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1 Sub-contracting In Construction By Olivia Sally Otieno On 4 th January 2010.

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1 1 Sub-contracting In Construction By Olivia Sally Otieno On 4 th January 2010

2 2 This involves the separation of construction from design. A main contractor is employed to build what designers have specified. Since this form of procurement was developed, it has become very common and is often referred to as traditional. It is both used in the building and civil engineering sectors of the construction industry. General Contracting

3 3 A subcontractor is an individual or in many cases a business that signs a contract to perform part or all of the obligations of another's contract. A subcontractor is hired by a general contractor (or prime contractor) to perform a specific task as part of the overall project. Whilst the most common concept of a subcontractor is in building works and civil engineering, the range of opportunities for subcontractor is much wider and it is possible that the greatest number now operate in the information technology and information sectors of business. businesscontractgeneral contractor (or prime contractor)buildingcivil engineering information technology Who is a Sub-contractor?

4 4 Today’s construction industry is characterized by the prevalence of sub-contracts. Main contractors are, to an ever increasing extent, reducing their dependence on directly employed labour. In consequence, most if not all projects involves some degree of subcontracting, and in many cases, the whole work will be carried out this way (e.g civil engineering projects). The construction industry is characterized by complex activities realized in time- constrained projects. The high complexity and differentiation of such activities and technologies involved necessarily lead to outsourcing practices. The principal agent thus is the general contractor that selects, organizes, coordinates, and manages subcontractors and specialists along the construction supply chain. The success of a project is, to an extent, related to the degree of collaboration and coordination existing among the actors involved. Why Sub-contract?

5 5 Origin of construction sub-contracting Practice of sub-contracting in the construction seems to be following in the footsteps of many other non-construction businesses. There are many influences on a business that encourage sub-contracting, and it is useful to distinguish these pressures that are general (affecting all businesses), and those that are specific (affecting the unique position of construction). The general pressures for sub-contracting include the following; Non-wage costs of employment, such as training, pension rights, redundancy payments and sick pay. The increasingly diverse skill base required for the growth of complexity. The rising expectations of workers and a concomitant shift to freelancing. The choice is every firm faces between diversifying and contracting out. The perceived threat posed by trade unionization of permanently employed labour e.g the requirements in the ACTS – WIBA, New Employment Act Off-setting the risks associated with responsibility by transferring them. The need to employ specialists of proven reliability and respute.

6 6 Origin of construction sub-contracting cont’d The factors affecting a contractor’s decision to employ permanently or to sublet are numerous, but are rarely considered as specific choices over whether to sublet. In fact, contractors respond to the pressures on their business in the most appropriate way, and the increasing prevalence of sub-contracting is merely a symptom of these phenomena, each of which dealt with below; The nature of construction dictates that sites are geographically dispersed, meaning that some workers will be better placed for some sites than for others. Associated with the general pressure to specialize, mentioned above, is the fact that different types of project call for different types of skill. The pattern of required skill combinations is different for each project. As a consequence of the increasing technical complexity, there are ever increasing numbers of specialist inputs into the building and construction processes. These take place because the more complex technologies need highly developed skills and expertise to apply them. Increased requirements of quality by clients

7 7 Legal basis of Sub-contracting It is an important principle of contract law that, where there is a contract between A and B, A may not simply decide to be replaced by C. If A wishes to handover all rights and obligations to C, and then simply drop out of picture, there must be a NOVATION. In effect, this is a new contract to replace the old one, and all three parties must agree on it. The laws view is that B has made this contract on the basis of holding A responsible on it, and the right to do so is not to be unilaterally taken away. A novation, then, is a contract that transfers both rights and obligations from one of the original parties to a new party. An assignment on the other hand, occurs where an original party transfers only contractual rights. For example, employers who are property developers might wish to assign to the first purchaser of a building the rights to claim against the contractor for breach of contract if any defects appear.

8 8 Legal basis of Sub-contracting Cont’d On the other hand, there is also the principle of vicarious performance. This occurs when a party may wish to have its contractual obligations carried out by someone else, while remaining legally responsible for the performance of these obligations. However, it will not be permitted where the contracting party has been specifically selected for some personal qualifications, skill or competence. Most modern standard form contracts place express limits on the extent to which the main contractor may satisfy contractual obligations through the medium of sub-contractors.

9 9 The contractual chain The basic position in law is that the main contract and the sub- contract (and the sub-sub-contract, if there is one) are regarded as links in a chain. The doctrine of privity of contract means that the rights and obligations contained in each contract apply only to those who are parties to it. Thus the main contract affects only the employer and the main contractor, the sub-contract only affects the main contractor and sub-contractor and so on. The idea of ‘chain liability’ works perfectly well so long as all links are intact. For example, where there are defects in the sub- contractors work, the employer will have a contractual remedy against the main contractor, who will in turn take action against the sub-contractor. Similarly, the sub-contractors right to payment will be exercised against the main contractor, who will be reimbursed by what is received from the employer.

10 10 The contractual chain cont’d However, a chain is only as strong as its weakest link, and considerable problems arise as soon as one of the links breaks. The dangers of a broken chain is well illustrated by the Canadian case of Smith and Montgomery V Johnson Bros. this concerned a sub-contract for tunneling work, which was to be carried out ‘according to the dimensions and specifications as set forth in the main contract’. A clause of that main contract empowered the engineer to order any work to be suspended, in which case the main contractor would be entitled to an extension of time but not to compensation for loss and expense. Acting under this clause, the engineer ordered the tunneling work to be stopped, and the main contractor passed on this instruction to the sub-contractors. This, it was held, entitled the sub- contractors to recover damages from the main contractor for breach of contract. The sub-contract had no express term equivalent to that in the main contract permitting suspension of work, nor had the main contract term been incorporated by references into the sub-contract.

11 11 SUB-CONTRACTING IN THE BUILDING SECTOR Building construction is the process of adding structure to real property. The vast majority of building construction projects in Kenya consist of commercial buildings, residential, healthcare facilities, amongst others. Small renovations, such as addition of a room, or renovation of a bathroom also from part of building works.real property All building construction projects include some elements in common - design, financial, and legal considerations. Many projects of varying sizes reach undesirable end results, such as structural collapse, cost overruns, and/or litigation reason; those with experience in the field make detailed plans and maintain careful oversight during the project to ensure a positive outcome. Building construction is procured privately or publicly utilizing various delivery methodologies, including hard bid, negotiated price, traditional, management contracting, construction management-at-risk, design & build and design-build bridging. Subcontracting is a type of work contract that seeks to outsource certain types of work in the building to other companies, such as electrical and plumbing works. This is a step down from general contracting, which is a contract overseeing a much broader project in many cases. Subcontracting in the building sector is done when the general contractor does not have the time or skills to perform certain tasks.work contractoutsource

12 SUB-CONTRACTING IN THE BUILDING SECTOR When a building is being constructed, subcontracting becomes a major deal. A general contractor may take care of a number of tasks, including the brick- and-mortar construction, but look to subcontractors for other types of tasks, especially things like plumbing and electrical work. These disciplines are nearly always subcontracted out.mortarsubcontractors Larger contractors may be able to handle the plumbing and electrical work as well, without subcontracting. However, these companies are rare not only because of the expertise involved, but the desire to focus primarily in one area. If a contractor has too many disciplines, the thought may be that it is not clearly focusing its efforts on quality in one particular area. In some cases, a general contractor may only be used as the construction manager or supervisor. In that case, subcontracting accounts for all of the physical work done on the premises. The general contractor's only responsibility is to approve the contacts, keep the project within budget and inspect the work. manager The JBC Agreement and conditions of contract are used to govern such works 12

13 13 CLIENT & PRJ MANAGER DESIGN TEAM MAIN CONTRACTOR Scaffolding Sub- Contractor Electrical Sub- contractor Plumbing Sub- contractor

14 14 SUB-CONTRACTING IN CIVIL ENGINEERING SECTOR Civil engineering is a professional engineering discipline that deals with the design, construction and maintenance of the physical and naturally built environment, including works such as bridges, roads, canals, dams and buildings.professional engineeringbridgesroadscanalsdams buildings Civil engineering is the oldest engineering discipline after military engineering, and it was defined to distinguish non-military engineering from military engineering.engineering It is traditionally broken into several sub-disciplines including environmental engineering, geotechnical engineering, structural engineering, transportation engineering, municipal or urban engineering, water resources engineering, materials engineering, coastal engineering, surveying, and construction engineering.environmental engineeringstructural engineeringtransportation engineering Civil engineering takes place on all levels: in the public sector from municipal through to federal levels, and in the private sector from individual homeowners through to international companies.

15 15 SUB-CONTRACTING IN CIVIL ENGINEERING SECTOR One civil engineering projects may involve one or a number of the above mentioned sub-disciplines, therefore giving rise to the need to sub-contract some part or whole of the works. The main contractor who secures for example, a road construction project which consists of various specialist works to be done, will sub-contract the elements so as to be done by specific sub-contractors. These may include for example, an environmental sub-contractor, geotechnical sub-contractor, transportation sub-contractor, etc., each having the required expertise and equipment to do work. Various contracts are used while undertaking the civil sub-contracts such as; –Conditions of Subcontract for Work of Civil Engineering Construction (1st Edition, 1994). Publisher: FIDIC –Form of Contract, Subcontract for Civil Engineering Works, The Brown book: 2nd Edition. –The Yellow Book, etc

16 IMPORTANCE OF SUB-CONTRACTING The incentive to hire subcontractors is either to reduce costs or to mitigate project risks. In this way the general contractor receives the same or better service than the general contractor could have provided by itself, at lower overall risk.reduce costs mitigate project Many subcontractors do work for the same companies rather than different ones. This allows subcontractors to further specialize their skills. In the United Kingdom economy, the need to respond to a rapidly changing environment and service a diverse infrastructure has encouraged flexibility and diversity in its subcontractor community with the majority of subcontractors now providing specialized skills to a wide range of companies.United Kingdomeconomy 16

17 Advantages of sub-contracting To the Main Contractor Time saving - It allows work on more than one phase of the project to be done at once, often leading to a quicker completion. Cost reduction - Because subcontractors already have the expertise and equipment to provide the service, it is often much cheaper for them to do the work than a general contractor who may not have that special expertise. Higher quality - the search for higher quality products with high reliability in a growingly sophisticated environment pushes companies to subcontract. Very often, in-house specialists may not match and may not meet the required criteria and as a result companies refer to the specialist skills and higher degrees of competencies available through outside suppliers or subcontractors. 17

18 Advantages of sub-contracting To the Sub-contractor The subcontractor is usually able to work with a general contractor on more than one project, thus creating a savings for both in the long run as a relationship is formed. Higher productivity and efficiency - subcontracting leads to a specialization in the completion of specific activities or specific components or parts. This type of specialization enables the subcontractor to achieve a higher level of efficiency and skill and thereby higher levels of capital and especially labour productivities. Subcontractors generally only work with one individual: the contractor. Subcontractors do not have to find their own clients, write up invoices, or deal with a lot of customer service in most cases, because these are jobs for the contractor. Subcontracting is an attractive form of self employment because it’s so hassle-free, and a lot of the responsibility actually falls on the contractor.self employment Most subcontractors are free agents, and often they aren’t tied to one specific contractor or company. Instead, subcontractors may choose to work with several different companies, picking and choosing jobs and projects that most appeal to the individual in question. 18

19 Why do people sub-contract? Various firms decide to sub-contract for various reasons, including; 1.You have more work than you can do on your own. - If you work around the clock and still find it difficult to catch up, this is probably a sign that you need to cut back or outsource. Truth is, you can only keep up this kind of workload for a while before you face burning out. Outsourcing allows you to maintain an income from the work you are subbing, keep current clients on your roster, and ensure they get the service they are used to, while freeing up some of your time.burning out 2. You don’t have the skills to do a specific job but don’t want to turn the work away - This can be particularly true if an existing client or a very desirable client wants you to take on a project you don’t the experience to handle. Subcontracting keeps you in the loop while ensuring the project gets completed by someone who knows how to do it well. 3. You want to expand your business and do something new, but keep your existing work going - As your business evolves, you may consider starting a new business, creating a spin-off or focusing on a very specific niche. If the new venture isn’t really aligned with the services you are currently providing, outsourcing allows you to maintain that work and those clients, without being held back from your new endeavor. 19

20 Reasons not to sub-contract Outsourcing is not for everyone. Some reasons outsourcing may not be for you include: You don’t want to oversee the work of someone else. You prefer to keep everything in-house. The services you provide are very particular and not easily outsourced. The time it would take to get a subcontractor up to speed wouldn’t be worth it in the end. There are confidentiality issues with the clients you work with and the work you do. Your rates aren’t high enough to be able to subcontract and still make money. 20

21 Procurement of Sub-contractors The best place to find a subcontractor is by searching your own group of active sub-contractors and acquaintances. As in any working relationship, collaborating with someone you know and trust can be easier, quicker and more productive. If you don’t know someone personally, ask a counterpart for a referral. Another place to look is on forums and discussion groups you participate in. A professional organization, networking groups and freelance job board sites may also be good places to search for a subcontractor. Regardless of where you find a subcontractor, though, you’ll want to make sure you verify their skills, view past work, ask for references, and spend the necessary time to make sure you can work together. Consultants and fellow contractors may also recommend various sub-contractors they have worked with well in the past projects. The Ministry of Public Works database may also give you a list of registered and practicing sub-contractors. Competitive tendering procedures may are often used in Kenya to identify a sub-contractor who will perform works at the best available price in the market. 21

22 22 Appointing sub-contractors The appointment of sub-contractors must not depend solely on technical ability but should take full account of their competence in health and safety matters. This may be judged by their attitude to safety, their safety policy and past performance.

23 23 Sub-contractor’s Health and Safety Assessment

24 24 TYPES OF SUB-CONTRACT RELATIONSHIPS Under the standard forms there are two broad categories of subcontract relationship: Firstly, those where the rights of the Subcontractor are largely determined by a third party, as in the case of a nominated subcontractor; And secondly, those where no outside control is exercised, and the subcontractor is entirely dependent on the main contractor for the proper operation of the subcontract, subject to the right to arbitrate. In this category are the so called ‘domestic’ subcontracts.

25 25 Types of sub-contractors However, there are many other types of sub-contractors’ that have emerged and are being used as outlined below; 1) Employer-selected sub-contract There are several circumstances under which an employer would wish to select a sub- contractor with whom the main contractor must enter into a contract. In some cases, the employer requires control over the section of certain specialists’ sub-contractors. For example, –To ensure the chosen sub-contractor has a proven track record for good work –To use a proprietary system chosen by the employer –To use a sub-contractor with whom the employer has developed a long term business relationship –To base the selection of the sub-contractor on a basis other than lowest bid In other cases, the employer may make the selection because of the needs of the design team or because of the nature of construction process; Some specialist sub-contract works requires a longer lead time than the project construction program would allow, therefore such work must be started before the main contractor has been chosen. The design team may wish to ensure the quality of design input from a specialist sub- contractor. The designers and the quantity surveyors may wish simply to increase their professional influence over the details of the project.

26 Types of sub-contractors cont’d 2) Nominated sub-contractor Nomination is the practice by which an employer, through the Contract Administrator, selects persons who then enter into sub-contracts with the main contractor. It is means of sub-letting sections of the work allowing the employer or his professional team full involvement in selecting the individual company early, using the sub- contractor’s expertise for design, co-ordination etc. This in turn gives to that sub- contractor certain security regarding payment and information throughout the contract. Certain contracts permit the architect or supervising officer to reserve the right of the final selection and approval of subcontractors. The main contractor is permitted to make a profit from the use of nominated subcontractors on site, but must provide attendance (usually provision of water, power, etc. to enable the nominated subcontractor to do his job).attendance In effect, sometimes the appointment of nominated subcontractors establishes a direct contractual relationship between the client and the subcontractor. This is an excellent mechanism for ensuring the contractor employs sub-contractors of adequate standing. 26

27 Types of sub-contractors cont’d 2) Nominated sub-contractor cont’d Without nomination, contractors would use high caliber sub-contractors when tendering, in order to keep the bid price high, but on winning the job they may re-negotiate to find the cheapest possible subcontractor, in order to maximize the return on the contract. Nomination forces the contractor to use a particular sub-contractor. Even though some have abused it, for example is to use nomination to relieve the architect and /or quantity surveyor of the burden of having to detail the design and specification and specification fully. By nomination a sub-contractor, the design team can get away with minimal documentation. However, this is bad practice and it will generate problems during the construction stage. If everything is measured and/or specified adequately, then most of the problems can be overcome. Nomination must be used only with extreme care because it fundamentally alters balance of risk between employer, contractor and sub-contractor. Wallace as quoted in ‘construction contracts’ goes as far as suggesting that nominations should never be used, referring to it as conspiracy against employers! 27

28 Types of sub-contractors cont’d 2) Nominated sub-contractor cont’d The reasons for nomination are: The employer selects the firm to be the nominated sub-contractor. The employer is able to choose which company he wishes to use and that decision does not have to be based on price. The timing of the involvement and appointment of the sub-contractor is left to the employer to meet his requirements. The nominated sub-contractor can be involved early and so his design expertise and his knowledge of the contract and co-ordination of services can be utilized. The sub-contractor is made part of the contracting team being fully involved, if required. Clear contractual liability is established providing a clear line of responsibility to the employer. By introducing formal links between the sub-contractor and the consulting engineer, architect, QS and employer time is saved, there are no long chains of correspondence and quick action on price, design, programme, variations etc, is established. By establishing direct links and involvement delay can be prevented on the project. 28

29 Types of sub-contractors cont’d 2) Nominated sub-contractor cont’d The principal features which are usually found in nominated subcontracts (but not always) are: –the provisions for extensions of time, which reserve to the architect/engineer the power to fix a revised period or periods for completion of the subcontract works; –the right of the subcontractor to use the contractor’s name in arbitration proceedings (subject to provision of such indemnity and security as the contractor may reasonably require); –the requirement that the architect must issue a certificate in writing certifying the subcontractor’s failure to complete the subcontract works within the stipulated time, before the contractor may claim reimbursement of any loss suffered by reason of the delay; –the provisions for reimbursement of loss and/or expense, which reserve to the architect/engineer power to ascertain the subcontractor’s entitlement; –the provision for the architect to certify practical completion of the subcontract works; –the provision for the quantity surveyor to value all variations required or sanctioned by the architect/engineer; –the provision for payment, which reserves to the architect/engineer the power to determine the value of work included in Interim Certificates; –The provision for determination of the subcontractor’s employment in the event of default by the subcontractor, which must be exercised only if the architect/engineer so instructs. 29

30 Types of sub-contractors cont’d 3) Domestic sub-contractors The domestic subcontract is a direct contract between a specialist sub-contractor and the main contractor. A sub-contractor who contracts with the main contractor to supply or fix any materials or goods or execute work forming part of the main contract. Essentially this contractor is employed by the main contractor. A domestic sub-contractor, at least in theory, is one in whose selection and appointment the employer normally plays no part, other than simply giving consent where this is required under terms of the main contract. The appointment of the sub-contractor is treated as being something entirely for the benefit of the main contractor, a purely ‘domestic matter’. If the main contract concerns itself at all with sub-contracting, it will usually merely insist that any sub-contract should contain certain clauses, which are designed to protect the interests of the employer. These will cover such matters as determination (it is important that, if the main contract is brought to an end, the sub-contract should also fall) and the ownership of materials brought to site. 30

31 Types of sub-contractors cont’d 4)Approved sub-contractors - A form of letting sub-contracts whilst giving the Employer some choice is where the main contractor is given a list of names of sub-contract companies to whom he may go for that package of works. The main contractor chooses one of the sub-contractors given in the list and adopts him as his domestic sub-contractor. 5) Named subcontractors (as used in the UK) - A further approach is the Named sub-contractor. The employer has full involvement in inviting tenders, selecting those who will tender, selecting the named sub-contractor and instructing the main contractor to enter into the sub-contract with that company. Once the named sub-contractor and main contractor enter into their contract the employer has no further dealing with that sub-contractor, he becomes a totally domestic sub-contractor. It is effectively the same as a domestic subcontractor – A subcontractor who contracts with the main contractor to supply or fix any materials or goods or execute work forming part of the main contract. Essentially this contractor is employed by the main contractor. 31

32 Types of sub-contractors cont’d 6) Management Contracting This is a procurement method consisting of 100% sub-contracting. Every item of building work is sub-contracted to works sub-contractors. A Works contractor appears under management forms of contract. The main contractor is the management contractor. He will not carry out any work himself; he will simply manage the contract. All sub-contracts are therefore complete packages called works contracts which are managed by the main contractor. In theory the sub-contract packages are let as required to meet the design and contract programme - the best combination of all sub-contracts should be achieved. In many cases the contract is fragmented and the work reduced to small packages i.e. pipe work, ductwork, insulation, plant. It can result in a fast-running and also a smooth running 32

33 Types of sub-contractors cont’d 6) Management Contracting cont’d This type of sub-contracting will be used in the following situations; The employer wishes the design to be carried out by an independent architect and design team. There is need for early completion The project is fairly large The project requirements are large The project requirements are complex. The project entail, changing the employer’s requirements during the building period The employer requiring early completion wants the maximum possible competition in respect of the price for the building works. 7) Labour sub-contractors They are engaged by the main contractor or other sub-contractors to provide labour only, in form of human labour and or plant and machinery. 33

34 MANAGING SUB-CONTRACTS 1) Procurement of sub-contractors This is done differently depending with the type of standard form contract in use. For example; Joint Contracts Tribunal 98 Contract - Clause states that ‘the Contractor shall not without the written consent of the Contract Administrator (which consent shall not be unreasonably withheld), sub-let any portions of the works. This is reinforced by clause 19.4 which provides further that any sub-contract must contain certain conditions that are designed to protect the employer’s position. The importance attached to this clause is shown by the fact that unauthorized sub-letting is a ground for the employer to determine the contractor’s employment under clause 27. Joint Building Council (JBC) Agreement and Conditions of Contract for Building Works – the JBC standard form of contract which is commonly used in Kenya, also stipulates under clause 26.0 and 27.0 that ‘neither the Employer nor the Contractor shall without the written consent of the other not assign or sub-let whole or any part of the works in the contract’. This is for the same reason mentioned above, that either of the parties must seek consent first so as to avoid any liabilities arising later on due to poor choice of a sub- contractor. 34

35 Managing sub-contracts cont’d Procurement of sub-contractors cont’d About nomination of sub-contractors, Clause 31.3 states that ‘The Architect shall not nominate any person as a sub-contractor against whom the Contractor shall make reasonable objection’. This gives the Contractor power to refuse any sub- contractor who he is not comfortable to work with, and helps him to reduce liabilities which might arise due to non-performance of sub-contract works. Selection and approval to use subcontractors Under the RTA’s General Conditions of Contract, the Principal Contractor must: obtain written approval from the RTA to subcontract any part of the work to be done obtain written approval from the RTA prior to engaging each subcontractor, and Provide information about the subcontractor’s health and safety performance and safe working procedures in the submission to the RTA to use a subcontractor. 35

36 Managing sub-contracts cont’d Procurement of sub-contractors cont’d The RTA may refuse approval for the use of a subcontractor on the basis of the above information. Keeping control over subcontractors involves three main steps for the Principal Contractor: Select subcontractors who: Can show they are competent to do the job, and have demonstrated risk treatment measures. Only allow subcontractors on site who: Have undertaken the three levels of induction – general industry, work activity and site specific. Monitor subcontractors’ risk management processes to ensure they are: doing things according to plan, and Working to their safe work method statements. 36

37 Managing sub-contracts cont’d 2) Payments A sub-contractor has a right to be paid by the main contractor for works done under the contract. As a basic principle, the lack of a direct contractual link between an employer and a sub-contractor or supplier means that the employer is not liable to pay sub-contractor directly for work done or materials supplied. Although the terms of the main contract may lead to the conclusion that the employer is personally responsible for payments to sub-contractors such an interpretation is extremely unusual. Most of the cases in which liability has been imposed have been ones in which the employer has entered into direct negotiations or dealings with a sub-contractor or supplier. In most cases, a contractor will be paid whatever nominated sub-contract works costs. Such work falls into the category of prime costs, or cost reimbursement. For this reason, the risks for the contractors are different to those associated with the employment of domestic sub-contractors. The latter involves simply an arrangement between the contractor and the sub-contractor and the contractor pays them from within the contract price. 37

38 Managing sub-contracts cont’d Payments cont’d Clause in the JBC contract (Nominated Sub-contractors) states that the Main contractor and sub-contractor will enter into an agreement which stipulates ‘ That payment in respect of any work, materials or goods comprised in the sub-contract shall be made within fourteen days after receipt by the Contractor of the sum to which the Contractor shall be entitled by virtue of the Architect’s certificates issued under clause 34.0 of the conditions which states as due an amount calculated by including the total value of such work, materials or goods, and shall when due be subject to retention by the Contractor of the sums stated in sub-clause of the condition’ This concept of contractor paying sub-contractor when he actually receives his money is usually incorporated in most standard forms for two main reasons; –The first is to protect the main contractor’s cash flow. This occurs because the main contractor will merely act as a channel of payment between the employer and the sub-contractor and will thus be in no danger of having to finance the sub-contractor’s work. –The second purpose, which is less obvious, is to make the sub-contractor carry the risk of the employer becoming insolvent. This will happen in circumstances where the employer’s insolvency occurs after sub- contract work has been certified, but before the main contractor has been paid for it. Without a pay when paid clause, it is the main contractor who will bear the resulting loss, in the sense of having to pay the sub- contractor and then recoup whatever can be salvaged in the employer’s liquidation. 38

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40 Managing sub-contracts cont’d 3) Health and safety Managing subcontractors on a construction project adds another complication to risk management at the site. Effective management of subcontractor’s health and safety can sometimes be overlooked because subcontractors: may only be on site for a short time and are wrongly thought to pose little or no risk may be wrongly considered as solely responsible for their own actions and consequences may work in isolation from the main project activities risk exposure may not be considered as part of the overall site risks may not know what their responsibilities are in risk management may not be committed to risk controls, and May take unnecessary risks, to cut costs and increase profits. The risk management process has to be efficiently managed so effective strategies are in place to eliminate or minimize risk. Under RTA contracts it is the Principal Contractor’s responsibility to provide effective safety management at the work site. Principal Contractors have to make sure: their own people are working safely, and Their subcontractors are also working safely. 40

41 Managing sub-contracts cont’d Health and safety cont’d The JBC conditions of contract states under clause (liability against injury to persons and property) that ‘The Contractor shall be liable for and shall indemnify the Employer against any expenses, liability, loss, claim or proceedings whatsoever arising under any statute or at common law in respect of personal injury to or the death of any person arising out of or in the course of or caused by the carrying out of the Works, unless the injury or death is due to any act or neglect of the Employer or of any person for whom the Employer is responsible’. This includes sub-contractor and his workmen too. Clause (Insurance against injury to persons and property) stipulates that it is the Main contractor’s responsibility to indemnify the Employer by taking insurance and causing sub-contractor to also take insurance to cover for liability which might arise due to injury or damage of works or persons. 41

42 Managing sub-contracts cont’d 3) Formality A contractor may have or be in the process of creating a contract with an employer to carry out certain works. He may consider that part of the Works is best carried out by another contractor. In that case he will wish to sub-contract that part of the Works to the sub-contractor. The sub-contract is then intended to create a contractual relationship between the two parties, in order to allow the contractor to perform part of his obligations under the main contract. Insofar as the sub-contract is intended to create legal relations, it is subject to the same principles which apply to the formation and operation of any contract. A formal agreement may not always be executed particularly if there is some urgency or disagreement as to the terms. This happened in G Percy Trentham -v- Archital Luxfer Ltd (1992). There was disagreement as to the sub-contract form to be adopted. There were offers and counter-offers. The final counter-offer was by the Contractor, but required execution of a formal sub-contract and return of a signed acknowledgment slip. Neither requirement was fulfilled. The sub- contractor started on site, and payments were made on the Contractor's proposed sub-contract form. The sub-contractor was held to have accepted the Contractor's counter-offer by conduct. 42

43 Managing sub-contracts cont’d Formality cont’d Sub-contracting arrangements introduce another element of complexity. This arises from the mechanisms which contractors need to adopt in order to transfer to sub-contractors appropriate parts of the risks which they have accepted under the main contract. In addition the contractor must ensure that the creation of the sub-contract does not itself create other risks outside their control. The problems which arise from this added level of complexity inevitably require examination of the relationship between employer/contractor/sub- contractor, as well as examination of the terms of both main and sub- contracts. 43

44 Managing sub-contracts cont’d 4) Effect on Contractor of Subcontracting The general principle is that a contractor cannot sub-contract performance of any part of the Works without the consent of the employer, unless the contract expressly states otherwise. This applies equally to a sub-contractor. He cannot sub- sub-contract performance of part of the sub-contract works unless the contractor consents, subject to the terms of the sub-contract. This arises from the nature of contract. The contractor (or sub-contractor) is employed for his experience, character and capability. He is required to perform a personal service. If the contractor does sub-contract part of the Works without consent, then this may amount to a repudiatory breach of contract. The employer will then be discharged from further obligation under the contract including payment, since the contractor's substituted performance will amount to non-performance. The employer will also be entitled to damages for the repudiatory breach. This applies mutatis mutandis??? to the contractor and sub-contractor. 44

45 Managing sub-contracts cont’d Effect on Contractor of Subcontracting cont’d The commercial basis of this principle is that the employer values the financial standing, technical capability and trustworthiness of the contractor. This is particularly the case where the contractor has been chosen from a list of contractors who have prequalified for instance. It applies also where the sub-contractor has been chosen for his specialist trade. This general principle is therefore based on the inference of personal performance being essential to the contract. In the absence of express terms, it may be that the nature and circumstances of the contract will prevent such an inference. This indeed was the case in British Wagon. The contract involved the repair of railway wagons. It was held that the defendants did not attach any importance to whether the repairs were done by the company or anyone with whom the company might enter into a subsidiary contract to do the work. 45

46 Managing sub-contracts cont’d 5) Incorporation of Main Contract Terms If a contractor is to avoid introducing additional risk in sub-contracting the performance of his obligations under the contract, he must take particular care to ensure that the terms of the sub-contract are consistent with those of the main contract. He should ensure that the relevant terms of the main contract are incorporated into the sub-contract, but additionally that the administrative operation of both forms is consistent one with the other. Incorporation of certain terms of the main contract by reference may create substantial risks for the contractor. In Smith and Montgomery -v- Johnson Bros & Co Ltd (1954) the sub- contractor was required to carry out tunneling works "To the dimensions and specification as set forth in the main contract." The Engineer stopped that main contractor tunneling in accordance with the contract. Although the contractor could claim an extension of time, he was not entitled to additional payment under the particular terms of the contract. However, the sub-contractor was entitled to damages because the particular power to stop work without incurring additional costs was not incorporated into the sub-contract. Even if the sub- contractor has agreed to carry out the Works in accordance with the terms of the main contract, this does not give the contractor the equivalent powers under the sub-contract as the employer has under the main contract. 46

47 Managing sub-contracts cont’d Incorporation of Main Contract Terms cont’d In Chandler Bros Ltd -v- Boswell (1936) the employer had power to have the contractor dismiss the sub-contractor. This term of the main contract was not incorporated into the sub-contract. Although the sub- contractor was aware of the term when entering into the sub-contract, the court would not imply a term that the sub-contract would come to an end with the exercise of this power. The Sub-contractor's knowledge of the main contract terms is not enough to imply a term that he is bound by them. Thus if the contractor becomes entitled to payment only by a certifying officers certificate, the absence of such a certificate will not entitle the withholding of payment to the sub-contractor if the sub-contractor has completed the work Lewis -v- Hoare (1881), and if there is no equivalent provision in the sub-contract. 47

48 Managing sub-contracts cont’d 6) Responsibility for Performance The general principle is that the contractor is responsible for performance of his obligations and cannot excuse his breach by reference to having sub-contracted that part of his performance. Webster J in John Laing Construction Ltd -v- County and General Properties Ltd (1982) stated that it is the main contractor who contracts with the sub- contractor and it is he, not the employer, who, as between himself and the employer, takes the risk of non-compliance by the sub-contractor with his obligations. 7) Defects Liability The contractor is responsible for performance of all his obligations under the contract. He can delegate performance but not responsibility. This is of course subject to the express terms of the contract. Contractor is liable for sub-contractor’s defects and delays…he can sue the sub-contractor for these damages – discuss??? 48

49 Managing sub-contracts cont’d 8) Subcontractors Design A subcontractor will be liable for any design he contracts to produce if that design subsequently proves to be faulty. The subcontractor will, in the absence of an express provision, be liable in contract for any failure to produce a design fit for its purpose and in tort a subcontractor will be liable for any breach of a duty of care to use all reasonable care and skill. Where design does arise expressly in construction contracts, the standard of design duty is normally set out, and this usually takes the form of an undertaking by the designer that he will exercise all reasonable skill and care. Even where there is no express design provision, if as a matter of fact design has been provided as part of a contract for the provision of work and materials, certain terms will be implied into the contract relating to the sufficiency of that design. 49

50 Managing sub-contracts cont’d Subcontractors Design cont’d A main contractor may in some instances have no design liability, but the design may rest with the subcontractor. Norta Wallpapers (Ireland) Ltd-v-John Sisk and Sons (Dublin) Ltd (1977). A nominated subcontractor was appointed to supply and erect the superstructure of a wallpaper factory. The design proved faulty and the court held that in the absence of an express term in the main contract the main contractor did not accept responsibility for the design. It was not reasonable to imply into the main contract a term that the main contractor accepted responsibility. The subcontractor was nominated and the main contractor was not required to check the design because an engineer had been employed by the employer for this purpose. 50

51 Managing sub-contracts cont’d 9) Other issues of sub-contractors Rights over materials – the position on this is that once ownership of materials has passed from sub-contractor to the main contractor, any lien or similar right on the sub- contractor’s part comes to an end. The sub-contractor losses any leverage that might otherwise have been used against the employer to ensure payment. Liability of sub-contractor to the employer – a sub- contractor has potential liability in contract and in tort. ??? 51

52 Scope of works by sub-contractors Sub-contractors under the various procurement systems will have various defined scopes of work. This is as follows; Traditional procurement method - this a procurement system where the design team is first contacted for purposes of designing and documentation of the proposed development. A general contractor is employed either through tendering or negotiation to build what the designers have specified. Under this procurement system, sub-contractors who can either be domestic or nominated may be brought in to mainly carry out specialist works identified in the project. The main contractor is usually paid profits and attendance for works done By nominated sub-contractors. 52

53 Scope of works by sub-contractors Design and build systems – this is based on the concept that a single firm has the in-house staff and expertise to perform all planning, design and construction tasks. This has however developed, and no longer only limit it to those with in- House capability in both areas, but also permits contracts with engineers for example, who sub-contract the construction portion to a contracting firm, with construction contractors that sub-contract design services to an engineer or an architect, and with engineers and architects in joint venture with contractor firms. Sub-contractors under design and build can therefore be consultants, main contractors and also specialists in various works. 53

54 Scope of works by sub-contractors Management contracting – under this method, the client engages the management contractor to participate in the project at an early stage, contribute to design and manage the construction. All works are sub-contracted to works contractors, who are fully liable to carry out works in accordance to specifications and design. Construction Management – in this method of procurement, the client places a direct contract with each of the specialist trade contractors, and employs a construction manager who acts in the role of the consultant. There is usually no direct link between the construction manager and the trade contractors. 54

55 International Contracts and sub-contracting  The term "international construction" as applied in this article refers to the activities of the civil engineering and general building sector in projects procured outside the contracting company's home country. International contracts will therefore apply to any works which are done outside one’s geographical area of jurisdiction.  In international projects, both international clients and contractors prefer to operate with tried and tested forms of contract. It is therefore possible to determine which contractual approach would be most appropriate for the wider implementation of sub-contract projects on international contracts. 55

56 International Contracts and sub-contracting cont’d The most probable approach, if not the ideal approach, then is the use of an established and tested international standard form contract (e.g. the FIDIC "Red and Yellow Books"), however, significantly modified to include the main provisions of partnering. 56

57 Importance of international sub-contracting International subcontracting has become an increasingly useful tool for both subcontractors and main contractors. On the one hand, subcontractors; reduce their spare capacity develop economies of scale improve their productivity and efficiency benefit from technology transfers. Moreover, by concentrating on small and medium sized suppliers in developing countries, it stimulates a whole process of linkages within different industrial sectors and hence facilitates their industrial development. 57

58 Importance of international sub-contracting cont’d On the other hand, main contractors from developed countries ; improve their competitiveness by reducing their production costs; by having access to high quality components, parts, sub- assemblies or industrial services and by penetrating markets with commercial opportunities. This increased efficiency and the resulting spare resources then enables them to generate new employment opportunities. Hence, not only do the contractors from developed countries and the subcontractors from developing countries benefit but so do their respective nations.. 58

59 Importance of international sub-contracting cont’d  Nevertheless, despite these market-driven advantages, some concerns have been expressed about the implications of subcontracting stemming from developed countries and targeted at developing countries.  Falling transportation and communication costs, rapid technological changes, the reduction in trade barriers (tariff and non-tariff related) and intensified competition within consumer markets have forced enterprises to improve their competitiveness by reaping the benefits of costs differences available across the world.  In this search for improved competitiveness, companies have delocalised internationally, either by subcontracting outside their domestic markets or by moving part or the entirety of their production processes to foreign countries. 59

60 International Contracts and sub-contracting cont’d With economic development, contracts in the construction industry have greatly increased in recent years. The experience of large companies has shown that technology co-operation agreements with developed country partners have helped to reduce organizational and transaction costs, facilitated international sourcing of technology and improved marketing and managerial practices. As a result, main contractor prefer to subcontract the services. Subcontracting has proved to be an entry point to the international market for small and medium-sized construction companies from developing countries and also transition economies. This appears to be because developing country companies seem to have inadequate capacities for executing overall management of large construction projects and are usually subcontracted for other specialized services. In most construction projects, especially building projects, it is common for 80 to 90% of the work to be performed by subcontractors. 60

61 International Contracts and sub-contracting cont’d The contractors that are selected to enter into international contracts must fully satisfy the conditions on experience and capability. In the process of preparing, entering into and performing the contracts, the contractors are encouraged to put forward initiatives, measures or apply their experiences in order to fulfill the contractual jobs, meet the objectives and requirements of the projects or bidding packages and raise their efficiency 61

62 International Contracts and sub-contracting cont’d Normally, subcontractor control strategy has been well aligned and well organized in all aspects to international contractor. However, there are some major points that need to be improved in order to strengthen the management efficiency and it effectiveness. These are the following: Consider to the size of scope of work for each package. Consider to the public and private subcontractors in the subcontractor master list and the overall subcontract plan, also their current works at the same time of awarded project as well. They are the main causes of overloading. Study site conditions more carefully in order to consider the proper price of each package that could be awarded to subcontractor. Sharing with subcontractors in risks that could be happened by unforeseen conditions not only generally covered in contractual provisions. Obligate subcontractors must use legal tools for tracking schedule and define delays. 62

63 CHALLENGES OF SUB-CONTRACTING Subcontractor in today's construction industry faces unique challenges and concerns which include; Dealing with a bid process that can lock in a bidding subcontractor without any written agreement e.g in competitive tendering. Subcontractor forming contracts that are written largely, if not entirely, in favor of the general contractor. In addition to concerns in bidding and contract formation, a subcontractor must constantly evaluate and preserve its relationship with the prime contractor on its projects. In doing so, a subcontractor is often tempted, if not altogether resigned to subject itself, to unfavorable indemnification clauses, payment clauses, etc. However, a contract that is overly favorable to a prime contractor and places you at risk is too dangerous in today's construction climate. 63

64 CHALLENGES OF SUB-CONTRACTING In bidding, he faces the challenge of pricing a winning bid. Knowing the main contractor to whom he will sign a contract with early enough may influence his decision to work or not to work. Enforceability Problems that arise as reflected by case law. Under subcontracting; Scope of Work (if not clearly defined may lead to disputes),Time,Payment,Contractor's Warranties and Duties,Assignment, Claims and Dispute Resolution, Indemnity,Insurance,Termination and Default 64

65 CHALLENGES OF SUB-CONTRACTING How to overcome challenges The sub-contractor must learn how to diagnose areas of subcontract language that most often lead to costly dispute resolution for the parties i.e scope, payments They need to learn tactics that will aid them in countering a general contractor's attempts to shift any and all risks associated with a subcontract to the subcontractor. Failure to have a clear understanding of the parties' rights and responsibilities in executing and performing the subcontract only threatens the profitability of the work you do, hence the importance to learn legal issues. 65

66 IMPORTANT NOTES TO REMEMBER Main contractor needs to maintain a very systematically concise subcontract performance management. However, there are some major points that need to be improved in order to strengthen continually the performance,efficiency and it effectiveness. These are the following; 1. Contractor must consider to the prepared schedule may include milestone and interim completion dates that satisfy contractor needs and they should be required in subcontract provisions clearly. 2. Contractor must consider to unforeseen conditions clearly as the bad weather and undiscovered soil conditions. 3. Contractor must consider the progress payments that to be used 100% by subcontractors for project. 4. Contractor must consider the facilities conditions for subcontractors in subcontract before implementing the work at site. 5. Contractor must consider incentive in line of subcontractors’ performances. 66

67 IMPORTANT NOTES TO REMEMBER cont’d In order to improve subcontractor control strategy, some of the recommendations to be followed are as follows: 1) Whether the scheduling obligation is to be imposed on a subcontractor, main contractor, the scheduling specification should be as carefully considered and written as any other technical specification. 2) Setting up the rewards for subcontractor performance when achieving each milestone as required in the subcontract in order to increasing the productivity and endeavors from subcontractors. 3) construct an unforeseen conditions control procedure for applying at site when the parties faced, especially for bad weather and soil conditions not only locked by subcontract provisions. 4) Parties must get resources evaluation for project before implementing the work in the cases of far site location with economic - social centers. They must be considered in the contract negotiation meetings. 5) Maintain the other standby strong subcontractors/ suppliers for cases of back-charge decisions happened. These standby subcontractors could be some ones that are doing other packages of project in order to reuse available resources and facilities. 6) Maintain at least a lawyer for cases of contractual conflictions in a large project in order to solve local rules and regulations, especially when removing any subcontractor out of battery limits. 67

68 CONCLUSION  Proper management of sub-contract contracts is key in determining the success of a project.  This is because sub-contract works form large volumes of today’s contracts.  If mishandled, it may lead to delays, cost overruns, disputes and hence arbitration.  The contract administrator therefore must ensure that sub-contracts entered in to; are valid and managed properly from beginning to the end. 68

69 REFERENCES 1)Atkinson D (1999) Sub-contracting; (Internet Accessed on 11 th November 2009).http://www.atkinson-law.com/Disclaimer/Disclaimer.htm 2)Black K (2009), What is sub-contracting?; (Internet Accessed on 8 th November 2009).http://www.wisegeek.com 3)Gregory A (2009) Sub-contracting Basics; (internet Accessed on 11 th November 2009).http://www.sitepoint.com/blogs/category/news/ 4)Hughes W and Murdoch J (2000) Construction Contracts: law and Management, Spon Press, 3 rd edition. 5)Jean – Louis (2003), International Subcontracting Vs Delocalisation, UNIDO 6) Joint Building Council (JBC), Kenya (April 1999 Edition) Agreement and Conditions of Contract for Building Works. 7) Morgan K. C (2007), Considering Sub-contracting? Getting started in Self Employment, (internet accessed on 8 th November 2009) 8)Professional Project Management Education (2009) ; Managing Sub-contractor Schedule Performance in an EPC contract: subcontractor-schedule.html.http://professionalprojectmanagement.blogspot.com/2009/07/managing- subcontractor-schedule.html 9)Ronchi S and Milano P (2006) Managing Sub-contractors and Suppliers in the Construction Industry; Supply Chain Forum: An international Journal, Issue No. Vol 7 No.1 10)RTA Contractor Health & Safety Information Pack - Part 12 - Managing Subcontractors 11)Mawhinney M (2001) International Construction, 1 st edition, Blackwell Science Ltd. 12)Fisk E.R (2000) Construction Project Administration, 5 th edition, Prentice-Hall,Inc. 69


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