Top 10 Secrets of Successful Subcontract Commercial & Claims Management

It is no secret at all that subcontracting is one of the highest risk sectors within our industry. Subcontractors suffer more than most from the mistakes and misdemeanours of others. If the project is poorly funded then the Main Contractor’s first course of action is to reduce outgoings. The easiest way to do this is to delay or limit payments to Subcontractors.

If the Main Contractor feels the pain of liquidated damages or the rejection of interim payment applications then the first to feel the impact will again be the Subcontractors (and often for reasons completely out with the Subcontractors’ own performance!). This is not the result of malice, rather an unpleasant commercial inevitability in jurisdictions without statutory protection for Subcontractors.  The reality is that the further you are away from the source of the project funding, the less likely it is that the cash will find its way to you.

However, there is much that the weary and / or wary Subcontractor can do to minimise their risk and maximise their recoveries. Here are our top 10:

“Back to Back” or “Pay when Paid”- Is it really? The authors of this piece very much doubt that this is indeed the case. What people declare as being “back to back” is rarely so. A Main Contractor may not have been paid for a variety of reasons. Unless those reasons expressly relate to your performance then you may legitimately ask why this has anything to do with you at all. Ask yourself “If the Employer never pays the Main Contractor does that mean I will never be paid?” Is that what you actually signed? We find this rarely to be the case and is often a cause of great confusion between Contractors and Subcontractors who blur the difference between the commercial reality of their financial position and the conditions of the Subcontract they have entered into.

Have you actually seen it..? You’ve heard about it and it’s referred to in your Subcontract but more often than we would care to count, we find that the Subcontractor does not have access to a full copy of the Main Contract. Ask for it, ensure that your Tender team has actually seen it. Make certain that a copy is retained as many Subcontract claims or claim defences are founded upon what the Main Contract does or does not actually say.

Think very carefully before signing your rights away in a purported claim cooperation deal. Cooperation agreements that state something along the lines of “..we will incorporate your Subcontract claim into the Main Contract claim if you drop any direct claims against the Main Contractor..” have become commonplace. Let’s be clear, these agreements are not about ensuring that your claims receive a fair and just hearing by the Employer – they are simply about limiting the Main Contractor’s liability to you (and the Employer) for his own misdemeanours. The Main Contractor does not wish to pay for anything that he cannot pass onto the Employer. Analysing both Employer delay events and Main Contractor delay events is essential to preserving your full entitlement. How best to use this information is a key commercial decision faced by the Subcontract management team.

Prepare your own Programme. It sounds obvious but a tactic we often see is to request that the Subcontractor does not prepare his own programme but simply adopts the Main Contractor’s programme. This can prove to be a very costly decision and often results in the Subcontractor signing up to a programme that does not reflect his own anticipated work sequence or a programme that is not actually approved by the Engineer and subject to further change. Prepare your own programme and this is what your performance will be measured against.

Prepare your own Progress Reports. It seemed like a sensible, cost saving idea at the time to allow the Main Contractor to measure and report your progress but these records remain the Main Contractor’s records. Where are yours? This question will be difficult to answer and ultimately costly to you if you ultimately end up in a dispute with the Main Contractor. The progress reported will also be the Main Contractor’s perception of progress – not yours.

Follow the Subcontract. It costs surprisingly little to properly administer and comply with the terms of the Subcontract with respect to payment applications, variations, progress reports, notices and particulars. The cost of not following these basic Subcontract requirements can be alarmingly high. You need to comply in order that the Main Contractor can also comply and maintain a clear route for recovery of payment from the Employer.

Don’t be one of the crowd. On a project which may include 30 or more Subcontractors  it is easier to follow what others are doing rather than do what you should be doing. Many of the Subcontract terms may differ. Wider relationships may protect other Subcontractors  and they may be holding back accordingly. Don’t be steered by others, follow your Subcontract and comply with the terms.

Be first in the Queue (or not far behind!). It’s always a difficult decision about when to time your move (in terms of claims for additional time or cost) and it is sometimes the case that the first Subcontractor to ‘ask for more’ is used as an example to others of what they can expect. That said, many Subcontractors leave it far, far too late to act. This also leaves the Main Contractor exposed as they have most likely proceeded with claim submissions in the absence of your detailed particulars.

Are you getting the attendance you deserve? You priced your tender on the basis of the timely  provision (by others) of scaffolding, temporary power, timely inspections, 14 day turnaround of shop drawings, agreement of a coordinated construction plan etc., etc.. Make sure you receive this attendance and support and if not, make sure you notify the Main Contractor accordingly. Claims arising in this regard will not be passed on to the Employer as it is most likely to be due to breaches of attendance obligations by the Main Contractor and therefore likely to be strongly contested.

Successful Subcontracting is all about relationships and maintaining a fair balance of risk and reward between the Main Contractor and the Subcontractor. Get this right and most problems can be resolved. A focused and jointly coordinated commercial strategy is likely to yield far greater financial returns from any Employer. Maintain the dialogue with your Main Contractor at all times but don’t forget to protect your interests at the same time because if matters are not amicably resolved you will find yourself in an Arbitration against the Main Contractor not the Employer.

This guest blog article was written by DBS Consult, an international claims and dispute management consultancy based in the UAE.

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