I’ve spent most of my working life in the construction industry and it’s a rare day when everything goes to plan. Mistakes, misunderstandings, or simple lack of thinking things through causes a whole lot of negotiation about what comes next. Change orders can be immensely profitable, indeed many businesses depend on them to be profitable. That being said, negotiations don’t always land in your favor so it’s important to understand what’s at stake.
I’ve seen situations that escalated because one or more parties’ lost sight of the bigger picture.
“You know, I think we’re looking at this negotiation all wrong, we’d love to have you for dinner tonight”
For example, let’s say the client is on a shoestring budget. The design team didn’t get paid to investigate existing conditions, so lots of surprises are popping up. Further, let’s say the client decided to purchase salvaged materials that turn out to be different from what they told the design team to include.
So far, it sounds like this is all clearly the client’s fault, and they’ll have to pay to remedy the situation.
Let’s say this client is desperate to open on time because they would otherwise miss out on peak season that accounts for nearly all their annual revenue. To protect themselves, the client required a payment and performance bond for everyone on the job and stipulated liquidated damages of $10,000 per day for being late.
The client is in a tough situation, so they’re particularly concerned about overpaying on change orders. This leads to squabbles that go on much longer than they should. To be efficient and productive, the work at issue needs to happen before other tasks so the job doesn’t progress like it should. A lot of low-budget construction clients aren’t very experienced. They’re not concerned with how this squabble is affecting the overall job because they have contract terms and bonds ensuring their deadline.
So, who pays the price for being wrong? In situations like this, the immediate answer depends on timing. If the squabble drags on long enough, the client may call in the bonds to replace the contractors and get their project built. The replacement contractors aren’t going to be cheap because they’re getting paid for by the bonding agency who can (and likely will) seize assets to settle the exorbitant tab.
Now I’m not a lawyer, nor do I play one on TV, so none of this should be misconstrued as legal advice. I suppose it’s possible that a contractor could win a case against the client, but that will take a lot of time and money. Keep in mind that said legal battle would probably take place after you’ve had assets seized by your bonding agency which likely preclude you from conducting business anywhere else.
For most contractors, getting their bond invoked is an “extinction level event”. I’ve seen situations where a particularly malignant client drove the project into delays, then used the threat of invoking bonds to demand extreme discounts. Over the years I’ve had several situations where it was considerably cheaper to pay for the clients mistake so we could avoid more costly problems. That’s something to consider the next time the client wants to change something on the project.
I’ve found that more contractors go out of business because of problems with a job they won, than from all the jobs they lost. Don’t let it happen to you!
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