In Part 1 of this two part subcontracting series, we detailed some tips and traps with respect to subcontracting, and considered the criticality of successful subcontractor performance to the timely and on budget delivery of projects. In Part 2 below, we examine the risks of pro-forma subcontracts and back-to-back drafting and briefly touch on the benefits of bespoke drafted subcontracts.
Now, we appreciate that a lawyer’s innate desire to dot every ‘i’ and cross every ‘t’ does not always resonate with commercial teams keen to deliver a project, and we are mindful that there are times when it is appropriate to put the weighty law books aside and just get on with it. Subcontract drafting is not however, an appropriate issue to gloss over. It is useful to consider the function of a subcontract, and why they demand attention to detail.
A subcontract defines, among other things:
• what a subcontractor is required to do,
• the time within which the subcontractor is required to do it,
• the consequences for the subcontractor if it fails to meet the time obligations,
• the assistance the subcontractor is required to provide to the main contractor to assist the main contractor in administering the main contract,
• the interfacing that is to go on between subcontractors, and
• the events entitling additional time and cost.
The subcontract constitutes both the rule book and the map for the subcontractor; defining what is required and the consequences of failing as well as broadly illuminating the manner in which the subcontractor may go about the task. The rules and the path of each project are different, and the requirements for each subcontractor on each project are also likely to be different. If the subcontractor is not provided with a clear and concise rule book and map, but rather a broad and generic indication of what is basically required, the subcontractor is unlikely to precisely perform as the main contractor would like.
Here are two common but dangerous habits in respect of subcontract drafting:
The ‘pro forma’ subcontract
It is quite common for major contractors to hold one or a number of ‘pro forma’ subcontracts, which are then routinely released to all subcontractors on all projects. There is an upfront time and cost saving benefit to this approach, as one subcontract can be drafted in a manner that seeks to allocate all transferrable risk onto the subcontractor, and the document can then be used repeatedly.
The major, and quite obvious, risks that arise from this strategy are that a pro forma subcontract will rarely, if ever, accurately address the relevant risks in the specific project, will rarely identify the subcontractor’s obligations with sufficiently clarity as to aid the subcontractor’s compliance and delivery, and will not take account of any specific or unusual main contract provisions. Indeed, the time and cost saving of pro forma subcontracts can very quickly be eroded by additional contract administration work and subcontractor supervision that can result form the use of a pro forma subcontract that is inappropriate for a specific project and does not effectively serve its function.
Rather, it may be appropriate to hold ‘draft precedent’ subcontracts, which may have been derived from previous projects and which contain the major necessary clauses and a typically suitable risk allocation. Such a document may represent a skeleton structure, around which the project-specific subcontracts can then be created. This will ensure that the end product is a bespoke subcontract suitable for the project, however the time and cost will be minimised by using a pre-existing base document. This is, of course, substantially different to rolling out the same pro-forma agreement to each subcontractor on each project.
The ‘back to back’ subcontract
Another common but potentially disastrous approach to subcontract drafting is to stipulate that the subcontract is ‘back to back’ with the main contract and the subcontractor is required to comply with all relevant obligations of the main contract. Commonly, this brief form of subcontract will include a copy of the main contract as an appendix.
This is fraught with problems and is, in many ways, a completely unreasonable way to contract with subcontractors. Under this strategy, the main contractor is effectively saying that the subcontractor is required to identify all the obligations that may be relevant under the main contract to the performance of its works, and to then comply with the obligations it has identified. There is a significant risk of the subcontractor failing to identify all of its obligations and consequentially failing to meet these obligations. There is also a risk of disputes regarding the interpretation of the main contract with respect to the subcontract works. In circumstances where the main contract is administered by an engineer, there may be issues with the administration of the subcontract, particularly regarding whether the main contractor has the authority to act as the ‘engineer’ when administering the subcontract.
As with ‘pro-forma’ subcontracts, briefly drafted ‘back to back’ subcontracts risk exposing a main contractor to significantly greater administration hassles and pose a threat to the efficient delivery of the subcontract works. In the event of formal dispute in respect of an insufficiently drafted ‘back to back’ subcontract, there is a high likelihood of greater legal fees being incurred and a longer and more complex process for resolving the dispute that would be the case if a clear and accurately drafted bespoke subcontract had been used.
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. The time and cost invested in bespoke subcontracts at the commencement of a project can return big dividends in terms of efficiency and smooth project delivery and can often provide some protection to the main contractor in the event that problems arise on the project.
By Sachin Kerur and William Marshall