Subcontracting - Risking it all?
01/07/24
Newsletter #13:
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Subcontracting might sound like a good idea, but is giving someone else the responsibility to deliver your Scope really a good idea!?
Let’s break it down:
What is Subcontracting in the NEC4 ECC?
Why does it create risk?
What can a Contractor do to protect themselves?
What power does the Project Manager have?
What is Subcontracting in the NEC4 ECC?
Clause 11.2(19) defines a Subcontractor as - “a person or organisation who has a contract with the Contractor to”….(construct, design, provide a service)
The fundamentals of subcontracting are defined in Clause 26.1, where the following apply, this is the quick hit list of to-do’s:
26.1 - The Contractor is responsible for Providing the Works as if it has not subcontracted.
26.1 - The contract applies as if a Subcontractor’s employees and equipment were the Contractor’s
26.2 - Contractor submits the name of each proposed Subcontractor to the Project Manager for acceptance
26.2 - PM doesn’t have to accept a proposed Subcontractor if they will not allow the Contractor to provide the works
26.2 - The Contractor does not appoint a proposed Subcontractor until the PM has accepted them
26.3 - Contractor submits subcontract documents to the PM for acceptance unless its an NEC contract of the PM agrees no submission
That gives us a good starting point to work from, but what are the meaning behind each of these, let’s dig a little deeper:
Clause 11.2(15) Provide the Works means to complete the works in accordance with the contract. The Subcontractors need to abide by this also.
Clause 24.2 - PM can instruct the Contractor to remove a person, this will apply to Subcontractors and gives control to the PM if unsafe or unacceptable issues arise from an individual.
Clause 71 - Equipment of the Subcontractor can be marked by the Supervisor. Meaning more control is given to the PM and Client in consideration for payment.
The Contractor takes a risk that the PM will accept their proposed Subcontractor. If they don’t this could impact programme, require alternative Subcontractors to be sought etc….a risk!
Contract documents will need to be disclosed unless NEC is used…i.e. the PM can assess the subcontract terms and decide whether they will enable the Contractor to provide the works!
Why does it create risk?
There is a balance here, do you deliver in-house or appoint Subcontractors and act as a ‘management contractor’. Let’s give some pro’s and con’s and we will explain why its actually quite risky!
Benefits of Subcontracting:
Cost control. Fixed prices can be agreed with Subcontractor.
Programme. Subcontractors can be tied to programme dates which contractually bind them
Flexibility. Appointing a Subcontractor gives the Contractor a single point of contact with the Subcontractor then having to manage their own staff. Less burden for the Contractor.
Specialisms. The Contractor may not be a specialist in a specific activity, a Subcontractor could be used for this, e.g. demolition of an existing concrete asset
Distribution of liability. The Subcontractor will become liable to the Contractor if they don’t deliver, which the Contractor will transfer from their contract with the Client.
Disadvantage of Subcontracting:
Subcontractor’s are not part of the Contractor. Less control over their operations, staff, activities, etc.
Programme. The Contractor will have man activities to do, if a Subcontractor doesn’t perform, this could impact other works and create a bigger problem for the Contractor. E.g. Works are delayed for a valid reason, the Contractor cant transfer that risk to the Client, and it results in the Contractor’s programme being severely delayed and potentially pushing them into delay damages.
Availability. Subcontractors work for multiple contractors. You may not be the priority!
There is no additional fee for managing Subcontractors. NEC3 has a subcontract fee, NEC4 does not. With an agreed Subcontract cost and a fixed fee, there is a predefined margin that the Contractor can gain.
The deal breaker - Contractor still remains liable as per 26.1!! Even if you Subcontract everything, the Contractor still remains liable for delivering the works. Everything then comes down to contract management and control of the supply chain!
What can a Contractor do to protect themselves?
There are a few simple steps. These level of risk will vary depending on the project and Subcontractor but in principle this is a good starting point:
Ensure the contract with the Client has enough fee to adequately manage Subcontractor’s (Contract Data Part 2).
Use NEC Subcontract’s and go back-to-back, i.e. when reasonable, transfer risks/ liabilities in the main contract down to Subcontractors
Ensure Prices are agreed and controlled, compensation events are clear.
Have NEC professionals on your team to manage the Subcontracts.
Ensure Scope is clearly defined with the Subcontractor, as well as Site Information, and programme.
Use the principles of NEC. Bring Subcontractors into early warning meetings, programme reviews, and progress monitoring.
What power does the Project Manager have?
We mentioned this above, the PM has significant control when Subcontracting is proposed.
If the Subcontractor will not allow the Contractor to Provide the Works, the PM does not have to accept them. The responsibility is on the Contractor, however good project management shows that this is actually a benefit to the Contractor. The PM can explain to the Contractor why the Subcontractor might not be suitable, and thus avoid future issues with that supplier!
The PM also has the ability to remove people from site, including people working for the Subcontractor. This carries risk for the Contractor and again provides control by the PM.
Summary
NEC contracts should be delivered with mutual trust and co-operation. These processes outline above give even control to all parties but with the intention of ensuring the project brings in the right level of support with acceptance by the relevant individuals.
Ultimately though, it is the Contractor who takes the risk. They still have to deliver the project as if they were doing everything themselves!
Do you think this is risky?
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To understand more about how to prepare and manage an NEC contract, the following guidance documents are available.