Business owners of all kinds share an almost universal need – money. That’s the case whether they are developers, builders, manufacturers, brick-and-mortar, or online stores. At the end of the day, businesses need a client or customer to help them generate revenue.
But not every deal you’re offered is necessarily going to be good for your business. In fact, sometimes committing to a significant client or project can put so much pressure on cash-flow, staff, operations and resourcing that it actually crushes your business rather than growing it.
The sad result is that what seemed like a great opportunity at the time ends up causing immense pain for your business, if not a complete collapse.
In this article, we offer three main areas that should catch your attention as items of caution. These aren’t necessarily all “deal’s off” situations, but potential warning signs that might point to a deal that isn’t as lucrative as it might have first appeared.
These are probably more relevant in larger deals – developments, construction, major services and the like. However, to some extent the principles apply across the board to all business deals.
Negotiations
While many parties have their own terms and conditions, more often than not these are up for negotiation.
Take, for example, a contractor negotiating a deal on a major project. Particulars around scope, design, risk allocation and liability caps all tend to be subjects of discussion during the tender and contracting phase.
Of course, each negotiating party wants to:
- Maximise their own profit; and
- Minimise their own risk.
And often one party will have a bit more negotiating power than the other. As a result, there can be limits to how much “negotiating capital” you can spend on a given contract, so you’ll probably not get everything you wanted.
But there are two events here where you need to consider your position carefully:
First, if your counterpart is utterly inflexible in negotiations, you can reliably predict that they will be the same during project delivery. Let’s say you request 19 tweaks to the contract and are flatly denied all 19 (irrespective of their importance). You can probably take that negotiation attitude and assume it will be the same when it comes to compliance. This means if you’ve agreed to optimistic timetables, or are expecting to be able to reclaim additional expenses, or don’t have systems yet in place to strictly comply with the contract terms – you might be in for a world of hurt down the track.
Next, if you are being forced to accept more risk than you had anticipated, have you taken this into account from a business perspective? Have you priced that risk into your project, bearing in mind your tender or proposal didn’t necessarily factor in what you’re now being asked to accept? Do you know where the commitments on this project could potentially hurt your business? If everything went against you and all of the potential risks became actual events – does your business have the underlying support to survive?
Answering these questions is imperative. If everything is pointing to a high risk low yield contract, you really need to consider whether it’s a deal you want to go ahead with. You may still decide to proceed, but at least you’re doing it with your eyes open about where things could go wrong and the potential importance of working harder than usual to keep costs low and risks managed along the way.
Who Are you Dealing With?
Business markets in Australia are small enough that most major players in an industry know most of the other major players.
So if you’re in the formwork business, there’s a good chance you know exactly who your competitors are.
Similarly, though, you probably know who most of your potential clients are too. Which means you have a good idea about reputations.
In particular, you probably have a good feel for those clients’ reputations for how they deal with their suppliers and contractors. If not, a few phone calls might be in order.
Do they have a reliable habit of ending up in litigation? Do they generally require strict technical adherence to all elements of a contract? Are they sticklers for detail and scope? Are they extremely loose when it comes to payment timeframes? Do they have any experience or expertise in the area you’re to be engaged in? Are you dealing with the decision-makers, or is there a head office somewhere overseas calling the shots? Do they have the financial backing for this project?
Your management of a project should be informed by what you know about the other party.
If your potential client is a new entrant into Australia, you don’t know where their funding comes from, and they have just come out of 3 failed projects in Singapore and have a Google News story about financial concerns – then you will need to manage those risks. Without the right terms and protections in place, you might decide that this deal is simple too high risk to proceed.
What happens if their funding is withdrawn? Are you dealing with a special purpose ($2) company that has literally no assets or money of its own? Which bank are they dealing with? Is it first tier, second tier, non-bank lending, private backing?
Understand who you are dealing with and make informed decisions about how to deal with that information. Don’t be afraid to ask questions if it means the difference between a successful contract and a spectacular failure.
The First Days of Engagement
The first two areas we’ve discussed so far are things to consider before you even enter into a contract with someone.
This one is about your impressions right out of the gate once delivery begins.
Here are some red flags:
- Your scope immediately changes – this is common, and your response to it matters. While it’s extremely tempting to just “wear” it in the interests of a good commercial relationship, that’s not necessarily the best approach. Protect your interests, make the change in scope clear and price it accordingly. Because if this happens on day 1, you can predict what’s going to happen on days 2 through 100 – can you really wear 57 more unpaid scope changes after creating the impression that you’re OK with it?
- The job as described is not the job as you find it – sometimes during negotiations certain assertions were made that you took at face value and couldn’t necessarily verify for yourself. Perhaps you’re in the design business, and you were told that certain files were available, whereas it turns out they are not. Perhaps you were told an advisor would be on board in area X, and they actually aren’t. Similar to a scope change, if the expectations created in negotiations gave a very different impression to what you’re finding on the ground – that’s a red flag. At the very least it’s worth a discussion, because the deeper you go the more issues you might find.
- Your client is loose with compliance, but expects you to strictly comply – a one-sided approach to contracts is rarely a good ground for fostering solid commercial relationships. If your client insists on your strict compliance (“sorry, you didn’t send the notice within 2.7 hours as required by sub-clause 19.5.2.7.1(a)(iii) of the contract”) but not operating in that same mindset for your own (“oh don’t worry we’ll pay you soon there’s just a holdup in accounts”) then this is another red flag. Many service providers and contractors have found themselves in a deep hole with this kind of imbalanced approach to project delivery.
Now while these are red flags, there’s a problem that you didn’t have during negotiations – you’re already in a contract. Walking away from a contract that’s on foot is no small deal, and you should only really consider it with solid legal advice behind you, and a real commercial imperative to go down that path.
But beyond simply walking away, most of the time there are other options available to you to protect your business and ensure things don’t get worse. These might include a few frank discussions, contract re-negotiations, and potentially legal avenues to discuss with your lawyers.
Back in the Real World
Of course, we all live in the real world. We understand you want to foster solid commercial relationships with your clients, because it’s not just this project you’re thinking of – it’s all the potential future ones too, and the reputation your business has in the marketplace.
So we’re not suggesting that every single item of disparity or every red flag requires an over-the-top response, formal notices, variations, changes or angry letters.
What we are suggesting is that you regularly monitor the situation, take stock, and understand your own business pressure points both during negotiations and onwards into the client relationship.
Ultimately most of these issues are about good communication. Protecting your legal interests while maintaining solid communication with your client is the key to a contract ongoing good relationships. But if every sign you see is pointing to a potential disaster, and the upsides on offer don’t outweigh the potential downsides, then perhaps the best decision you can make for your business is to walk away.