Before starting a job, you likely spend time with your clients discussing their expectations and outlining your terms. Construction contract negotiation is both a science and an art — it takes people skills and legal know-how. Here are six tips for navigating the construction contract process so you can get client approval, get to work and get paid on time.
1. Always Draft a Written Contract
Some construction contracts take the form of verbal agreements. However, if an incident occurs, proving you ever had a conversation about your construction contract negotiation becomes impossible. Always get your contracts in writing. A written agreement outlines exactly what both parties are expected to do and is legally binding.
If you’re in a position to do so, consider hiring a construction attorney to help you draft a construction contract. You can use it as a template for further projects and the peace of mind you’ll get may far outweigh the legal fees.
2. Discuss the Tough Subjects
You wouldn’t need a contract if everything was guaranteed to go smoothly. But accidents — and purposeful crimes — can happen anywhere, especially on a construction site. There were 11,504 construction site burglaries in the U.S. in 2021, making it the seventh most common target for thieves.
Construction contracts protect you if someone damages or steals your equipment, your client refuses to pay you, or your working conditions are unsafe. They prevent expensive lawsuits in the event a project goes sideways. Questions to answer in a contract should include:
- Who is purchasing the construction supplies?
- How much will the materials cost?
- If you buy excess supplies, who pays for them?
- If the homeowner fails to obtain financing, how can they terminate the contract?
- Under which circumstances can a client withhold payment?
- Who is liable for a job site accident?
During your construction contract negotiations, you should also discuss the cost of labor. Providing a rough cost estimate may take just 30 to 40 minutes and can win a client over. However, it’s vital to stress an estimate differs from an official quote — what you will charge after calculating all costs — so your client is on the same page.
Discussing money and worst-case scenarios can be awkward, but remember that it protects you and your client. It’s in both of your best interests to be thorough and answer the tough questions before an incident occurs.
3. Know the Types of Construction Contracts
There are five main types of construction contracts, each serving slightly different purposes. Know which one you need before beginning negotiations. Common types of agreements include:
- Guaranteed maximum price (GMP) contracts: You and the customer decide how much the customer will be obligated to pay. GMP contracts usually include a contingency fund in case unexpected costs crop up.
- Unit price contracts: Rather than the customer paying for the project as a whole, you break the project into units. The customer pays you for each unit of work you complete.
- Time and materials contracts: In this type of contract, you earn an hourly rate for your work. The customer also pays for the actual cost of materials and equipment, plus an additional amount that covers overhead and profit.
- Cost-plus contracts: The client reimburses you for all project costs plus a percentage of those expenses that constitute your profits.
- Fixed-price contracts: Also called a lump sum contract, this agreement specifies the customer pays a single, fixed price for a completed project. The client will not cover the cost of any unexpected expenses.
Knowing which contract type benefits you the most before you start negotiating will better equip you to communicate your needs with your client.
4. Decide on Payment and Work Schedules
Only start a project after you and your client agree on a payment plan. Do you need half the money upfront? Will your client wait until you complete the job to pay you? Coming to a clear, written agreement prevents future disputes or late payments.
Knowing the dates — or at least the project milestones — in which you expect payment gives you and your client a sense of security. No one will be caught off guard.
It’s also crucial to agree on a work schedule during construction contract negotiations. Clients may get upset if they expect a project to take three weeks and it ends up taking three months. However, you must give yourself plenty of time to do a job thoroughly without worrying your client is growing impatient.
Talk with your customer about their expectations for a project timeline. Maybe they need you to finish their patio by a specific date because they’re hosting a backyard wedding or taking graduation photos.
At the same time, you should explain your own life circumstances and discuss how long projects typically take. You might even realize you can’t meet a client’s scheduling expectations, but it’s good to figure that out during the construction contract negotiation stage.
5. Start High and Negotiate Down
This construction contract negotiation technique is one of the oldest in the book. First, decide on a range of dollar amounts you would find acceptable as payment. For example, you might prefer the client to pay you $25,000, but you’d also be satisfied with $20,000.
Pitch the $25,000 figure — or even a slightly higher amount — first. The client may accept the offer immediately, in which case you successfully get your preferred amount. Or, the customer might pose a counteroffer. You can then work toward a happy medium that will satisfy both parties.
It’s crucial to always start with a higher amount because it helps clients feel like they’re getting a deal when they haggle down to a lower figure. In the best-case scenario, a customer might accept the higher number without negotiating.
Although haggling down is a great negotiation technique, don’t let a customer pay you less than you need. Construction is hard work and you deserve appropriate compensation. Let the lower price range be a hard line you’re unwilling to compromise on and if a client keeps trying to haggle, you can always walk away.
6. Be Respectful
The best negotiators ask for feedback and listen to a client’s point of view. Make your customer feel understood during the negotiation process, and always thank them for their time and patience. This courteous behavior can go a long way toward people’s perception of your business.
Mastering Construction Contract Negotiation
Reaching an agreement can take time and effort, but if you keep these six points in mind, you’ll be better able to negotiate contracts with your clients and reach a compromise. That usually leads to better outcomes for everyone involved.