Most often, a disputed change order request or claim for extra costs on a construction project will require one or more negotiation sessions between the contractor and owner to arrive at the final cost and time impact. Negotiation offers the last and best opportunity to settle a dispute without resorting to arbitration or litigation. Negotiation offers the last and best opportunity to settle a dispute without resorting to arbitration or litigation.
Before going into the negotiation meeting, it is important to establish a strategy -- the framework from which the topics to be negotiated will be approached. The following points are stressed by the Construction Contract Negotiating Guide*
- Establish objectives and how they might be obtained
- Understand which objectives cannot be compromised under any circumstances?
- Decide which can be compromised and to which extent?
- Anticipate which ones are expected to be compromised or dropped totally (pie-in the-sky)?
Strategies should be flexible; plan alternate strategies in case the primary strategy has to be abandoned.
Proper preparation also means assembling all necessary data and documents that may be required to support the contractor’s position in the negotiation sessions. Most of this data probably is already included in the claim document, but additional substantiation that might be useful for the presentation of the claim — including PowerPoint slides and comparison charts — should be brought along to the meeting.
Determine the desired order of the discussions during the negotiations. Some claims should be negotiated by discussing the strongest sections first. In this way, the strongest portions of the claim may be used to convince the opponent of the validity of the weaker parts. At other times, the contractor may wish to test the attitude of the opponent or display its reasonableness by first discussing the weaker portions of the claim.
The development of the strategy also should include a discussion of the relative leverage of the parties. The bargaining position of the parties dictates which party will negotiate from a position of strength. There is more than one potential area of leverage. For example, an Owner usually is in the stronger position in terms of economic power. This may influence the process by allowing the Owner to stall in order to weaken the contractor's will and financial ability to continue. The contractor’s leverage may lie in the strength of the claim, the ability to recover prejudgment or Contract Disputes Act interest or attorneys’ fees, or the ability to retain more experienced counsel.
This article is based on a chapter on negotiations written by Kathleen O. Barnes in an upcoming book on construction claims. Successful negotiations are not just about bargaining table tactics, but they are grounded in proper proposal preparation, company goals, knowledge of the process and understanding your opponent. In an upcoming interactive webinar on Negotiation of Construction Claims & Change Orders on Wednesday, February 18, 2015, Attorney Barnes walks through the process and the considerations to properly prepare for and achieve successful negotiations, including how to:
- Identify the various goals of a negotiation — it's more than a bottom-line dollar amount
- Anticipate the considerations of your opponent
- Perform recovery risk analysis
- Prepare for the negotiation
- Learn the importance of a term sheet and what it should contain
- And much, much more!
The session includes a 15-minute question-and-answer period so the audience can ask questions about their specific situations. Click here to register today.
*The Construction Contract Negotiation Guide was last published by the US Army Corps of Engineers in 1988.