Contract smart: Five dos and don’ts for contractors

We sign contracts routinely, often undervaluing their significance until conflicts occur. Here are five crucial dos and don’ts every contractor must consider.

Pre-signing

Dos

• Review and understand each project element together, considering their mutual impact.
• Draft with a “what-if” mindset – anticipate worst-case scenarios, not just ideal conditions.
• Conduct due diligence, including tax structures and implications.
• Include a list of pre-approved subcontractors.

Don’ts

• Accept strict, onerous obligations and unrealistic timelines. Factor in local conditions.
• Rely on present cordial relationships or project scale to accept arbitrary terms.
• Accept unrealistic timelines or deliverables, tied to third-party actions, such as regulatory approvals.

Payment terms

Dos

• Set out payment milestones clearly. Require front-loaded payments to maintain cash flow.
• Specify supporting documents for invoices and require timely payment within the due date.
• Define indices/methodologies for variable obligations in non-fixed price contracts.
• Require bank guarantees to be reduced proportionately with milestone completion.
• Provide performance bank guarantees post-handover. Insist on deeming provisions.
• Include default interest and right to suspend or terminate for payment delays.

Don’ts

• Agree to set-off rights for outstanding amounts.
• Agree to onerous bank guarantee terms.
• Allow high retention amounts for punch list items.
• Link significant payments to uncertain regulatory or right-of-way approvals.

Scope

Dos

• Clearly delineate scope and responsibilities. Use scope matrices, setting timelines and penalties.
• Insist on flexibility for third-party obligations, like regulatory approvals.
• Detail project owner responsibilities and obligations. Avoid limiting to payment defaults alone.

Don’ts

• Agree to broad, onerous obligations. Do not commit to unrealistic goals.
• Leave key project owner obligations open-ended – set long-stop dates with penalties.

Termination

Dos

• Set absolute (not relative) termination fees covering actual losses, including vendor cancellation fees, demobilisation costs and lost profit.
• Aim for equal termination rights – grounds should mirror those for the owner, not be confined to payment default alone.
• Incorporate obligation-specific remedies for breach to compartmentalise risk. For instance, specify delay liquidated damages as the sole remedy for delays, excluding any other relief.

Don’ts

• Agree to immediate termination. Insist on a default cure period.
• Agree to reimbursement of government penalties on termination.
• Incorporate termination clauses unrelated to contractor’s scope.
• Limitation of liability

Limitation of liability

Dos

• Cap liability and delay damages. Include standard exceptions such as fraud, gross negligence and personal injury.
• Exclude consequential damage.
• Provide for clear, time-bound and cost-effective (institutional) arbitration clauses.

Don’ts

• Agree to liability exceeding 100% of contract value.
• Agree to delay liquidated damages for the entire scope of obligations.
• Accept overly complex, multi-tiered dispute resolution processes.

Suruchi Kotoky is a partner at Kochhar & Co