Subcontractor Agreements

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

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.

Our team of specialist lawyers draft, negotiate and finalise sub-contracting arrangements and advise on issues arising on sub-contracts, including disputes. We advise employers, main contractors and also sub-contractor clients.

Our experience and sector focus results in clear, practical, cost-effective advice on the most important issues.

Employer 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.

• 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

Main contractor risks with sub-contracts

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 :-

• 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.

Legal protection for sub-contractors

We also regularly advise sub-contractors on the inherent risks which may include :-

• Sub-contractor’s obligations

• Payment terms .

• Time - the sub-contractor should seek a mechanism which allows applying 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 - the grounds for the termination of the sub-contract and the consequences which will follow, including payment on termination.

• Insurance - the types and levels of insurance required.