff, acknowledging and mitigating residual risks, pro-actively “defend” one’s position etc. An ostrich strategy has never been a good long-term solution.
Click here for other articles about risk or negotiation on this blog.
About AfiTaC
AfiTaC.com is the blog on commercial and contractual subjects for the Project Businesses (Construction, Infrastructure, Oil & Gas, Power & Renewable, Water Supply & Sanitation, etc). Its objective is to stimulate reflection, learning, convergence to balanced contracts and positive dispute resolution. You can subscribe to our newsletter by writing to “newsletter@afitac.com”. You can also connect to our LinkedIn page. Engagement with the readers is what keeps us going. So, don’t hesitate to exchange with us by commenting here below, liking our publication on LinkedIn and writing to us “info@afitac.com”.
0 Comments