By Judah Lifschitz and Daniel A. Kapner
The most skilled and successful contract negotiators achieve results not simply by communicating effectively and understanding the dynamics of negotiations. Rather, they arrive at the negotiation table fully prepared and take objective and measurable steps to maximize their negotiating position.
Especially in the context of engineering, procurement and construction (EPC) contract negotiations—where projects are large, complex, and involve numerous and significant risks—achieving optimal results requires a well-prepared and well-executed game plan.
There are two fundamental certainties in contract negotiations. Each party wants a good deal, and each party wants to shift as much risk as possible to the other side. The contractor wants to maximize its profit, receive payment fully and on time, and avoid key risks such as delays. The owner is looking to get a quality project at the lowest reasonable cost, in a timely fashion and within budget. Because their fundamental self-interests compete, an EPC contractor and an owner will maximize their positions by arriving at the negotiation table with a clear definition of the reasonable goals and objectives needed to be achieved and a comprehensive understanding of the project risks, strengths and weaknesses of each party, and the legal mechanisms by which an EPC contract distributes risk among the contracting parties.
The starting point for any contract negotiation is early planning and due diligence. After producing a detailed checklist, one should identify the contract provisions that will best serve its interests and develop a clear strategy for how to negotiate their inclusion.
Because projects and contracts differ, project participants should avoid the somewhat natural tendency to rely too heavily on a form contract or past agreement. They should develop language and strategies for negotiating important provisions that may provoke debate, such as the EPC contractor’s standard of performance, payment terms, changes, delay damages and consequential damages. A party that enters into negotiations without having prepared will be at a significant disadvantage.
In addition to early planning and due diligence, a contracting party should consider the following.
Judah Lifschitz is principal and co-president of Shapiro, Lifschitz & Schram, P.C., Washington, D.C. For more information, email firstname.lastname@example.org. Daniel A. Kapner is a member of the Shapiro, Lifschitz & Schram’s construction law, litigation and trial, and power and energy groups.
This article originally appeared in the October 2015 issue of Construction Executive magazine.