Contract Administration 341

opic 4

Sub Contracting

Topic 04 (Sub Contracting).doc

Table of Contents
TABLE OF CONTENTS............................................................................................................ 2
LECTURE OBJECTIVES ......................................................................................................... 3
DEFINITIONS ............................................................................................................................ 3
HISTORY .................................................................................................................................... 3
SUB-CONTRACTORS............................................................................................................... 4
NOMINATED SUB-CONTRACTORS .......................................................................................... 5
DOMESTIC SUB-CONTRACTORS .............................................................................................. 6
SUB-CONTRACTS..................................................................................................................... 6
SUB-CONTRACT FORMATION ............................................................................................ 7
ADVANTAGES AND DISADVANTAGES OF SUB-CONTRACTING............................... 7
VICARIOUS PERFORMANCE ............................................................................................... 8
ASSIGNMENT............................................................................................................................ 9
NOVATION................................................................................................................................. 9
CONTRACTUAL CHAINS....................................................................................................... 9
PAY WHEN PAID .................................................................................................................... 10
RIGHTS OVER MATERIALS ............................................................................................... 10
SELF ASSESSMENT QUESTIONS ....................................................................................... 12
BIBLIOGRAPHY ..................................................................................................................... 13

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Lecture Objectives

Discuss key differences between Nominated and Domestic Sub Contractors

Understand the meaning and differences of:

1. Vicarious Performance
2. Novation
3. Assignment
and their effect on sub-contractors

Understand the Pay when Paid concept; and,

Understand a sub-contractors rights in respect of materials delivered to site.

Definitions
Sub-contracting may be defined as a delegation of part of the responsibilities acquired
under a contract without transferring any of the contractual accountability.

A Sub-Contract is a contract between two parties where one contracts to do for the
other, part of the work which that other has contracted to do for a third party.

History
Sub-contracting emerged as a significant element in contracting during the post WWII
construction boom when home building was a significant proportion of the work to
accommodate the migrant intake.

Sub-contracting received further impetus with

increased government spending on major infra structure projects in the 1960s and it
reached its heights between 1965 and 1971. Contractors fostered the system for the
following reasons:

Better productivity and economies;

Reduced capital outlay;

Conservation of management resources;

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Better estimation of likely cost of work; and,

Smaller workforce to accommodate in times of recession.

With the emphasis on sub-contracting, the construction industry saw the emergence of
the entrepreneur contractor whose aim it is to sell real estate and realise a profit rather
than to enter the construction industry with the expertise provided by the subcontractor. Estimates suggest that now in Australia, sub-contracting accounts for 8590% of all construction work undertaken.

Sub-Contractors
It is unusual for a contractor to carry out all the work specified in the scope of work in
construction contracts. Contractors do not normally carry the diverse workforce for
the various components in a construction contract. Taking a domestic dwelling as an
example, a contractor will require at least the following trades:

Earthworkers;

Concretors;

Bricklayers;

Plumbers;

Electricians;

Plasterers;

Roof Carpenters;

Joiners;

Painters; and,

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Landscape Gardeners.

It would be very difficult for a contractor to maintain such a workforce and keep them
fully employed. However by trading their services across several contractors the subcontractors maintain their own full employment. There is also a traditional element of
sub-contracting in the Australian, and particularly the Western Australian Housing,
construction industry. Electricians, plasterers and bricklayers have generally enjoyed
their status as sub-contractors for many years.

Taking the wider view, sub-contracting has also resulted from the need for specialist
skills which again cannot be accommodated within a contractors day to day
workforce.

There are 2 types of sub-contractor:

1. Nominated.
and
2. Domestic.

Nominated Sub-Contractors
Sub-contractors that for some reason, usually specialist skills for particular elements of
the work, the Principal wishes to be used for that particular element of work. Hence
the Principal (or more usually the clients representative) nominates them for use on
the contract. Usually a provisional sum is included in the tender documents and the
contract to cover their cost, which is often unknown at tender time. The contractor
should also be informed of the prospective nomination to check there is no reasonable
objection. The contractor should also ensure the sub-contractor will enter into a subcontract with terms and conditions consistent with the main contract.

Nominating a sub contractor is the prerogative of the Principal or Client and gives
them control over the firm they use to carry out specialist work or for the provision of
particular manufactured items. Issues to be aware of when deciding to nominate or
not to nominate are:
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Principal/Client gets sub-contractor of choice;

Relationship between contractor and sub-contractor is imposed;

Part of risk is transferred to Principal/Client;

Nominated sub-contractor is in a more powerful negotiating position at tender

time; and,

Nominated sub-contractor has greater security.

Specific payment conditions are usually imposed on the contractor with regard to
payment of nominated sub-contractors.

BWIC (Builders Work In Connection) is work in attendance on a sub-contractor such

as chasing plaster for electrical conduits and allowance must be made for this. Without
nomination a contractor includes profit and attendance on a sub-contractor in their
price with nomination space is provided in the tender documents for inclusion of an
amount to cover this, usually expressed as a percentage.

Domestic Sub-Contractors
May be described as those sub-contractors which the contractor employs of their own
volition that is, they need some specialist work undertaken for which they do not have
the required skills and therefore use a sub-contractor to do it, often one they use
regularly for such work. The Client and Principal plays no part in the selection process
(although these days tender documents require details of sub-contracting of any
substance and who will carry it out).

As such it is a domestic matter who the

contractor uses and why.

Sub-Contracts
Both types of sub-contractor are the responsibility of the contractor in relation to the
work carried out under the contract to which they are sub-contractors.

It is an

interesting fact that whilst Clients in the traditional form of procurement have a
contractual relationship with their Principal, the consultants and the contractor, they
have no such relationship with sub-contractors. As their name implies the contractual
relationship exists between contractor and sub- contractor. Indeed, as methods of

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procurement have moved away from the traditional method so sub-contracting has
become more prevalent whereby contractors are the managers planners of the work
which is executed by sub-contractors.

The main contract may require certain clauses be contained in any sub-contract and
these are usually determined by the Principal to protect the Clients interests. Apart
from this the terms and conditions of sub-contracts are far less standardised and often
far less formal than the main contract documents. Contractors will also attempt to use
the main contract but amend it to their advantage before imposing it on their subcontractors.

Sub-contractors contract with main contractors and therefore there is no privity of

contract between the Client and the sub-contractor. This means the sub-contractor
only has any rights of redress with the main contractor

It is recommended these days that when entering into a sub-contract, a contractor

ensures that a Back to back arrangement is in place. This means that the terms and
conditions of the main contract are reflected in the terms and conditions of the subcontract such that neither the contractor nor the sub-contractor is disadvantaged as a
result of actions by the parties to the main contract.

Sub-Contract Formation
In the same way that contractors do not have enough time at tender time to prepare
their tenders and have obligations place upon them that they are not always aware of,
they do exactly the same to their sub-contractors. Sub-contractors of course then
experience the same difficulties and endure the same disadvantages that contractors
endure.

Advantages and Disadvantages of Sub-Contracting

The client gains from specialist work being done by the experts and the
responsibility remains with the contractor;

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Sub contracting reduces contractors overheads as a result of reduced

workforce;

Improved productivity

Improved efficiency

Lack of training and opportunities for apprentices;

Lack of onsite supervision and control;

Contractor can become a middle man only and become a bottle neck in the
process;

Contractual problems can develop from an over extended contractual chain;

and,

Sub-contractor may lack resources for the tasks eg capital, equipment, people,
business acumen and management skills.

Vicarious Performance
Refers to the execution of a contractual obligation by a person not contracted to do it.

A contractor can normally secure the vicarious performance of another through subcontracts depending on the terms of the main contract. Similarly the contractor is said
to be vicariously liable for the actions of their sub-contractors

Therefore the performance of the sub-contractor is said to be vicarious performance

on behalf of the contractor who always remains fully responsible for the work.

Most forms of contract make allowance for such events and sub-contracting the work
under certain conditions but not when the contract is assigned.

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Assignment
Assignment is the method used whereby a party to a contract can transfer to another
all of its rights, duties and obligations under the contract. The result is similar to subcontracting except that the party to whom the rights, duties and obligations are
assigned enters into contract with the Principal from the original contract whereas subcontracting is a delegation of responsibilities. The party who assigns their rights,
duties and obligations over walks away from the contract. As a general rule most
contracts do not allow assignment without the consent of all parties to the contract.

Novation
Novation is also similar to assignment and sub-contracting except that it refers to the
substitution by all parties concerned of a new obligation for an old one or the
substitution of one of the parties to the contract by another. The whole of the contract
can be novated in which case the new contract is a Contract of Novation and effectively
extinguishes the old one. It may be between existing parties or replace one of the
parties in which case all three parties must agree to the novation.

Contractual Chains
When a sub-contractor performs work that is unacceptable to the Principal, what
happens? The contractual chain exists to accommodate such an occurrence. The
Principal takes action with the contractor under the main contract and the contractor
takes action with the sub-contractor through the sub-contract.

Going in the opposite direction (up the chain) the sub-contractor claims payment from
the contractor who in turn claims payment form the Principal.

Difficulties arise when the terms of the main contract are not incorporated back to
back with the main contract. Single line clauses have tried to incorporate these terms
but invariably fail because they do not distinguish precisely the obligations of the
contractor, which the sub-contractor is to perform, and this necessary in such
circumstances.

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Rules governing sub-contracts are the same as any other form of contract, principally
offer and acceptance and consideration. A sub-contractor can withdraw their offer at
any time up until acceptance (and the contractor will not accept until they know they
have won the tender).

Pay When Paid

Most contractors will attempt to avoid paying their sub-contractors for completed
work until the client has paid them for it. This transpires through progress claims and
contractors do it to enhance their own cashflows.

Some contracts in Singapore and Hong Kong include s clause to this effect allowing
contractors to defer payment to their sub-contractors.

Australian standard forms of contract do not include such a clause but it tends to
operate anyway with sub-contractors not wanting to destabilise relationships and
having operated that way have priced the risk into their quotes.

The main problem occurs through non-payment by the client for whatever reason eg
bankruptcy when the sub-contractor should be paid by the contractor and the
contractor attempt to recoup from the liquidators. In practice it is very different. The
cases that have been challenged however have found in favour of the sub-contractors
and unless there is a clear and unambiguous term in the contract to the opposite effect
it is likely the sub-contractors will continue to be protected.

Rights Over Materials

Ownership of materials rules at common law are fairly straight forward and are
accepted as implied terms in most contracts where they are not overridden by express
terms. As soon as they are incorporated in the works they become the property of the
Owner. When delivered to site but not built into the works they are the property of the
contractor even if the owner has paid for them unless there is an express term to the
opposite (which there usually is).

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However it can change if a sub-contractor is supplying the materials as part of their

sub-contract. Once delivered to site they become the property of the contractor unless
the sub-contractor invokes a Retention of Title clause. These clauses vary in their
scope but they are designed to protect the sub-contractor by allowing the subcontractor to retain their interest in the materials until the sub-contractor has been paid
for them. In cases to date such clauses appears to be effective.

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SELF ASSESSMENT QUESTIONS

1. Define the following terms explaining how each one is different from the others
and contemplate a suitable circumstance where each may be adopted.

Novation

Assignment

Sub-Contracting

2. A clause in a contract empowers the Principal to order the work to be stopped at

any time in which case the contractor will receive an extension of time for the time
it was stopped, but no compensation for loss or expense. Acting under this clause,
the Principal stops the work and the main contractor passes the instruction on to
his sub-contractor who is performing the work. The sub-contractor then claimed
for loss and expense as well as an extension of time.

Is the sub-contractor entitled to payment of his loss and expenses?

3. What would be the outcome if a contractor uses a sub-contractors price in their

tender and wins the tender but the sub-contractor withdraws their offer in the
interim?

4. A sub-contractor delivers a quantity of roof tiles to site for inclusion in the works.
The client pays the contractor for the tiles. However the contractor goes broke
before paying the sub-contractor for the tiles. Who owns the tiles?

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Bibliography
Bailey, I. H. Construction law in Australia 2nd edition, North Ryde, N.S.W. LBC
Information Services, 1998.

Cremean, D. J.,Brooking on Building Contracts: the law and practice relating to

building and engineering agreements, 3rd edition, Sydney: Butterworths, 1995.

James, J. F. 1998, Contract Management in Australia, Longman, Melbourne.

Standen, D,. Construction Industry Terminology 3rd edition Melbourne RAIA Practice
Services. 1993.

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