Main Contractors, you are only as good as your subcontractors – why not look after them?

Robert Baker – Associate Director

Since joining Base, I’ve been involved many times in assisting subcontractors who have seemingly been given a tough time by main contractors. This often follows the same pattern, which begins with a friendly and collaborative tender period and a positive start on-site, often referred to as the ‘honeymoon’. However, at some point the main contractor programme starts to fall into delay, pressure builds on the subcontractor, some curt and/or contractual letters are sent by the main contractor and the subcontractor is accused of breaching obligations it apparently didn’t even understand it had. Site motivation wanes, cash-flow dries up, other jobs are prioritised and, before long, a dispute occurs. Sound familiar?

What is going on here?

Are the subcontractors letting main contractors down? Or are they innocent victims to underperforming main contractors? Of course, the answer is never black and white.

In my experience, it is rare that either side are completely fault free. However, there is a prevailing theme that the arrangement (contract requirements) that subcontractors thought they were taking on is not what they end up with. This is usually to their detriment. Common themes of dispute include:

  • Risks allocated via the subcontract that subcontractors seem unaware of and have made no pricing allowance for.
  • Programme obligations imposed via the subcontract that, again, subcontractors seem unaware of and did not account for at tender stage.
  • Contractual procedures, including notices, quote obligations and time barring that the subcontractor has neither the management resources nor skills to comply with.
  • Exposure to liquidated and (more commonly) unliquidated damages that the subcontractor has given no consideration to when pricing.

The problem often starts with a failure in procurement by the main contractor. The standard of subcontract enquiries can be poor with fundamental elements such as a fully defined scope and programme often left deliberately ambiguous. This leaves the subcontractor free to price what they want the required works to be, rather than what the contractor wants. This is often exacerbated by a subcontract order that attempts to pass most, if not all conceivable risk to the subcontractor, imposing a myriad of hoops that it will be obliged to jump through before it can claim an extra penny. This contrast between subcontractor expectations and the imposed contractual reality can be visualised as follows:

Procurement Problem

Subcontractor Assumptions

Main Contractor Expectations

No programme or an overly complicated programme sent with the enquiry. 

The subcontractor prices for optimal durations and sequences, one continual site visit, all areas made available and nobody impeding access.   

The main contractor expects the subcontractor to work to its lengthy, complex, critical path and main contract programme and take on board all of the risk with regards to sequencing, interfacing and durations.

The main contractor also expects the subcontractor to provide its own regular programmes in insolation, which still meet the main contractor’s programme requirements. This often occurs without providing any assistance to the subcontractor with respect to a programme which is normally out of date and irrelevant.

No terms and conditions are sent with the subcontract order or discussed during tender.

The subcontractor assumes that the contract will be simple, without onerous procedures, condition precedence notice requirements and time barring. 

The main contractor expects the subcontractor to comply not only with the terms of the main contract, but also with the multiple policies and procedures that have been added to the subcontract order to pass risk back to the subcontractor.

Status of subcontractor’s quote.

The subcontractor assumes that its quote and any discussions and clarifications made at tender stage will be honored in the subcontract.

The main contractor ensures that the subcontractor’s quote and tender correspondence is strictly excluded from the order. Tender correspondence is made irrelevant.

Collaboration during procurement stops during contract.

The subcontractor assumes the friendly and collaborative approach taken during tender stage will endure throughout the contract.

The tender stage is confined to history, with target driven project managers and quantity surveyors taking over subcontract administration.

Subcontract order issued after works commence. First payment to subcontractor linked to signing the order 

The subcontractor starts work in good faith and treats the late order as a formality that merely enables payment.

Despite being issued after works commence and containing information the subcontractor has not previously considered, the main contractor strictly enforces the procedures in the order – particularly ‘conditions precedents’ to entitlement for additional payment.

What is the answer?

In my experience, subcontractors generally want to perform and maintain good relationships with main contractors but are easily spooked by contractual heavy handedness and perceived unfair treatment. Furthermore, to remain competitive, they often ‘run lean’ when it comes to management staff; they just don’t have the skills and resources to deal with complex contractual administration.

One of the key roles of the main contractor is to manage their subcontractors in a way that engenders good performance. This should result in better quality works and production levels whilst also improving the subcontractor’s cash-flow, motivation levels and the long-term sustainability of their business. The success of the subcontractor is in the best interests of the main contractor; a happy, profitable subcontractor will inevitably perform better, and will be available again for future projects.

So, main contractors, it seems like better procurement, early open discussions about expectations and some empathy (if not sympathy) for a subcontractor’s predicament is required. Look after your subcontractors; after all, you’re only as good as their performance.