June 3rd, 2016
I am just returning from the 2016 DRI Construction Law Seminar in New Orleans. Besides the fantastic food (beignets, anyone?) and spending time with my fellow construction lawyers, I was treated to some great CLE sessions.
One such session featured Walter K. McDonough of ELK Consulting Services LLC who spoke about construction contracts from the general contractor’s perspective. I wanted to share the following excerpt from Mr. McDonough’s presentation materials:
In negotiating general contracts, the critical principle for the general contractor to keep in mind is risk management. Contractors you need to make the concessions necessary (price, schedule, special materials, etc.) to obtain the Contract. You want to get the work, but you also want to make money and minimize the risk of building the project. In order to meet these two seemingly conflicting objectives, the general contractor’s decision-makers need to understand the risks associated with a project, and then decide which to accept and which not to accept.
In construction, the cliché about the “best job we never got” can often be true. In many instances, the risks imposed by the Owner in the bid documents or in the Contract form itself, can make the job simply too risky to justify making the type of competitive bid that is necessary to win the job. Given the slim profit margins available on the best of jobs, the contractor absolutely needs to make a realistic assessment of the risks imposed by the job, and by the Contract terms, and then determine whether the rewards to be gained if the job is successfully completed outweigh those risks. Construction, by its very nature, is a risky business. It is, however, a fool’s business if those risks are not understood, considered and accounted for before the contract is signed.
The presentation made the striking point that contractors take on more risk for less return than virtually any other business venture. For me, because of the great amount of risk involved, this further emphasizes the need for a contractor to pay full attention to the construction contract process.