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Section 1
The order
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Worth the risk?
If you read nothing else in this book, please read this chapter. Of all the challenges that Specialist Subcontractors face, taking unnecessary risks must be the one that causes the most significant problems. Construction is a tricky balance of risk against rewards, so if youâre frightened of risk, then you should find another way of earning a living. But that does not mean that risk is something to be ignored. So, my most important message is right here: please do not enter into any contract, or situation with your eyes wide shut!
Here are some ways of recognising and controlling the risks you are taking:
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Ensure you know exactly who it is that you will be entering into contract with.
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Check their financial credentials.
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Identify the risks and responsibilities at tender stage.
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If the risks are unacceptable, consider withdrawing.
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Price for the risks.
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Qualify or reduce risk by negotiation.
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Ensure the contract incorporates what you have agreed.
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Manage the risks.
Step 1 You may think you know who you are going to be working for but make certain. People move around and often take their Subcontractors with them. But the fact that you or a colleague might know someone at the company will count for nothing if their company fails. Even large national Contractors have subsidiaries or trading companies that are there to shield the parent if things go wrong financially.
Step 2 Check the companyâs financial status. Are they good for the money? If they fail (and even the biggest can; think Carillion), and are not able to pay you, then all your hard work will have been for nothing, and it could cost you your business!
Step 3 Before you commit resources to the costly process of producing your tender, check out the terms and conditions that you are going to be asked to sign up for. Check for onerous conditions. These might include the following:
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Terms that nullify the benefits of the Construction Act
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Onerous amendments to Standard Form contracts
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Use of in-house forms of contract
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Excessive liquidated damages or unlimited damages
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Extended payment periods
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Non-payment for unfixed materials
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Conditions precedent for payment
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Excessive discount
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Extended retention periods
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Onerous set-off arrangements
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Onerous performance bonds and warranties
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Enforced acceleration without payment
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Lack of firm programme dates and periods
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Suicide terms such as âto suit main contractorâs progressâ
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Excessive design or coordination responsibilities
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Unworkable protection obligations
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Responsibility for checking previous works of other trades
Step 4 You need to decide if the risks are bad enough to justify âwalking awayâ at this stage. This will obviously depend on a whole range of factors, including the current state of the market and your order book. But putting your whole business at risk just to fill a gap in workload could be the worst business decision you ever make!
Steps 5 Make a realistic appraisal of the risks identified from the enquiry documents and practical assessment as to âwhat the market will standâ in terms of price and qualifications. Few Contractors will reject a favourable tender out of hand, even if there are some qualifications, and as price is almost always the key factor they will negotiate if the price is right. However, beware ruling your tender invalid in cases where qualifications are forbidden (e.g. local authorities and public utilities).
Steps 6 When it comes to agreeing to the terms of the contract, donât simply accept what the Contractor puts in front of you. Negotiate! Contrary to popular belief Contractors will negotiate about their terms.
Step 7 Once you have negotiated the best deal possible, make sure that what you have agreed on is properly incorporated into the contract, and donât start work unless you know and have confirmed exactly what basis you are starting work on.
Some Contractors are not averse to deliberately putting back in the contract that which you have negotiated out!
Step 8 You must manage the risk at every stage of the process. Here are a few ways in which you can manage risk:
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Use a RAID log to record all the risks from the outset (see Section 9 âWhat is normalâ).
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Give the site management a thorough âteamâ briefing or âworkshopâ as to the contents of the documents.
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Use the tender risk appraisal to instill awareness of the risks.
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Identifying these risks immediately they appear on the horizon.
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Use a system of site records and notices which seek to minimise and âmanageâ the risks.
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Allocate sufficient and appropriate staff resources.
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Use a procedure for regular monitoring.
These procedures need to be operated as a matter of routine on every job. This can be done via standard checklists, linked in to the companyâs QA procedures (see the Appendices). One of the many benefits of this approach is that everyone is encouraged to feel âpart of the teamâ. If this approach is followed on all jobs, then financial disasters should become a thing of the past.
Itâs close to 30âyears since Jack Russell first wrote The Streetwise Subbie. Since then much has changed, and in contractual matters mostly for the worse as far as Subcontractors are concerned. Back then most Contractors werenât out to screw their Subcontractors. Sadly nowadays, many can only survive by doing so!
Donât say you havenât been warned!
Identify and manage risk from the outset!
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Beware letters of intent
The letter of intent is one of the most common sources of subsequent argument, or even disaster! Many such letters, when studied carefully, are often no more than an indication that some party is contemplating placing an order. If that party changes its mind, there is usually no legal comeback whatsoever .
If you are not careful, you could end up with all sorts of obligations, e.g. to commit to placing materials on order and organising resources, but with no entitlement to be paid for your trouble!
What is required, as an absolute minimum, is
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Instruction to proceed and/or expend money on specific functions (e.g. âCommence working drawings and procurement of quotations for specialist itemsâ)
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Terms of payment for all works and/or services provided, including profit, as the work progresses and irrespective of whether or not the subcontract proceeds or formal contracts are entered into
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Confirmation of price, and either no restriction or an appropriate restriction of the amount you will be able to recover
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Clearly defined scope of works
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Confirmation of programme, start date and periods
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Confirmation of agreed terms and conditions â see âWorth the risk?â
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Indication of when formal order or documents will be forthcoming
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No onerous conditions
The fact of the matter is that very few letters of intent comply with the above criteria. Regrettably, it is often the case that jobs are started (even major projects), on the basis of very vague letters which may well be contractually worthless. Even if they are indicative of the potential formation of a binding contract, there may well be glaring omissions regarding price, programme and/or other terms. These deficiencies are, in fact, the seeds of subsequent dispute. Indeed, it is fair to suggest that many disputes arise not from belligerence, but from uncertainty.
It is foolhardy to expend substantial resources on the basis of a âletter of intentâ. Even properly formed and well-drafted construction contracts are subject to interpretation, and they are complicated enough without the added burden of trying to establish whether or not there actually is a contract! The last place you want to be is in court trying to resolve a protracted and expensive dispute.
As a streetwise subbie, you should try to get all essential aspects (i.e. price, programme, subcontract conditions, etc.) agreed and confirmed in writing before you actually do any design, order any materials or commence work. If a letter of int...
