How to lose everything without really trying
Don’t enter into any contract or situation with your eyes wide shut. Because if you do, it could cost you your business.
OF all the challenges flooring contractors face, taking unnecessary risks must be the one that causes the most significant problems. Construction is a tricky balance of risk against rewards, so if you’re frightened of risk, then you should find another way of earning a living. That doesn’t mean that risk is something to be ignored.
So, my most important message is right here: please do not enter into any contract, or situation with your eyes wide shut! Because if you do, then it could easily cost you your business.
Here are some ways to recognise and control the risks you’re taking:
1 Ensure you know exactly who it is that you will be entering into contract with.
2 Check their financial credentials.
3 Identify the risks and responsibilities at tender stage.
4 If the risks are unacceptable, consider withdrawing.
5 Price for the risks.
6 Qualify or reduce risk by negotiation.
7 Ensure the contract incorporates what you have agreed.
8 Manage the risks.
You may think you know who you are going to be working for but make certain. People move around and often take their subcontractors with them. But the fact you or a colleague might know someone at the company will count for nothing if their company fails. Even large national contractors have subsidiaries or trading companies that are there to shield the parent if things go wrong financially.
Check the company’s financial status thoroughly. Are they good for the money? If they fail and are not able to pay you, then all your hard work will have been for nothing because you won’t get a penny. If you can, talk to other subcontractors that are working for them to see how well they get paid.
Before you commit resources to the costly process of producing your tender check out the terms and conditions that you are going to be asked to sign up to. Check for onerous conditions. These might include:
terms that nullify the benefits of the Construction Act
onerous amendments to Standard Form contracts
use of in-house forms of contract
excessive liquidated damages or unlimited damages
extended payment periods
non-payment for unfixed materials
conditions precedent for payment
extended retention periods
onerous set-off arrangements
onerous performance bonds and warranties
enforced acceleration without payment
lack of firm programme dates and periods
suicide terms such as ‘to suit main contractor’s progress’
excessive design or co-ordination responsibilities
unworkable protection obligations
responsibility for checking previous works of other trades
You need to decide if the risks are bad enough to justify ‘walking away’ at this stage. This will obviously depend on a whole range of factors, including the current state of the market and your order book. But putting your whole business at risk just to fill a gap in workload could be the worst business decision you ever make!
Make a realistic appraisal of the risks identified from the enquiry documents, and practical assessment as to ‘what the market will stand’ in terms of price and qualifications. Few contractors will reject a favourable tender out of hand, even if there are some qualifications, and as price is almost always the key factor they will negotiate if the price is right. However, beware ruling your tender invalid in cases where qualifications are forbidden (e.g. local authorities, public utilities etc).
When it comes to agreeing the terms of the contract don’t simply accept what the contractor puts in front of you. Negotiate! Contrary to popular belief contractors will negotiate about their terms.
Once you have negotiated the best deal possible, make sure that what you’ve agreed is properly incorporated into the contract. Some contractors aren’t averse to deliberately putting back in the contract that which you have negotiated out. And don’t start work unless you know and have confirmed exactly what contractual basis you are starting work on.
You must manage the risk at every stage of the process. Here are a few ways in which you can manage risk:
give your team a thorough briefing or workshop as to the contract etc.
use the tender risk appraisal to instill awareness of the risks
identifying these risks immediately they appear on the horizon
use a system of site records and notices which seek to minimise and manage the risks
allocate sufficient and appropriate staff resources
use a procedure for regular monitoring all aspects of the project
These procedures need to be operated as a matter of routine on every job. This can be done via standard check lists, linked to your company’s QA procedures. But, however you do it, please do not ignore the need to manage risk.
If this approach is followed on all jobs, then financial disasters should become a thing of the past and you won’t be in danger of losing everything without really trying.
As ever, if you have a problem, or need any help managing the risks your business faces, don’t hesitate to contact me.