How To Negotiate Your Security On a Construction Project

Hey, Construction Legends. In this video, we're going to show you everything you need to know about security and construction contracts. It is an internal training that we've done and we just want you guys to have the information. And now, if you're watching this on YouTube, perfect. You're going to see all the slides, you're going to see everything. If you're on Spotify or iTunes, you'll still be able to listen to everything. It'll be perfect. But it'd be better if you jumped out of YouTube so you could see all the graphics and that sort of stuff. Make it a bit of a better experience for you. And for those of you who don't know me, my name is Cian Dillon Brennan. I'm CEO of Quantum Contract Solutions. The reason we make these videos is there are so many construction companies out there that are losing money hand over fist, and they shouldn't. If they understood a few different contractual things, they would make much more money and lose less money, reduce their risk, and ultimately do better as a construction company. So if you're getting some value from this, please like and subscribe now, and let's get into the training and let's go. Okay, security, let's go. So if we go back to this process that we had before, and we're in this section of, of the pre-award, we're negotiating under general conditions and we're talking about security. And we know that once the contract is awarded, we're going to have to provide security to a certain percentage. And then we're going to get half back at the PC, so practical completion. And then we're going to get the other half back at the end of the DLP, defects liability period. And that's how this is all going to work. Now, all we need to do is think about security similar to kind of a mortgage, right, from the company's point of view. So the company is looking at you guys and you're saying, hey, we're going to do this work. And they go, right, well, you're going to do it, we're going to hold back, we're going to need to hold it, we're going to make sure that we have you know, a certain amount of money just in case you don't do the work, right? Kind of like a bank is looking at you and they go, well, I need to be able to sell the house if it goes belly up. Their deposit money that we can keep if this whole thing doesn't work out for us, right? It's just kind of, you know, it's a hedge against things going badly from their point of view, okay? That's all it is. So let's talk about what is security specifically, okay? First thing is The company will retain in a few different ways. We'll talk about it now. 5% of the contract value. Now, the contract value is an important term that you are going to ask you to make sure that you define. And it's basically what is the total value of the contract that you've signed? Okay. So when you sign the contract, there's going to be an agreed contract value, and we need to figure out what that contract value is because it's 5% or 10% of that contract value. Normally the contract value or the contract price is defined in the contract as a defined term. Okay. So that's how you'll know exactly what we're talking about. Make sure the company can complete the work even if you mess up or go insolvent. That's the real reason that we have security. They're going to hold that money back to make sure that they can pay someone else to do the work if you go off or you go insolvent or something bad happens. That's why they want to hold the money or For example, if during that DLP period you don't come back to site to fix your mistakes, they'll use that money to rectify the works. Okay, that's what security is. That's the purpose of security. Now remember that you'll get half back at PC and you get the other half back at the end of the DLP. Okay, once again, you're kind of trying to get rid of, you know, by getting half back at the PC, you get, you know, half of it back and they're going to retain the other half if anything happens during that PC period. Okay, I hope that's clear. Now let's talk about the types of security there is. There is bank insurance bonds, okay? So really, the bank guarantee and retention are the main two ones that get used all of the time, right? Bank guarantee is— it's through the bank and you go, hi bank, I need a guarantee from you that you will pay the company 5 to 10% of the contract value, whatever it's agreed on in the contract, of the contract value in the case that, you know, I can't do the work. They can come to you and pull on that money, um, and that's the agreement. So you have to pay the bank for that privilege. So they'll go, right, we'll give you a bank guarantee, but you need to pay us X amount per month, um, to be able to— for us to do that for you, because we're taking on a risk that that could potentially be pulled in and therefore we're gonna charge you interest. Now, what are the upsides of that? The upsides is it doesn't really affect your cash flow from a large point of view, from like a project point of view. So your cash flow is not really badly hurt. And the other one is, you know, it's quick and you can get it done. You know, that's it. The downside is you obviously have to pay for it. It costs you money. You're actually out-of-pocket money with a bank guarantee. So that's typically why we prefer the next one, which is retention. So retention is they will withhold 10% of every invoice until they hit 5% or 10% of the contract value. Whatever you agree that security is going to be, they'll withhold 10% of every invoice until they hit that amount. Now, what's the Pro of this, the pro of this is it actually costs you nothing. You don't lose any money, you're not paying any money away. The downside is you lose 10% of every invoice, but pretty much at the start of a project where you kind of need the cash flow, you want, you need the money to cash flow your project. So if you're a company that is a good cash flowing company and that's not a concern to you, then obviously retention is much better because you're actually paying less money. But if cash flow is important to you, then a bank guarantee might be better. A bank and insurance bonds are pretty much the same thing. One is just by a bank, one is by an insurance company. They give you a bond to basically cover the same thing. You pay the insurance company money and they'll hold the bond for you, and then they'll pay out if the company basically pulls on it, or they say that we need to do it because whatever, for whatever reason. Okay, so there are the 3 different types: bank guarantee, retention, and insurance bond. Now, what is the problem we're trying to solve with this part, this clause in the contract where it's asking for security, right? Really, we're talking about how much security do they want, right? Because for, for our clients, the less is better. The less security they have to put up, the less it's going to cost them in cash flow, and less it's going to cost them in actual paying out. Okay, so the less is better. So we want to get it down to zero if possible, or if 5% is industry standard, right? A lot of companies will look for 10% security, and then, you know, we will get it down to 5%. So what that means is, if you have— just to be clear— if you have 10% security, you'll get 5% back, um, at PC, and you get 5% back at DLP. And if you have 5% security, you get 2.5% back at PC and 2.5% back at the end of the DLP. So that's, that's important. That's the main thing. We're trying to reduce the security because if we can reduce the security, we can increase cash flow and we can reduce costs. And that's a real money saver. Okay. Now, what is more important, cash flow or total cost? We've got to think about which one is better because the company will really accept bank guarantee or retention. They don't really care. They'll get their money either way. So as we got to think of our clients that we're dealing with is, okay, what's more important to them? Is it cash flow or is it the total costs? Okay, so if it's cash flow is more important, then bank guarantee would be better because we need to— the retention eats at your cash flow more. And if total cost is more important, then obviously retention is a better option. If you can handle the cash flow issues, the retention is definitely better. Okay, you're actually not out of pocket. Now, do you get it back at PC, right? You get half back at PC, or you get half back at DLP. Now, typically that's normal, right? It's you get half back at both of those times, and that's kind of industry standard. However, you've got to think about the type of company that you are. For example, if you're the type of company that all of your work— if you're a service provider and the service that you provide is finished when you leave site, well then there should be— there's nothing, no works that can, that can go wrong, or there's nothing that can happen for a 12-month period. For an example is a scaffolding company. If you're a company that's going around putting up scaffolding around and then you finished work, right, so you're gone, you're gone, your service provider's scaffolding is gone, well then there shouldn't be a defects liability period because you're gone. There's nothing can go wrong for 12 months. So to withhold the money makes absolutely no sense. You should get it all back then. So really, this is making sure that you the type of company you are needs to make sense for if you're getting security back or not. Okay, now one little tricky thing that we need to be careful of, and this is why I said we've got to remember the contract value, contract price definition, and we've got to also look at the security clause. More often than not, you're going to have your contract price, and probably it's going to increase as the contract goes on. There's going to be variations, there's going to be delays, changes, whatever. So it's going to increase, which means in theory that if you have to provide a 5% security, 5% is going to increase. So does that mean that your security has to increase? It needs to be crystal clear to understand what happens. Obviously for our clients, we don't want it to increase. We want it to stay the same. We don't want to get— have like, you know, if a contract doubles, we don't have to give double security. Best interest at heart, we want to keep their costs down. Down. Okay, there are the 4 things that we're looking for. That makes sense. Um, what you need to be able to do now is go through, talk about each of the key points, talk about what security is in general, talk about how, like, what it is, how it works, kinds of securities, um, how each of them— and then what are the problems that we're trying to solve. Okay, that's what I need you to put in your Loom.