The traditional lump sum bid contract places most of the responsibility on the owner or developer to guarantee that the bid documents, plans and specifications are perfect. Without any contractor input, the owner is on his own when problems, changes or conflicts occur. The contractors are only contracted to build what's on the plans and included in the specifications. No more or less. Any interference from the developer such as field changes or poor plans will require a cost increase and extension of the completion date.
Using a negotiated contract approach, much of the responsibility shifts from the developer to the contractor or subcontractor. By negotiating, the contractor assumes much of the developer's liability and responsibility including some or all of the following depending on the specific contract negotiated:
- Design accuracy
- Complete plans
- Scope of work
- Site conditions and requirements
- Contract management
- Quality of materials
- Overall budget
- Field conflicts
When negotiating a general contract or subcontract, consider the following contract clauses that may entice your customer to negotiate with your company:
Guaranteed maximum price -- Offer a guaranteed maximum price based on an agreed upon scope of work. Work together to create the required scope of work for the project. Mutually develop a budget that works and is realistic. Guarantee that you will not exceed the budget and you have anticipated everything required to complete the project or your scope of work.
Fixed fee -- Rather than hiding your profit from your customer, explain what it takes to operate your business, cover your overhead costs and make a fair profit. Convince him that your markup percentages are fair and competitive. Then, offer a fixed overhead and profit fee for the project. A percentage fee gives the wrong impression - when costs increase, so does your profit. In the customer's eyes, this doesn't give you an incentive to help him reach the project's budget goals.
Open book -- Tell your customer your books and financial job cost records are open for review. You will hide nothing and your customer can participate in the financial, purchasing and estimating decisions as you arrive at the guaranteed maximum price. At the end of the project, offer to show your customer every dollar you spent. If the final costs exceed the guaranteed maximum cost, your company will be responsible for any overruns. If your final cost is under the estimated guaranteed cost, you will share the savings with your customer.
Savings clause -- Offer a savings participation with your customer for every dollar you save under the guaranteed maximum cost and the final job cost. After you receive your contractor fee, offer to split the savings on a 75-25 percent or 50-50 percent basis between your company and the customer.
Change orders -- A fair markup on change orders should be anticipated. Markup you changes in a negotiated contract at the same markup percentage as you used when calculating the guaranteed maximum price. Don't charge more as it gives the wrong impression that you want lots of changes.
Contingency -- Offer to carry a contingency fund in your contract amount for the exclusive use of your customer. As field problems occur, this makes it easier to work out small extras by using this fund for unforeseen items that occur. At the project completion, refund any unused contingency to your customer.
Discounts -- Offer all trade and material supplier discounts to your customer. Use a contract clause that states when discounts are available, the contractor shall inform the customer of them and ask for the necessary timely funds to maximize the discount opportunities. These discounts will then accrue to your customer who made the funds available.
Pre-payment options -- As an added enticement to negotiate, offer your customer an early pay or no retention discount. Suggest if you are paid within 10 days of the completed work, you will offer a 1 to 5 percent discount for quick progress payments. Additionally, as you complete your scope of work, offer a 2 to 5 percent discount to not withhold the 10 percent standard retention from your final invoice for early payment in full.
Negotiating a Contract is a Privilege
Your customer has placed an extra level of trust in your ability to perform. The best way to develop trust is to have customer relationships based on several years of working together. The second best way to get a customer to negotiate with your company is to seek referrals from your good customers. Word of mouth and making loyal customer relationships a priority will insure you will negotiate more contracts in the future.