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General principles (level 1 – knowing)

What is a subcontractor and what is subcontracting?

 A subcontractor is a person who agrees to perform some or all of the obligations that
the main contractor is obliged to perform under a separate main contract with the
employer.
 Subcontracting is the subletting, by the main contractor to the subcontractor, of the
performance of some or all of the main contractor's obligations under the main contract.
 Almost all construction work involves subcontracting.
 The main contractor will remain responsible to the employer for the completion of the
subcontract works.

The main contract may expressly prohibit the main contractor from subcontracting any or all
of its obligations under the main contract without the employer’s written consent (usually
this consent must not be unreasonably delayed or withheld).

Pros and cons of subcontracting

Pros
The main reasons for subcontracting are project-related and business-related.

 Project-related reasons include:


o The main contractor does not have the necessary skills to carry out the
works to be subcontracted.
o The main contractor requires additional resources for a particular project.
 Business-related reasons include:
o The main contractor is able to respond to increases and decreases in
workload without substantially increasing or decreasing its own resources.
o The main contractor might wish to transfer contractual risks and/or
liabilities to subcontractors.
o The main contractor is better able to forecast and manage its cash flow.
o The main contractor can reduce the cost of training, research and
development.

cons
 Subcontracting can have potential drawbacks, such as:
o It might restrain the development of skills and innovation.
o Main contractors lose a degree of management and control over specialist
work.
o Main contractors might form the view that subcontracting is a key part of
their risk management strategy, but this is not a complete approach to risk
management.
o Where risk is passed down the supply chain, it may go too far and become
inappropriate ‘risk dumping’.
o Subcontracting can lead to the industry operating by way of one-off (or
project-specific) teams.
 Vertical integration can help to overcome or mitigate some of the potential
drawbacks of subcontracting.
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Types of subcontractors

There are seven categories of subcontractors in the construction industry:


nominated subcontractors, named subcontractors, domestic subcontractors,
works contractors, trade contractors, labor-only subcontractors, and design
consultants as subcontractors.

 Nominated subcontractors are selected by the employer and the main contractor is
required to enter into a subcontract with them. This type of subcontractor is not common
anymore.
 Named subcontractors are named by the employer in the main contract and the main
contractor is required to employ them. This type of subcontractor is more common than
nominated subcontractors.
 Domestic subcontractors are selected and employed by the main contractor. The
employer usually has to give consent to the main contractor before they can appoint a
domestic subcontractor.
 Works contractors are not subcontractors in the traditional sense. They are contractors
employed by a management contractor to carry out part of the main contract works.
 Trade contractors are also not subcontractors in the traditional sense. They are
contractors employed by the employer to carry out part of the main contract works.
 Labour-only subcontractors only provide labor and do not supply materials.
 Design consultants as subcontractors are design consultants who are subcontracted by
the main contractor to carry out design work.
Procurement and tendering overview

Procurement is the process of obtaining services or goods from external sources.


The procurement of subcontract works is the obtaining of such works from external
sources, for example, the main contractor procures the subcontract works from the
subcontractor.

Procurement involves deciding the strategy for how the subcontract works are to be
obtained.

Tendering is the bidding process phase of the procurement strategy, in which potential
subcontractors (tenderers) submit offers (tenders) to carry out the subcontract works.

The tenderer's price for the subcontract works is an important component of the tender,
but other aspects that may not have been fixed in the ITT (e.g. the programme for the
subcontract works) may also be important.

Tendering can be a sophisticated process; a ‘one size fits all’ approach may not be
appropriate.

The procurement strategy may state that different tendering procedures should be
adopted for different subcontract works.

A tender bond is designed to act as security by reimbursing the main contractor for
losses incurred if a tenderer does not complete, or abuses, the tender process.
key features of a subcontract

 Subcontract agreement: This sets out the key terms of the contract, such as the parties
involved, the scope of work, the payment terms, and the dispute resolution process.
 Subcontract conditions: These set out the detailed rules governing the relationship
between the main contractor and the subcontractor.
 Particulars: These are specific details about the subcontract works that are not included
in the subcontract agreement or conditions.
 Scope of subcontract works: This is the work that the subcontractor is required to do.
 Technical documents: These are the drawings and specifications that show or describe
the requirements for the subcontract works.
 Attendances: These are facilities and services provided by the main contractor to the
subcontractor.
 Security: This is provided by the subcontractor to the main contractor to protect against
the risk of non-performance.
 Collateral warranties and third-party rights: These are mechanisms that allow third
parties to enforce the terms of the subcontract.
 Special requirements: These are additional terms that are imposed by the main
contractor on the subcontractor.
Providers of standard forms of subcontract
JCT: A UK-based organization that publishes many forms of contract, including subcontracts.

Construction Industry Publications (CIP): A UK-based publisher of construction industry-related


materials, including subcontracts.

New Engineering Contract (NEC): A UK-based organization that publishes two key standard forms of
subcontract.

Civil Engineering Contractor's Association (CECA)/Association for Consultancy and Engineering (ACE): A
UK-based organization that publishes subcontracts for use with its Infrastructure Conditions of Contract
(ICC).

Association of Consultant Architects (ACA): A UK-based organization that publishes a subcontract for use
with its main contract.

FIDIC: An international federation of associations of consulting engineers that publishes two standard
forms of subcontract.

Benefits of using a standard form of subcontract


Reduced cost and time

Clearer understanding of contractual allocation of responsibility and risk

Explicitly dealing with issues that often arise in relation to subcontract works

Reflecting the generally acceptable market position

Using lessons learned from the adoption of the standard form and judicial guidance

1.10 Amending standard forms of subcontract


Standard forms of subcontract are often amended by the parties to the subcontract. The main
contractor typically drafts the amendments and includes them in the invitation to tender and the
eventual subcontract.

There are two main reasons why the main contractor would want to amend the standard form:
To reflect relevant project-specific amendments included in the main contract.

To reflect the main contractor's business needs.

There are five main considerations to bear in mind when amending a standard form of
subcontract:
The amendments should not lead to discrepancies or ambiguities in the subcontract.

The amendments should accurately reflect the commercial intention of the parties to the subcontract.

The amendments should be drafted in the same style as the standard form (e.g. terminology and tense).

The amendments should be lawful.

The amendments should be properly incorporated into the subcontract, generally through an enabling
article or clause.
Bespoke/in-house forms of subcontract
Bespoke/in-house subcontracts are contracts that are tailored to the specific needs of the parties
involved. They are often used by main contractors, who may have their own bespoke form of
subcontract that they want to use.

There are several advantages to using a bespoke/in-house subcontract:


It can be tailored to the specific needs of the parties involved.

It can be drafted in a way that is clear and unambiguous.

It can be used to allocate risk in a way that is fair to both parties.

However, there are also some disadvantages to using a bespoke/in-house subcontract:


It can be more expensive to draft and negotiate than a standard form subcontract.
It may not be as widely used as a standard form subcontract, which can make it more difficult to find
legal precedents.
It may not be as well-understood as a standard form subcontract, which can lead to disputes.
If a subcontractor is asked to sign a bespoke/in-house subcontract, they should carefully review the
terms and conditions to make sure that they understand them and that they are fair. They should also
seek legal advice if they have any concerns.

Practical application (level 2 – doing)


Developing a procurement strategy for subcontract works
A procurement strategy for subcontract works involves reviewing and setting requirements, such as the
division of the main contract works into various subcontract works, scope, quality, time, and cost. The
procurement strategy can be set at various stages of the project, but it is most commonly set by the
main contractor when they prepare their tender for the main contract works.
The procurement strategy should set out how the various subcontract works will be procured. It should
also include a detailed procurement programme that is consistent with the demands of the design and
construction activities. The procurement programme should contain, as a minimum, activities for:
 Pre-qualification
 Issuing the invitation to tender (ITT)
 Receipt of tenders
 Assessment of tenders
 Selection of the subcontractor
 Entering into the subcontract
 Design of the subcontract works
 Off-site subcontract works:
o Procurement of subcontractor's materials
o Design/fabrication drawings
 Commencement of subcontract works on site
 Key dates/sections
 Completion of subcontract works
The durations allocated to the activities included in the procurement programme should be appropriate
and realistic. If tenderers are given insufficient time to prepare their tenders properly, the quality of
tenders is likely to be inadequate.
The procurement strategy should be considered a "live" document and be subject to revision as
circumstances require.
2.2 Subcontract packages
The main contractor needs to determine the subcontract packages into which the main contract works
will be divided. The main contractor should consider the following factors when dividing the main
contract works into subcontract packages:

 The size and complexity of the works

 The availability of skilled subcontractors

 The criticality of the works to the project schedule

 The budget available for each subcontract package

The main contractor should determine their subcontract package philosophy at the beginning of the
procurement process. This philosophy should consider the use of in-house specialists, existing supply
chain arrangements, and strategic and transactional subcontract packages.

In-house specialists: The main contractor may choose to use their own in-house specialists to complete
certain subcontract packages. This can be a good option if the main contractor has the skills and
experience necessary to complete the work, or if they want to maintain control over the work.

Existing supply chain arrangements: The main contractor may also choose to use subcontractors that
they have worked with in the past. This can be a good option if the main contractor is confident in the
subcontractor's ability to complete the work, or if they want to avoid the time and cost of tendering.

Strategic subcontract packages: The main contractor should identify any subcontract packages that are
particularly significant to the project. These packages may be high-value, critical to the project schedule,
or require specialized skills. The main contractor may choose to keep these packages in-house or award
them to a single subcontractor who can guarantee timely completion.

Transactional subcontract packages: The main contractor should also identify subcontract packages that
are not as significant as strategic packages. These packages may be lower-value, not critical to the
project schedule, or there may be many subcontractors available to complete the work. The main
contractor may choose to tender these packages to multiple subcontractors to get the best price.

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