Since Adam Smith first set his mind to the efficiency of the pin factory in 1776, specialisation and division of labour has underpinned industrial development. The construction industry has embraced specialisation and division of labour to such a degree that almost every construction project, no matter how large or small, is delivered in practice by a large number of separate parties, each with a narrow field of expertise and each with a commercial and practical imperative to maximise the efficiency within their field of expertise.
We are, of course, speaking of subcontractors. Whether through management contracting or more traditional procurement, subcontractors continue to play a major role in project delivery and are often instrumental in on time and on budget completion. One would naturally then assume that the documentation and management of subcontracts would be a matter of prime importance for contractors and for the industry. In practice, however, the drafting and administration of subcontracts is often given insufficient thought and the management of subcontractors is often poor.
While every project and contract is different, we think there are four strategies that can assist in managing subcontractors and maximising successful project delivery.
1. Bespoke subcontracts – ‘back to back’ is not enough
It is perplexing that contractors will often spend significant amounts of time negotiating and understanding the issues within the main contract, and then seek to engage its subcontractors with an inadequate and imprecise reference to ‘back to back’ obligations. ‘Back to back’ has no precise legal meaning, and seeking to impose a wholesale risk transfer of all obligations in the main contract to each of the subcontractors does little to assist the subcontractor in delivering its works in the manner that is actually required by the main contractor.
The allocation of risk in the main contract is, of course, critically important to the main contractor, as is a detailed understanding of the risks and obligations contained therein. It is equally important, however, that the main contractor allocates appropriate and clear risks to each of its subcontractors in a manner that will ensure the subcontractor understands its express obligations and will be bound to deliver in a manner and at a time that will enable the main contractor to comply with its obligations. The only sure-fire way to achieve this is to draft bespoke subcontracts for each project and, in many cases, for each specific subcontracted scope of works. The issue of subcontract drafting will be addressed in detail in part 2 of this blog series.
2. Subcontractor cash flow fear
All but the largest of subcontractors are susceptible to cash flow risks and are painfully aware of their position in the payment hierarchy. In jurisdictions where ‘pay when paid’ clauses are legal and enforceable (such as the UAE), main contractors frequently utilise such clauses to protect their own cash flow position, to the detriment of the subcontractors. The protection of cash flow is a legitimate and necessary imperative for a main contractor, but it is equally important to discuss issues with subcontractors and to explain the reasons for delayed payment and the likely solutions to the subcontractor’s concerns. This managerial ‘hand holding’ can go a long way to reducing subcontractor fear and subcontractor disputes, delivering an appreciable efficiency gain for main contractors in terms of management and administration time. Maintaining a dialogue with subcontractors is important to mitigating the potential fall out from slow payment.
3. Co-ordination and programming
The role of a subcontractor is often quite simple – deliver a precise scope of work within a precise time. While simple in isolation, the interaction of many subcontractors working on the same site and the issues of overall project deliver can affect the practical ability of the subcontractor to deliver its required works. Problems of access often arise and efficiency is often lost when multiple subcontractors are working in a small area on the same site. These issues increase the risk for subcontractors and can create a hostile atmosphere on site. This in turn creates risks for the main contractor due to potential disputation and a likelihood of more adversarial subcontract management from subcontractors, resulting in more claims and the need for an investment of additional administration and management time by the main contractor.
One solution is, of course, to seek to program the performance of subcontractor’s works in a manner that will minimise the concurrent performance of works in the same part of the site but this is often not an available solution. It is important to ensure there is adequate coordination and communication between subcontractors, ideally at project ‘toolbox’ meetings, so that minor hurdles to project delivery can be resolved before they impact on individual subcontractor’s programmes.
It may be clichéd, but strong, positive relationships with subcontractors can prove to be good insurance for the main contractor when projects turn bad. The ability of the main contractor to deliver the project often rests in the hands of his subcontractors, meaning that the assistance of subcontractors to overcome project delivery problems can reduce the likelihood of ‘up the line’ disputes for the main contractor. Main contractors should for that reason seek to strengthen relationships with subcontractors. Using the same subcontractors on subsequent projects and developing an understanding of the subcontractor’s business can assist in building such relationships.
Subcontractors frequently hold the key to successful project delivery. It is therefore critical that main contractors draft appropriate subcontracts, administer subcontracts successfully and manage subcontractor relationships. In Part 2, we will consider the use of standard form subcontracts or pro-forma subcontracts and the risks involved in this strategy.
By Sachin Kerur and William Marshall