Construction sub-contracts

Our team of specialist lawyers draft, negotiate and finalise all tiers of project documents, including industry standard and bespoke sub-contracting arrangements, which achieve our clients’ commercial aims. Our experience and sector focus results in clear, practical, cost-effective advice on the most important issues.

With many construction projects, sub-contracting is a necessary and important part of the project.

The backbone to a well-managed and successful construction project is found in a comprehensive and typical set of construction legal terms at all tiers, including sub-contracting level. It’s essential to ensure the project is well planned and contractually clear, including appropriate safeguards.

Where a sub-contractor is engaged, the main contractor is still ultimately responsible for fulfilling all the obligations under the construction contract with its employer, even if it is one of the sub-contract team who fails to perform. That said, all parties have an interest in ensuring that the sub-contracting arrangements are sensibly drafted, implemented and properly align with the main contract.

Employer protection for sub-contractor related risks

The employer should review sub-contracting arrangements to ensure they support and align with the main contract. By way of example, the employer will want to ensure that the sub-contracting costings align, and relevant performance requirements match those in the main contract.

Some key areas to consider include :-

• Due diligence on and/or ability to veto sub-contractors - verify the financial health of potential sub-contractors to assess their ability to complete their work, evaluate their track record, references, and experience in similar projects, and ensure they have adequate insurance coverage.

• Incorporating main contract terms - relevant terms from the main contract should be cited or incorporated into the sub-contract to avoid ambiguities, gaps, or movement away from a ‘back-to-back’ arrangement.

• Sub-contracting assignment and novation - the employer should have control over sub-contractor changes.

• Consultant oversight – allocate responsibility to a consultant team member to provide oversight of the project as it progresses on site and to also ensure compliance with key contractual arrangements.

• Liquidated damages - ensure the main contractor has properly ‘stepped-down’ liquidated damages arrangements, so it can recover sufficient funds to meet its liabilities under the main contract.

• Collateral warranties – ensure the arrangement correctly ‘steps-down’ obligations onto the key sub-contractors who are to provide collateral warranties under the main contract. Where necessary, make sure the sub-contract correctly annexes the template form of collateral warranty containing the expected level and basis of professional indemnity insurance, in a manner which is ‘back-to-back’ with the main contract.

Legal tips for contractors

From the main contractor's perspective, it will be important to avoid a poor ‘pass-down’ of key commercial obligations, gaps in liability, and/or otherwise failing to ensure there is a sensible ‘back-to-back’ arrangement with the main contract. The main contractor will want to ensure there are no gaps between its obligations under the main contract and the sub-contractor's obligations under the sub-contract. If there are any problems the risk is likely to sit with the main contractor.

A key concern for the main contractor will be ensuring there is sufficient 'headroom' under the sub-contract to be able to perform its obligations in the main contract. For example, if the contractor is obliged to notify the employer under its main contract of a Relevant Event within 14 days, when ‘stepping-down’ that same obligation into the sub-contract, the main contractor will want to impose a shorter period on the sub-contractor to exercise that same right. In that context, issues which we typically emphasise can include:

• Information exchange – if the contractor is obliged to provide information to the employer, such as an updated programme or collateral warranty, within a specific time period under the main contract, it will need to ensure that the amount of days in the sub-contract is for a lesser period of time i.e., so it ‘builds-in’ adequate time to pass on the requested information to its employer;

• Extensions of time and other remedies - as part of a general ‘back-to-back’ arrangement, the main contractor will want exactly the same reliefs and remedies under the main contract as the sub-contractor is entitled to under the sub-contract. It will want to avoid any gaps, where a sub-contractor has an entitlement to more time, which isn’t mirrored in the main contract.

• Certification of completion – to avoid inconsistency, the main contractor will want to ensure that a practical completion certificate confirms not only completion of the works under the main contract, but also applies to the sub-contract. It wants to avoid completion being certified under just one of the contracts.

• Payment – to avoid the need to pay sub-contractors before receipt of relevant sums from its employer, a contractor should seek to set up its contractual arrangement so that there is a suitable ‘buffer period’ between payments. Any such mechanism will need to be mindful of laws prohibiting conditional payment / ‘pay-when-paid’ clauses.

• Dispute resolution - the contractor will want to ensure there is coordination between the dispute resolution procedures in the main contract and sub-contract.

• Liability caps - review liability caps in both contracts and assess potential risks. If caps are more limited in the sub-contract than in the main contract, the main contractor will be taking on that risk.

By carefully considering these factors and addressing potential risks, both the main contractor and employer can effectively manage sub-contracting relationships and ensure a successful construction project.

Legal protection for sub-contractors

We also regularly advise sub-contractors, assisting them to draft and negotiate suitable sub-contracts, be it amendments to a standard form sub-contract, a bespoke sub-contract arrangement, or a purchase order with associated terms and conditions.

In all scenarios, we are very mindful of the inherent risks for our sub-contractor clients, some of which may include:

• Sub-contractor’s obligations – ensuring that the sub-contract clearly and comprehensively defines the works to be performed, including materials, specifications, and deliverables together with a process for change, regulating additions or omissions to the works including how the same will be documented, priced, and approved, together with how this may impact on the date for completion of the sub-contract works. In addition, the sub-contract should specify with clarity the sub-contractor’s responsibility for the design of the works (if any) and its liability for its workmanship and the materials used.

• Payment terms – regulating how progress/milestones will be measured for interim payments of the sub-contract sum, the percentage of retention and terms for its release, and a mechanism for calculating the final sub-contract payment.

• Time - following specific risk events, a mechanism which allows the sub-contractor to apply for more time, resulting in an extension to the date for completion of the sub-contract works, thereby avoiding any liquidated damages for late delivery.

• Dispute resolution - a suitable mechanism to resolve disputes which may arise between the parties, including processes such as negotiation, mediation, and/or adjudication.

• Termination rights - clauses setting out grounds for the termination of the sub-contract and the consequences which will follow, including payment on termination.

• Insurance - specify the types and levels of insurance required.

• Governing law and jurisdiction – set out the governing law that will apply to the contract and the jurisdiction where disputes will be resolved.

We ensure our clients fully understand their obligations and the contractual ‘pitfalls’ and risks.