Disputes are an inevitable part of the construction industry. Whether minor disagreements or significant conflicts, claims over payments for work performed are common. For contractors, mastering the art of negotiating these claims is crucial—not only to secure fair compensation but also to maintain business relationships and protect profitability.

In this guide, we explore why effective negotiation matters, how to build a robust construction claim, strategies for negotiation, and common pitfalls to avoid, with practical examples to illustrate key points.

Why Effective Negotiation Matters

Effective negotiation is a cornerstone of financial health, reputation, and long-term success in the construction industry. Here’s why it’s critical:

• Financial Health: Unrecovered claims directly erode profit margins. On average, 10-15% of project costs can stem from claimable events like delays, variations, or disruptions. Failing to pursue these claims means contractors are effectively paying to perform work for others.
• Business Relationships: Skilful negotiation allows contractors to assert their entitlements while preserving relationships with clients, fostering trust and collaboration.
• Reputation: A contractor known for fairly and professionally pursuing claims builds a reputation as a reliable operator who doesn’t “roll over” when faced with unfair deductions or disputes.

Example: The Cost of Non-Recovery

Consider a $10 million contract with a 10% profit margin, meaning $9 million in costs and $1 million in expected profit.

If the contractor is directed to perform additional work worth $1 million but fails to claim it (e.g., assuming it’s a “grey area” or accepting a rejection without further pursuit), the financial impact is severe:

• Original Financials:
  • Revenue: $10 million
  • Costs: $9 million
  • Profit: $1 million (10% margin)
• Revised Financials (with unrecovered $1 million variation):
  • Revenue: $10 million
  • Costs: $10 million ($9 million original + $1 million variation)
  • Profit: $0 (0% margin)

This unrecovered variation wipes out the entire profit. To recover a $1 million loss on a 10% margin, the contractor would need to win a new $10 million job just to break even. This example underscores why negotiation is an investment in your business’s financial health.

Building Your Construction Claim

A well-constructed claim is the foundation of successful negotiation.

Contractors should focus on four common heads of claim: contract works, variations, extensions of time (EOTs), and delay costs.

Asking the right questions ensures you maximize recovery and avoid leaving money on the table.

1. Contract Works

These are claims for the originally agreed scope of work. Key questions include:

• Has the reference date for payment arisen under the contract?
• Is the work valued according to the contract (e.g., scheduled rates)?
• Have all required documents been included?
• Was the payment claim submitted in the correct form and timeframe?

If the client alleges defects, respond with evidence of the work’s quality and compliance with the contract.

2. Variations

Variations involve work outside the original scope. To strengthen your claim, ask:

• Is the work clearly outside the original scope?
• Was the variation properly directed or approved?
• Was notice given within the required timeframe?
• Can you demonstrate the cost or time impact (e.g., additional resources, plant, or materials)?

3. Extensions of Time (EOTs)

EOTs protect against liquidated damages for delays. Consider:

• Was there a qualifying cause of delay (per the contract)?
• Is the delay on the critical path?
• Was notice given as required?

4. Delay Costs

These compensate for costs incurred due to delays. Ask:

• Does the contract allow claims for time, cost, or both?
• Can the delay be evidenced and quantified?
• Are delay costs capped (e.g., a daily rate limit)?

Example: Building a Variation Claim

Suppose a contractor is asked to install additional piping not included in the original scope, incurring $100,000 in extra costs.

The contractor confirms the work was directed in writing, submits a claim with timesheets, material invoices, and a program showing the impact on the schedule.

By referencing the contract’s variation clause and scheduled rates, the contractor presents a clear, evidence-backed claim, increasing the likelihood of approval.

Identifying the Best Negotiation Strategy

There’s no one-size-fits-all approach to negotiating construction claims. The best strategy depends on the claim’s specifics, your relationship with the client, and the legal and factual context. Here are key strategies to consider:

1. Prepare Thoroughly

Preparation is non-negotiable. Steps include:

• Research the Facts: Review project documents and consult with project managers to clarify details (e.g., who authorised a variation and when).
• Collate Evidence: Timesheets, emails, and photos are more persuasive than vague recollections.
• Review the Contract: Identify clauses supporting your claim and anticipate counterarguments.
• Know Your Target Dollars: Calculate the claim’s value but be ready to adapt if weaknesses emerge.

2. Understand the Other Side

Step into the client’s shoes to tailor your approach:

• Identify Their Goals: A developer may prioritize profit, while a government entity may focus on process compliance to avoid scrutiny.
• Know the Decision-Makers: Determine who has authority to settle (e.g., project manager or executive) and escalate if needed.
• Recognize Pressures: Understand individual motivations (e.g., bonuses tied to project outcomes) and negotiation styles (e.g., face-to-face or formal).

3. Leverage Formal Dispute Resolution

Formal processes like adjudication, mediation, or arbitration can create leverage:

• Explore Options: A notice of dispute may lead to productive discussions without escalating to litigation.
• Use Timing: In Queensland, for example, submitting a payment claim under the Building Industry Fairness Act gives you six weeks to negotiate before submitting your adjudication application, building pressure on the client.
• Example: A contractor submits a $3 million payment claim and receives a $1.8 million payment schedule. By signalling their readiness to proceed to adjudication, the contractor prompts the client to negotiate seriously to avoid a formal dispute.

4. Decide When to Take a Hard Line

A hard line may be appropriate when:

• You have a clear contractual breach (e.g., a client fails to respond to a payment claim within the statutory timeframe).
• The client’s failure to meet notice or procedural requirements weakens their position.
• Your reputation is at stake (e.g., the client is spreading false claims about your work quality).
• You have a strong evidentiary position, or the client is disorganized (e.g., multiple project managers have left, weakening their defence).

5. Collaborate for Mutual Benefit

In a tightly connected industry, collaboration can be powerful, especially on high-profile projects where both parties’ reputations are at stake. Propose win-win solutions, such as:

• Non-monetary trade-offs (e.g., future work opportunities).
• A compromise that preserves the relationship without fully forgoing your claim.

Example: Hard and Soft Strategy Combination

A contractor submits a $2.5 million variation claim with detailed evidence, signalling a hard line by commencing adjudication proceedings.

Simultaneously, they send a “without prejudice” letter offering a $1.8 million settlement to encourage negotiation.

This approach applies pressure while keeping the door open for a commercial resolution, maintaining the relationship.

Avoiding Common Pitfalls

Even the best claims can falter due to avoidable mistakes. Here’s how to steer clear:

1. Lack of Evidence

Claims without evidence lose credibility. Maintain detailed records from day one, including timesheets, correspondence, and photos. If it’s not documented, it didn’t happen.

2. Unsubstantiated Claims

Avoid vague assertions (e.g., “Bob told me to do extra work”). Back claims with specific evidence, such as written instructions or detailed cost breakdowns.

3. Contract Missteps

Misinterpreting the contract can undermine your claim. For example, claiming variation costs based on actual expenses when the contract specifies scheduled rates can lead to a 30% overvaluation, damaging trust. Always align claims with contract terms.

4. Emotional Decisions

High-stakes disputes can be emotional, especially after years on a project. Avoid reactive decisions by seeking objective advice from legal or industry experts.

5. Poor Timing

Don’t waste the first-mover advantage. Submit a detailed, evidence-backed claim to set the tone. If you receive a strong counterclaim, pause to investigate before negotiating—don’t rush into a deal from a weak position.

Example: The Cost of Poor Evidence

A contractor claims $500,000 for extra work based on a verbal instruction but provides no timesheets or written confirmation.

The client disputes the claim, citing lack of evidence. Had the contractor documented the instruction and labour costs, they could have negotiated from a stronger position, potentially recovering the full amount.

Conclusion

Negotiating construction industry claims is both an art and a science.

By building evidence-backed claims, choosing the right strategy for the situation, and avoiding common pitfalls, contractors can maximise recovery while preserving relationships and reputation.

Whether pursuing a hard line, collaborating for mutual benefit, or combining approaches, preparation and strategic timing are key.

Invest in developing these skills within your team to ensure your business thrives in the competitive construction landscape.

For personalized advice on your construction claims, contact our team at Batch Mewing. Stay tuned for more insights on navigating the complexities of the construction industry.