For effective communication and a more professional environment, we discuss the importance of a subcontractor order…
A good construction sub-contract order can protect both the principle/main contractor (hereby stated as contractor) and subcontractor/specialist contractor (hereby stated as subcontractors) and ensure a project runs smoothly. Many subcontractors are of the opinion that this documentation is only for the benefit of the main contractor, but in actual fact, it does protect the sub as well.
Subcontractors and construction contracts in the past are not always a comfortable pair. Many subs view signing a construction contract as a necessary admin task, firstly to secure the work and secondly to get paid. Their thoughts on what clauses the construction contract may contain, aren’t in the main of interest to them, and they typically keep their fingers crossed that unread documents, term & conditions and sub-contract clauses don’t come back and cause them a headache.
It has to be said that the signing/witnessing of a sub-contract order is a major part of anyone’s business, as each and every order is a legally binding document between both parties. In actual fact it could be between three parties (third party being the ultimate client), if there is a requirement for retention bond, particular warranties or a design portion. On this basis alone, they should never be entered into lightly.
The reasons some subcontractors ignore the importance of perusing, understanding and particularly negotiating the proposed construction contract are culturally plausible. For example:
- The subcontractor may think the main contractor may get upset if certain items are requested to be changed, which could lead
- The cost of employing a professional to vet the construction contract is too expensive
- The main contractor will seek the services of one of my competitors if I come across too contractual
- The main contractor said I would not be paid until I signed the contract
However, what many subcontractors fail to realise is that many contractors see lack of negotiation as a sign of weakness and being unprofessional.The important point to remember is the need to mitigate as much risk to the company is the key to any business survival, whether it be construction or other industries. It is imperative that subcontractors minimise their financial risks/uncertainty by identifying the risks of construction contracts and where necessary negotiate.
A subcontractor should never have ‘uncertainty’, this is the worst position to be in. Understanding your contractual rights and reading and understanding the contract prevents this.
Subcontractors need to remember that negotiation is not being contractual, it is merely used to find common ground for both parties to agree on. Remember the Contractor wants to remove as much of the risk away from their organisation as possible, but at the same time need subcontractors to be comfortable to allow them to bring the project to a successful conclusion. Carrying out the negotiation at the pre-commencement stage helps to: identify and minimise financial risk and reduce uncertainty. This helps to avoid disputes during the course/completion of the project, opportunity to increase margins and improve one’s cash flow. If you can obtain an early final account settlement, it can be an advantage to both parties. This could end up in repeat business with a view of forming partnership agreements, which in turn will lead to turnover and margin growth.
The benefits of identifying and understanding your risks are huge. Being contractual and being commercially aware are definitely not one in the same. Being commercially aware facilitates a good negotiator who knows when his hand is strong and when his hand is weak and can thus make educated contractual decisions accordingly. Being contractual only leads to upsetting relationships. Being contractual with someone/an organisation should be seen as a last resort. Being Contractual only leads to “upsetting the apple cart”, breakdown in key relationships that have possibly being built up over a number of weeks/months and could lead to court/arbitration.
Nobody disputes that if a construction project was carried out to the letter of the contract it would probably be delayed by a considerable period of time. It is essential that a good main contractor/subcontractor relationship is based on a mutually agreed understanding of the construction contract and its parameters and the flexibility of both parties to work within the spirit and not necessarily the letter of the contract.
Understanding the construction contract you enter into is paramount.
Should you wish to discuss the above in more detail or need assistance with any commercial aspects of your construction projects, please don’t hesitate to contact me, either through my website; www.qsadvisor.com or via e-mail grant@qsadvisor.com.
