Construction contracts are inherently risky. Over the years standard forms of contract have been drafted and revised to spread those risks reasonably fairly between Employer and Contractor. However, no one likes accepting risk, so what happens? Contracts get amended and risk is moved from one party to another. Consequently, tendering contractors within their bundle of tender documents usually have a sizeable document containing amendments to the standard form.
These can range from reasonable amendments to reflect the specific nature of the project, to the wholesale transfer of every possible risk, cunningly undertaken as an exercise in contract drafting by an overzealous solicitor. Unless these are picked up and challenged, you will be responsible for the consequences. Contract reviews are therefore vitally important, but often undertaken as a last minute, cursory exercise. Do not fall into this trap, or you may miss cleverly hidden, highly risky clauses. These Ten Top Tips provide some ideas as to how you should approach your Contract Reviews.
Understand the Basis of Your Review
Before starting your review, be clear as to your level of expertise. Typically, reviews are undertaken by the commercial or quantity surveying department, so the basis of your review will be looking at the commercial risks, i.e. how do the amendments affect the financial and commercial operation of the project. So as a QS, stick to your area of expertise as there are usually plenty of commercial risks carefully woven into bespoke amendments.
Allocate Sections to Specialists
Be prepared to split your review and allocate to appropriate professionals. If the review identifies legal or insurance matters, then ensure these sections are reviewed by a lawyer or insurance professional. Further, amended or bespoke documents such as Bonds or Collateral Warranties are typically not drafted in “plain English” and unless you are extremely knowledgeable about these they should be reviewed by respective experts.
Read the Amendments Carefully
Sounds obvious, but unless you read slowly and carefully, risks will be missed. Contract amendments are seriously dull reading, and it is easy to speed over dense but important text. So give the task plenty of time, read through all the amendments and highlight anything that looks in the slightest bit risky. Come back to these later for further consideration.
Compare the Amended Clause with the Standard Form Clause
Ensure you read relevant amendments against the unmodified standard form clause. Contract Documents usually only include the amendment and not the whole amended contract, making interpretation more difficult. Consequently, have both the appropriate standard form and the specific version. Do not assume an Employer is using the latest version as its baseline. Frequently they will use older versions which they are more familiar with and where their amendments have been tried and tested.
Set Up a Review Proforma and Risk Analysis Process
Contract reviews should be approached in a consistent and methodical manner. Set up a standard proforma that allows the specific clause to be identified, the risk against it stated and the desired solution proposed. Ideally a risk analysis process should be included e.g. 1 – 10, or perhaps, more simply, a traffic light system, with green as low risk, yellow as moderate and red as not acceptable in its current format.
Establish Your Risk Profile and Priorities
Each client has a different risk profile, where some risks are acceptable and others are definite no goes. Be clear as to what these are from a company perspective and schedule these out in advance so that they can be used as a standard for all subsequent contract reviews. If you are clear about what is and what isn’t acceptable, it becomes easier to identify whether an amendment has transgressed your company policy.
Be Aware of Typical High-Risk Areas
Through carrying out numerous Contract Reviews, Hawk is aware of the areas which are typically rife for risk transfer and for which contractors should be aware. Pay particular attention to the following areas, which frequently may be subject to more than one amendment:
- Exclusion clauses and unlimited liabilities (particularly damage to works, property, equipment etc)
- Other uncapped liabilities (consider trespass, malicious acts, anti-bribery, confidentiality, data protection etc)
- Indirect and consequential losses
- Uncapped liquidated damages
- Fitness for purpose obligations
- Ground conditions and site risks
- Termination rights
- Hidden design obligations
The above list is not exhaustive, yet within it contains significant areas where a contractor can, unknowing, take on extensive liability.
Transferring Risks onto Supply Chain
A main contract amendment can effectively be a hot potato. No one wants to be left holding the risk. Consider if and how you transfer any unwanted risks onto your supply chain. For example, design risks are often passed on, however consider carefully the mechanism by which this is done. Do your subcontract clauses effectively transfer the risk and is any bespoke drafting required? Consider the implications carefully.
Review Your Review Carefully
Once your review is completed, review it carefully. Have you clearly established what is acceptable and what isn’t? The review should give a clear indication of the level of risk involved allowing fundamental decisions to be made, for example, is it simply too risky to take on? If you intend to proceed what are you going to do about higher risk amendments? The usual options are to manage risk internally or propose amendments and negotiate an acceptable change. Be clear as to how you intend to do this.
Communicate Results to Site Team
If risks are to be managed at site level (for example there may be specific time bar provisions for notices) ensure that these risks are communicated to site level personnel. There is no point identifying a risk and leaving it on a piece of paper. Ensure the site team are aware and the risk is actually managed.
In summary, review all contract amendments extremely carefully and do not simply accept them without question as doing so may give the impression you are not contractually astute. Don’t be a pushover and stick by your company red lines. If an amendment is unreasonable, identify it and seek to change it. Remember all things are up for negotiation and don’t be burdened with unwanted risk.
Hawk has a demonstrable track record in providing high quality commercial reviews, where our experience, commercial and contractual acumen and enthusiasm for our work gives a client the reassurance that major commercial risks are identified in advance. If you have any queries whatsoever, just give us a call. We’d be delighted to discuss.