How You Can?Mitigate?Tender Risk
This will be helpful for all growing construction and engineering businesses including SMEs that are regularly tendering for new opportunities and do not have in house legal services to provide guidance on contracts and risk.
I understand how important it is to avoid getting stuck with difficult contracts that cost your business money and sometimes lead to a dispute! Contracts that you won but have risk loaded into them that you can?t do anything about. Looking at these risks before you submit a tender will give lead to fewer problems, protect your margins and prevent disputes.
Why is it that more time is often taken to prepare technical submissions and to get the tender price right yet often far less attention is given to the terms and conditions of contract? I appreciate that it can be awkward to raise prickly contractual issues with clients before you have even won the contract. Sometimes, clients may even tell you not to qualify your tender however, its much better to sort things out before you start any project.
There are a number of things that you can do to avoid problems and I’m going to help unpack some of them, so lets start to look at 2 of the risks and what you can do to address them.
1. Lack of Contractual Clarity
One problem you face when tendering is signing up to contractual terms that are not clear.?Here are some important questions that you may want to think about before you execute any contract:
? Is the form of contract bespoke?
? Are the contract documents complete?
? Is the contract heavily amended?
? Are there any ambiguities in or between any of the documents?
Any lack of clarity within a proposed contract leads to uncertainty and it?s better to try and sort things out before you submit your tender or to add something to your price for the risk.
2. Inequitable Risk Allocation
Another problem arises when contractual risk is transferred to a party that has little or no ability to control it, examples include:
? Unreasonable payment terms
? ?Gold? plated guarantees or warranty’s
? Punitive levels of liquidated damages for late completion
? Strict design liability with an incomplete or ambiguous brief
? Risk such as adverse weather or unforeseen physical conditions
Both of these have a bearing upon the level of risk you are being asked to hold and it may affect the final tender price you submit and level of profit sought. I like to think of profit as:
“a measure of the level of reward you would like to receive for the risk being taken by your business”
Profit is also effected by competition, the economy and prevailing market conditions.
These factors all put pressure on you as a tenderer to lower your tender price and exclude amounts for risk from within your tender BUT?this is done at your risk!
If there is little or no control over a risk and its transferred to you, it’s likely that you will get into problems. This could even drive you into a dispute. Contractual risk is best placed with the party is best able to control it. If it is not, a premium should be added to the tender price. In some cases the impact of the risk (if it occurs) may be so great that you decide to decline an opportunity to tender.
If you would like to find out more please watch my You Tube clip on 5 key contractual risks to watch out for when pricing tenders: