Although contractors sign new subcontracts every day, there is a surprisingly big gap between those who do it well, and those who do not. Errors in subcontracting can waste time, cost money and expose your company to unnecessary risk. Below is a list of common errors, all of which can be easily avoided.
1. Not having a good subcontract template.
If your company is not already using a good, standard form of subcontract agreement template, this is the place to start.
Having a standardised form of subcontract will:
- save time in preparing your subcontracts,
- improve the consistency and quality of your subcontract terms,
- allow you to streamline all of your subcontracting processes (eg processes and forms relating to payments, variations, defects etc),
- make your internal training easier and more effective, and
- allow you to streamline all of your contract administration.
A good form of subcontract will be succinct, and no more onerous than it needs to be.
Long, convoluted and confusing contract terms can create the perception of unfair or difficult contract terms, which in turn can lead to subcontractors increasing their prices.
A good question to ask is whether your company would be willing to sign up to your own form of subcontract. If the answer is ‘no’, consider whether changes should be made (particularly if your team is frequently having to deal with objections).
A good form of subcontract agreement should also be fast to complete and easy for your team to understand. This will save time internally (both at the time of preparing the subcontract and during its administration), and allow your team members to manage their subcontracts effectively and with confidence.
2. Including the subcontractor's quote in the subcontract.
At best, including a subcontractor’s quote in your subcontract could create ambiguity and inconsistency. At worst, it could result in your company inadvertently accepting various unwanted terms.
This is because a subcontractor’s quote will often include scope clarifications or exclusions and/or general terms and conditions, some of which may contradict the terms in the balance of your subcontract.
Including a subcontractor’s quote could result in:
- ‘gap risk’, where between the terms of your subcontract are not back-to-back with the terms of your head contract (eg your subcontractor might exclude scope, limit liability or seek relief for delays where no corresponding relief is available under the head contract), or
- arguments about how individual scope items, clarifications or exclusions should be interpreted.
The better way to address any qualifications in a subcontractor’s quote is to amend your own documents to address them individually. This will force you to consider whether each clarification is valid (as opposed to inadvertently accepting terms and clarifications), and avoid any potential conflict between documents. This will reduce the chances of a dispute arising later in the project.
3. Not identifying the subcontractor entity correctly.
It is surprising how often party details in a subcontract are entered incorrectly. The most common mistakes are:
- the company name is incorrect;
- the ACN is incorrect;
- an ABN is entered that relates to a different company or a trust (details of which do not appear in the document).
Where the subcontractor is a trustee, details for both the trustee and the trust should be included.
Incorrectly identifying the subcontractor entity can become a major problem if claims arise during the course of the project (for example, in respect of defects) or if the subcontractor becomes insolvent. Regardless of how good the form of your subcontract is, it won’t help you unless it has been entered into with the correct entity.
These issues can be easily avoided by a few simple searches at the time of contract entry, and ensuring the subcontractor’s details are accurately recorded in the subcontract agreement.
4. Not obtaining appropriate security, particularly where large deposits are concerned.
The risk of subcontractor insolvency is as high as it ever has been. And while this is a risk that affects all projects, there are steps that can (and should) be taken to protect your position.
The first is obviously to ensure that you are dealing with reputable suppliers who are creditworthy. But even then, no company is immune from the risk of insolvency.
You should therefore make sure that you are seeking appropriate security, particularly if the subcontractor will be seeking payment before goods are delivered or any work is performed. There are a number of different types of security in construction contracts, including personal guarantees, bank guarantees, related party guarantees and PPSA security interests. Keep in
5. Not getting the subcontract signed before starting work.
Allowing a subcontractor to start work before the subcontract is signed could result in your company being bound by the subcontractor’s terms, or being taken to have accepted clarifications or exclusions in the subcontractor’s quote.
Disputes often arise where there is no signed contract when the subcontractor’s work commences.
This is why it is so critical for your company to have systems and training in place to ensure that:
- you receive a signed subcontract back from your subcontractor before they start work,
- the subcontract is properly signed, and
- your team can easily produce a signed copy of the subcontract on request.
Automated workflows and good document management practices are the best way to manage these risks, along with training so that everyone understands why they are so important.
