Part 14 of Our Series on Construction Project Management Skills
XIV. Working with Contractors to Complete Projects
A. Establishing Principled and Fair Negotiations with Contractors
Being an effective Project Manager requires the ability to negotiate in a manner that is consistent, fair and complies with the contract. This paper is intended to identify how barriers to settlement are created, how you can break down those barriers, and how to supervise the collection and creation of project data in order to respond effectively to claims. This paper also addresses how to prepare for a negotiation session, how to establish the rules governing the negotiation and negotiation techniques that help reach a reasonable resolution.
Successful early resolution of claims requires the project manager to be sensitive to barriers that can stop negotiations. Addressing the underlying motivations of the claimant is essential to unlocking these barriers. These motivations often are unrelated to the issues underlying the claim.
The need to be heard and have one's position recognized with dignity is an essential step. The listening process can identify those matters lying beneath a dispute. Once these issues are identified, directing efforts toward addressing the underlying concerns opens the mind of the parties to cooperative problem solving. By identifying and addressing these issues of significance, these barriers can be broken, allowing meaningful discussions to begin.
The secret to an effective negotiation is the adoption of a consistent and persuasive narrative. Consistency is achieved through the information control. Persuasion is achieved through presenting themes and issues that resonate and create sympathy. All of this requires preparation, goal setting and attention to the distance that separates agreement.
1. How Barriers to Resolving a Dispute are Created
A dispute begins with the assignment of blame. In deconstructing a dispute, the first step is to understand how the assignment of blame took place. Many times, the assignment of blame arises from misplaced anger.
Take the example of a contractor who, in the middle of building a project, realizes that his bid was too low, and that he is likely to lose money building a project. When the contractor started the project, there was a feeling of optimism and confidence that the project would turn a decent profit.
When the contractor recognizes that optimism is no longer an appropriate feeling to apply to this project, the contractor searches for other feelings to see which ones match his present predicament. Self-doubt, insecurity and panic are all likely initial feelings. These feelings are not comfortable to hold onto, however, and the contractor will likely engage in some degree of problem assessment to ease these feelings.
The typical process of problem assessment looks for potential sources of problems and potential means by which the problem may be solved. The owner on a project is readily identified as a potential source and solution to a problem because the owner caused the project to occur, and the owner is a source of money for the contractor.
Particularly in instances where there is a public bid, one of the feelings many contractors have is that the competitive process caused the contractor to underbid, resulting in a windfall to the owner. These thoughts rapidly turn to how the owner might be found responsible for putting the contractor in this predicament.
The blame placed on the owner is often tenuous. The contractor's own bid mistakes are blamed on the inadequacies of drawings or specifications. Mistakes by the contractor's crew or late deliveries of materials are blamed on unrealistic or confusing contract requirements. The misplaced assignment of blame against the owner is a common reaction by contractors who feel mistreated.
The process of creating a claim also creates barriers. Contractors equate the effort to create the claim with entitlement to payment. A competitive desire to win the claim arises. Once the claim is received by the owner, a dismissive rejection can aggravate the feeling of unfairness and frustration at being unable to control the outcome. The contractor looks for others to validate its claim. The contractor speaks to the superintendent, who readily agrees with any scenario that removes blame from construction operations. The contractor discusses the claim with other contractors, who concur based on their own desire to assign blame to owners. By the time the contractor has reached this stage, negotiations generally are left to an exchange of obscenities and the self-righteous pronouncement "see you in court!"
Sound familiar? By the time the dispute has reached this stage, it is often too late to reach a reasonable outcome though person-to-person negotiation. A lawsuit inevitably follows.
The legal system can cause substantial changes in the contractor's attitudes, but these changes arise primarily from the high cost of litigation. The monthly receipt of ever-mounting legal bills, with no end in sight creates new anxieties and self-doubts. The blame is usually focused upon the lawyers and the unfairness of the legal process itself. The matter of principle that sounded so good several months ago has transformed into a matter of survival. The owner and contractor are now many thousands of dollars poorer. The project manager and superintendent are blamed for letting this dispute get out of hand. Nobody wins in this situation.
The legal system has embraced the use of mediation to settle the majority of construction disputes. Mediation is a process where a neutral third party employs various means to bring the parties to a mutual resolution. The tools used by mediators to reach resolution can be just as effective at the early stages of a dispute as they can after litigation has been initiated. Project managers can serve the ultimate goal of getting a project built on time and within budget by identifying and addressing the source of settlement barriers at an early stage.
B. Breaking Barriers through Listening, Exhaustion and Confirmation.
A contractor's feelings of resentment toward an owner often arise from a perception that the owner, the bidding process or project management has been unfair. A project manager who is attentive to these attitudes can defuse perceptions of unfairness and foster a better level of communication with the contractor.
1. Listening to the Contractor's Concerns.
Listening is a critical part of this process. When you first hear a contractor grumble about unfair treatment, an immediate face-to-face meeting should be held. Optimally, this occurs before the contractor has had the opportunity to put any claims down on paper. The contractor should be given a full opportunity to express concerns without interruption. You should take detailed notes, and allow the contractor to continue uninterrupted.
The step of listening to concerns can take an extraordinary amount of patience on the part of the project manager. Listen carefully to comments that appear to have nothing to do with the claims, but may give you insight to the underlying issues that are motivating the contractor's discontent. Examples of such underlying issues are: "I had two jobs go south on me last month," "My wife is going to have a baby," "I keep telling the inspector that he is not doing his job right, but he doesn't listen to me." These statements tell you that there are financial pressures or frustration that may be the unstated issues that may be the true motivation behind a claim.
2. Ensuring Exhaustion of the Contractor's Concerns.
When the contractor appears to reach the end of the concerns, exhaustion is a critical next step. Ask the contractor "is there anything else that concerns you about the project." Let the contractor continue with the list of concerns until another pause arises. Ask again whether there are any other concerns. At some point, the contractor will acknowledge that he has finished expressing his concerns. At this point, you should to detect a change in body positioning. The contractor may sink back into his chair, breathe out a sigh, and disengage his gaze. These are all signs that the contractor has exhausted his desire to have his concerns heard.
This is the point of exhaustion. The contractor has been given the opportunity to be heard, and has had the opportunity to say everything that he or she feels has been a source of trouble. This is a critical event, because the pent up feelings of frustration have now had an outlet.
3. Confirmation of the Contractor's Concerns.
The next step is just as important. You need to go though the notes of the discussion and identify the concerns in a factual way, without judgments or assessments. The review of issues should give dignity to the contractor's position without acknowledging or accepting responsibility. There should be a request for confirmation that the understanding of the issue is correct A typical confirmation of the contractor's views might sound like this:
"Ok, your first issue is that you don't feel you should have to pay to get your people back on schedule because it wasn't your fault that the materials were delivered late. Your second issue is that the architect keeps rejecting your working drawings as not being detailed enough, and it is causing you delays. The third issue is that you didn't understand from the contract that you were required to provide temporary fencing. Did I get all of this right?"
At this point, a significant and positive change in the contractor's attitude should be apparent. The contractor has been heard, all of the issues in his mind have been dealth with, and the project manager has confirmed that he or she has listened to the concerns. The contractor is now at the point where constructive discussion of addressing the issues can begin.
Once this change in attitude is recognized, the project manager has the opportunity to ask clarifying questions. These questions should not be judgmental, but can raise issues in the contractor's mind that may not have been considered because of the attitudinal barriers that have blocked settlement.
Here are some examples of non-judgmental questions:
- Can you show me where you believe the drawings are in conflict?
- When did you first notice this condition?
- How have you gone about tracking your costs on this issue?
Note that the way these questions are worded do not acknowledge that the claim or issue entitles the contractor to compensation.
Once these questions have been discussed with the contractor, the project manager should ask for whatever documentation the contractor has on the issues, and take them back for further study. Try to avoid an immediate response or an indication of how you feel about the issues, particularly if claims are involved. Allowing time to respond to the contractor's concerns will give the contractor the appearance of careful consideration, which will later be realized in the response to the claim.
If possible, give the contractor a time frame within which a response can be expected. One of the goals of setting and meeting a deadline is to inspire the confidence of the contractor. If matters prevent you from responding on time, call the contractor before the deadline and tell the contractor you need more time. This shows the contractor that you remember your commitment to the deadline, and is yet another confidence building measure in dealing with a contractor.
Don't let requesting additional time become a habit. If you repeatedly request moving forward deadlines, the contractor's confidence in having his concerns treated as a priority will diminish.
This process of listening, exhaustion and confirmation should help create a better dialogue with contractors, and establish you as a reasonable and fair representative of the Owner. Although these steps may or may not resolve the dispute, it will establish a protocol by which the contractor can bring other concerns to your attention at an early stage.
C. Responding to the Contractor's Concerns in Writing
Following the meeting with the contractor, you should prepare a written response to the concerns. In preparing a response, consult with project inspectors to confirm the nature and scope of the issue, conduct a site inspection to confirm the condition or extra work, and submit the issue to the project designer for consideration. There may, in certain cases, be a need to consult with an attorney. Once all of the information is collected, draft a letter to the contractor, responding to all of the issues raised.
The letter should reflect a careful consideration of the issues and reference the parts of the contract that apply to the dispute. In those instances where the claim does not appear to have merit, be sure to include any concerns you have concerning the amount being claimed by the contractor.
Identification of contract provisions is important. It shows that the Owner continues to intend enforcement of the contract, and avoids a claim of implied waiver.
1. Implied Waivers and Reservations of Rights
An implied waiver of the contract provisions can arise when parties adopt a course of conduct that ignores contract requirements. For example, if the contract requires a verified statement from the contractor that a claimed conflict in the drawings was not and could not have been identified prior to bid, but claims involving ambiguities in the contract are accepted without this verified statement, then there is an argument that the parties agreed not to enforce that condition to the presentation of claims.
Failure to abide strictly to the contract requirements has other ramifications, many of which may not be obvious at the time a claim is received. In the previous example, the waiver of the verification requirement can greatly weaken the Owner's case if there is a later claim under the False Claims Act.
In those cases where there is a deviance from contract requirements, you should be sure to reserve the right to assert all contract requirements on this or any future claims. Failure to provide a written reservation of rights can lead to a claim of implied waiver.
Here is an example of a reservation of rights. In this instance, the contractor has delivered some claim data after the deadline set forth in the contract. The project manager elects to consider the additional data, but wishes to reserve all rights to strict conformance with the contract. The project manager sends a letter, stating the following:
"We are in receipt of your additional time sheets for January 4, 5 and 6, 2003. Although this data was submitted after the deadline set forth in Section 184.108.40.206 of the General Conditions, we will review the information as it has not impacted our review of your claims. Notwithstanding this decision, we reserve the right to strictly enforce all contract provisions with regard to any future claims or claims information submitted."
D. Delivering the Project Manager's Determination
Once you have incorporated the relevant contract provisions, reviewed the data submitted by the contractor and the project records, a thorough set of findings should be prepared and presented to the contractor. The goal is to discourage further pursuit of the claim and to present a strong piece of contemporaneous project documentation that can be employed in the event that a claim is ultimately pursued.
The letter should also note that if the Contractor disputes the determination of the Project Manager, then the Contractor should submit a claim in accordance with the Claim Filing provisions of the Contract.
Before sending the letter, you should set up a meeting with the contractor. Start the meeting by thanking the contractor for coming, and then proceed with a series of questions about the claim that begin a dialogue. Again, these questions should be worded in a way that do not challenge or confront the contractor, but brings issues forward for discussion. Here are a few examples:
- Would you look at this note on the drawing and tell me how you considered this information?
- When I read this specification, it seems to tell me that this was part of the contract work. Do you agree?
- What did you think the scope of work was for this work when the bid was submitted?
Based on the state of the resolution of the issues at this point, you may choose to give your tentative decision, show the contractor some of the documentation that influences your decision making, or arrange that the contractor will provide you with additional information on a date certain. Write the date down on your calendar, and call the contractor if no further information has been received.
Once you have reached a point where you believe all of the issues have been addressed, update your letter with any additional information, have it reviewed by legal counsel, then call the contractor and tell him the letter is coming. If you wish, tell the contractor what decision you have reached. If appropriate, offer the contractor the opportunity to provide additional information on any issues, but set a deadline for receipt of that information.
At this point, you have accomplished a number of important goals in diffusing the contractor's barriers. You have taken steps to create a favorable impression in the contractor's mind, and attempted to diffuse feelings of unfair treatment. Establishing a position of fairness and consistency also creates goodwill for the project as it proceeds.
E. Effective Negotiation Techniques and Strategies
Assuming the discussions did not result in the contractor either dropping its claim or accepting the public entity's valuation of the claim, more formalized negotiations may be considered. There are some basic negotiating protocols that should be established before proceeding with negotiation.
1. Exchanging Information.
Exchanging information voluntarily is a good way to continue the cooperative spirit, and it may provide yet another opportunity to discourage a contractor from proceeding with questionable claims. If the premise of the claim is that the contractor did not include certain work in its bid, request that the contractor provide its bid backup.
Bid backup is the documentation used by the contractor to prepare its bid. Most contractors consider bid backup to be absolutely confidential, and will refuse to provide it. The public entity should insist, noting that if the claim goes into litigation that the bid backup will have to be produced. To alleviate the contractor's concerns, there can be an agreement to confidentiality, so that the bid backup is used only for purposes of claim review, and must be returned at the time of resolving the dispute.
2. Require Complete Resolution of All Issues
Contractors with a large number of claims often try to obtain piecemeal settlements in which some but not all of the claims are resolved. Piecemeal settlements present no risk to the contractor and diminishes the negotiating leverage of the public entity. By the time the parties get to their last rounds of negotiations, the contractor has received payment on all of its strong claims. The remaining claims are usually the ones where the parties are very far apart. Here is an example.
The contractor presents thirty claims. Ten of the claims have merit; the remainder do not. The public entity's primary incentive is to reach a final resolution on the claims. It offers to settle on the ten claims that have merit. The contractor agrees, takes the money, then presses forward with the remaining claims. The contractor has taken the risk out of the negotiations by settling the strong claims. The public entity still has twenty more claims to resolve. The contractor has achieved his goals. The public entity has not.
One technique to avoid "concessions by attrition" is to insist that negotiations result in a complete resolution of all claims, or there will be no settlement. This allows the public entity to make concessions on some claims, and puts pressure on the contractor to accept the amounts offered, lest the amounts offered be lost. This technique can force a contractor to drop a number of weak claims in order to receive an immediate payoff on the stronger claims.
Going back to the previous example, the contractor is offered money on the ten strong claims as part of an overall settlement of all claims. The contractor bears the risk of losing this money if he is forced to litigate. The public entity will only be required to pay if its goal is realized. This is a much better balancing of settlement leverage than allowing piecemeal settlements.
Do not confuse this technique with withholding undisputed progress payments to force settlement of claims. A willful withholding of undisputed payments can lead to a lawsuit seeking interest of two percent per month and attorney's fees. In addition, there may be circumstances where elimination of all of the contractor's strong claims give the public entity an advantage in a lawsuit. Like any negotiation strategy, flexibility to respond to the unique elements of any negotiation is necessary.
3. Using an Independent Third Party to Negotiate Claims
Use of an independent mediator to resolve claims can be a very effective way to resolve claims. Mediators are neutral parties used to help reach a settlement. Mediators often employ the tactics of listening, exhaustion and confirmation to add credibility and to move the parties toward resolution. Mediators are generally very effective in resolving claims by providing an intermediary. Mediators can help explore the settlement positions of the parties without either party making a concession. Mediations are also confidential, which promotes a more candid dialogue.
Mediators are used extensively in construction disputes. If you need the name of an independent mediator, consult with legal counsel. There are many specialized negotiation techniques available in mediation that provide a substantial advantage to parties aware of these techniques. Consulting with legal counsel experienced in mediation in advance of mediation will greatly assist in reaching a positive result.
4. Negotiating the Claim
Negotiating a claim involves controlling the flow of information, adopting a consistent approach toward the evaluation of claims and keeping a very close eye on the difference between the two parties' position. In addition, there are approaches to presenting issues that can help motivate concessions.
a. Adopting a Negotiation Narrative
People are persuaded by what they believe the issues are that surround the dispute. Good negotiators adopt consistent and believable narratives to frame and explain positions taken. A convincing narrative unfolds like a story. Believable stories strike at issues that resonate with people.
Take, for example, an elderly lady who has had her life savings taken by a con man. The story creates instant sympathy toward the elderly lady and instant hatred of the con man. The feelings this narrative evokes are difficult to shake. It will be difficult to persuade people that the elderly lady stole the money for her life savings from a bank, or that the con man was in reality a stock broker giving advice. This type of story resonates so strongly that people will often ignore facts that interfere with the issues that resonate.
Narratives can also force the direction negotiations take. If, for example, one person in the negotiation believes that the other has no money to resolve a dispute, then the negotiations will focus on non-monetary means to resolve a dispute. The ability to employ these issues depends entirely upon the legitimacy that the parties attach to the issue. A party claiming to have no money loses all legitimacy in negotiations if the other party obtains information suggesting the claim is untrue.
Adopting an unsupportable narrative can lead to undesirable outcomes or a breakdown in negotiations. If, for example, a project manager decides to claim that the project is over budget, and that there is no money left to satisfy the contractor's claims, the project manager may well intend this narrative to cause the contractor to reduce or drop his or her claims. The contractor may, in response, decide that the only way he will see any compensation is to pursue litigation. The narrative causes negotiations to cease.
Establishing a narrative that resonates can be difficult on a construction project. People generally respond well to narratives that show fairness. A project manager who has acted fairly and reasonably in resolving claims presents the strong implication that he has acted fairly and reasonably in rejecting claims.
Preferred narratives are those that show fairness, thoroughness and a willingness to reassess issues. Narratives often develop through the history of the dealings between the parties. If the project manager adopts a consistent approach to addressing claims, a narrative develops of reasonable handling that will assist whether the claim is resolved early or though litigation. Convincing narratives are earned, not made.
b. Information Control
Control of information is another essential component of negotiation. It is very difficult, if not impossible to communicate a consistent narrative if several people are communicating for one side. Different messages may be sent concerning the willingness of the public entity to resolve the claim, and undercut the negotiator's credibility. This is particularly the case where there are several levels of authority involved. Speaking with one voice adds legitimacy and power to a position.
The contract documents usually identify the person who receives information. That person should generally act as the source of all communications. This helps ensure consistency in communications and provides a stronger negotiating position.
Identification of a single source of information does not mean that the negotiator acts alone. Each decision on a negotiation should be vetted and considered by all persons having decision making authority on a claim. Once that decision is reached, however, it is the negotiator who should take responsibility for communicating the decision to the contractor.
Contractors often take advantage of the structure within public entities to uncover weaknesses in the communication structure. Communications may be routed to higher levels of authority in an effort to circumvent normal channels. The entire project team needs to be aware of such techniques, and should be directed to return the communication with a request that it be sent to the recipient designated in the contract documents. If an attorney becomes involved in a dispute, the attorney normally takes over the responsibility for all future communications concerning the claim.
There are times where an intentional shift to a new negotiator makes sense. Over the course of the project, there may amass a series of credibility or personality conflicts that undercuts the negotiator's effectiveness. Under those circumstances, there should be a formal reassignment to a new negotiator, and all communications with the contractor should come from that source.
c. Maintaining Negotiation Distance
One of the more difficult skills to master is maintaining negotiation distance. Negotiation distance is the amount of separation between two positions. The manner in which there is movement within negotiations is critical to attaining a reasonable negotiating outcome.
One of the unwritten rules of negotiation distance is that once a party presents a position, that position can never be withdrawn without a substantial reason. If, for example, the contractor submits a claim for $100,000 and the public entity allows only $50,000 for the claim, the public entity cannot later offer to pay less than $50,000. From this point forward, the contractor accepts as true the premise that the minimum he or she will receive through negotiation is $50,000. Similarly, if the contractor indicates a willingness to accept $75,000, any attempt to retreat from that position will be ignored, in the absence of substantial justification. Retreats from previous negotiation positions also substantially undercuts the credibility of the negotiator.
The substantial justification underlying a retreat from an earlier bargaining position is rarely successful in changing the understood negotiating position. For example, the movement from informal negotiation to litigation does not justify a change in negotiating position, even though the reason for the offer was to avoid the costs of litigation. The discovery of significant information that changes the assessment of a claim can establish a reason to change one's negotiation position. The discovery of a new claim can also affect negotiating position.
d. Requiring Justification for Changes in Position
Because changes in negotiating positions should be generally considered irreversible, a great deal of attention needs to be paid to both the amount of movement and the reasons for the movement. One good technique is to change negotiation positions only where new information has been presented that causes a reassessment of the claim. This is particularly effective where there has already been a careful assessment of the claim.
Using the previous example, if the public entity has performed a careful evaluation of the contractor's claim, and can justify paying only $50,000, further movement may be conditioned upon new information that causes a reassessment of the claim. This places the contractor in the position of having to offer new information to justify any change in position. The public entity can then receive the information and decide whether the information is sufficient to cause a reassessment of the claim. This strategy is a means to avoid the attempt to split the negotiation distance in half to come to a settlement.
For example, the contractor claims entitlement to $100,000. The public entity's evaluation is that the claim is only worth $50,000. The contractor drops its claim to $87,500 in an effort to bring the public entity up to $67,500, for an ultimate resolution of $75,000.
Instead, the public entity responds to the demand for $87,500 with a statement that any movement by the public entity can only come where there is adequate justification to support additional payment. The public entity has responded by putting the contractor in a position to present additional contentions to support its position. If the contractor fails to provide any additional information, the public entity has not had to give any ground, yet it can maintain its willingness to negotiate. If the contractor does provide additional justification, the public entity should respond based on an evaluation of the information presented. If, for example, the contractor responds by presenting $10,000 in additional costs, the public entity may respond by noting the tardiness of submission of the information. Reserving its rights to reject the late presentation of the claim (see earlier discussion on reservation of rights), the public entity may then decide that only half of the costs should be recognized.
The result is that the contractor has changed its position substantially, but has been met with a negotiation obstacle that has merited only a slight change in the public entity's negotiation position. This technique is generally effective only in the early rounds of negotiations. There usually becomes a point in negotiations where the distance is small enough to where maintaining a requirement for justification becomes unsupportable. If, in the example presented above, the contractor dropped to $60,000, this would be a strong sign of a desire to close the deal. Requiring specific documentation to justify further movement at that stage would be contrary to common sense because of the substantial additional costs involved in continuing the dispute.
e. Using Negotiation Movement to Communicate.
Another negotiation technique is to show willingness to settle by the amount and nature of the movement. Negotiating teams need to plan in advance in anticipation of multiple rounds of negotiation to preserve settlement leverage. Small moves in position communicate an unwillingness to move from a position, or that the willingness to compromise is reaching an end. Larger moves in position communicate a willingness to negotiate, and a likelihood of further movement.
There is the anticipation that parties will eventually "meet in the middle." Structuring each movement can help avoid overpaying in negotiation of a claim.
In structuring the movement, there can be significant concession points, particularly when there are conflicting claims. The relative strengths of the claims need to be separately evaluated. Moving from a demand to receive money to a demand to pay money is a significant concession, and should be used to communicate a substantial change in position, even if the monetary change is small.
The communication of a "last and final" offer is rarely taken seriously in negotiations. One way to move a contractor off of a "last and final" offer is to get them to admit that if an offer came in for one dollar less than the "last and final" offer that it would be accepted. Once the contractor makes this concession, the point has been made that there is no "last and final" position, and negotiations can then continue. Notwithstanding this, "last and final" positions are signals to the other parties that negotiations are coming to an end.
There is a certain amount of gamesmanship involved in negotiations. At times, the need to reach a resolution overtakes the reasoned assessment of the value of the claim. If you are negotiating and find yourself going beyond established limits, take steps to slow or stop negotiations from proceeding further. Introducing a need to consult with senior management before proceeding further is a means to put the brakes on negotiating further. If you plan ahead by establishing a strategy and setting a goal, you will rarely be caught in this position.
Here is an example of how movement through several rounds of negotiations communicates messages to the other party.
The public entity has a claim against the contractor for $25,000. The contractor has a claim for $100,000. The contractor's negotiation goal is to be paid $50,000. The public entity's goal is to pay $25,000. Both parties begin negotiations by demanding the full amount. The contractor drops its claim to $75,000, hoping to communicate a demand to get rid of the public entity's claim. The public entity does not want to give up so easily on what it believes is a strong claim, so it responds by demanding payment of $15,000.
The contractor, seeing that its gambit has not been successful, retreats and demands payment of $85,000. The public entity responds by maintaining its position and refusing to move further. The contractor relents, and drops back to $75,000. At this point, the public entity claims that it has thoroughly evaluated the contractor's claim and cannot move further without further justification. The contractor presents some of its arguments to the public entity. After considering the arguments, the public entity drops its payment demand to $5,000. Because the public entity's demand has dropped down to a marginal sum, the public entity has essentially communicated its willingness to pay something to the contractor.
The contractor, encouraged by this change, matches the University's movement by dropping its claim to $65,000. The University then makes a substantial move, by suggesting that both parties walk away without any money exchanging hands. This is a typical intermediary move before offering to pay money. It communicates a willingness to negotiate, but suggests that further movement will be minor.
In this instance, the reaction from the contractor is negative. He is getting impatient. The contractor rejects the proposal out of hand and again demands $65,000. This should be expected by the public entity. The public entity needs to move matters forward. The public entity offers $5,000 as token amount to the contractor. The strategy here is to validate the previous proposal to a mutual walk away, and to give an indication that the ultimate settlement will involve some modest payment to the contractor.
At this point, the contractor recalls its goal was settlement for $50,000. There is insufficient negotiating distance to reach this goal. The contractor presents a "last and final" offer of $45,000. The public entity panics, and decides to make a substantial movement to bring matters to a close, and offers $25,000. The contractor does not want to walk away, but is concerned that he has already given too much up. The contractor's demand drops to $40,000, communicating a desire to meet in the middle at $35,000. The public entity presents its own "last and final" of $35,000. The contractor holds out for $40,000. The public entity realizes it has rushed to close the deal and ends up settling for $37,500; twelve thousand five hundred dollars over its goal.
In this case, the public entity made a significant error in jumping by $20,000 late in the negotiations. This communicated to the contractor that there was significant additional room to bargain. A better strategy for the public entity would have been to demand information that would cause a change of position, and to have the contractor withdraw its previous communication of a "last and final" offer. Based on whatever the contractor presents as "new information," the public entity can then move a more modest amount, such as $3,000, to signify that it has reached the end of negotiations.
Watching for the underlying communication of movement is an essential part of negotiating claims, and should be carefully watched.
F. Resolving Contract Change Orders
The primary focus concerning any change order is to reach a final resolution of the dispute. This can be a difficult process, since most contractors are reluctant to release all claims relating to a particular issue, and often seek some form of "reservation of rights" to allow further claims to be made. Most project managers are all too willing to allow the contractor to assert these reservations of rights in order to bring the particular subject of the change order to what the project manager considers to be a close.
That is not what happens, however, with the claims oriented contractor. Signing a change order is viewed as an admission that there was an event that gave rise to additional work or delays associated with the work, and then gives the Contractor the opportunity to present a further claim for impacts.
Project managers need to resist the temptation to have change orders signed with reservation of rights by the contractor. Change orders should reflect full compensation of all types and kinds relating to the issue raised by the contractor. If possible, a change order should represent full resolution of all issues up to a particular date.
In order to achieve an effective release, the usual change order forms are usually not sufficient. Consultation with legal counsel is advised when there is a significant change order to get the proper language to ensure a full and complete release of all claims, whether known or unknown.
Taking this approach will lead to strong protests by the contractor, accusations of unfairness and undue hardship. The response to these accusations should be to note the owner's willingness to resolve the issue, but only if the issue is totally and completely resolved. This correspondence should also note the absence of any continuing impacts upon the contractor's operations, and the ability of the contractor at this point to price out any and all issues relating to impacts. It is not unreasonable for an owner to insist upon a final resolution as a precondition to paying on change orders.
G. Making Partnering Sessions Effective
Claims oriented contractors often encourage the use of partnering sessions. From the contractor's standpoint, the more people that the contractor can involve and focus upon the contractor's claims, the more likely that the contractor will receive some compensation, regardless of the merits of the claim itself.
Partnering sessions are often conducted under agreed rules that the discussions are all "off the record" and do not change the contractual relationships of the parties. The relaxed atmosphere of partnering session often lulls the owner representative into making concessions or observation that the claims oriented contractor can then use outside of the partnering session.
Despite this, owners should be willing to participate in partnering sessions, even with the worst contractors. Before any partnering session, the owner and project manager should develop a principled and reasonable response to the issues raised by the contractor, so that the facilitator's efforts are focused primarily upon the contractor's unreasonable demands. There should be pains taken to limit the degree of open communication that is provided in these sessions, while giving the impression of openness. Sometimes, project management teams can benefit from getting the advice of a professional negotiator to assist in such techniques are information control and negotiation planning.