Construction projects and negotiations with sub-contractors

Mar 6, 2023

Construction projects: what do you need to consider in your relations with sub-contractors to ensure a smooth project in which you are legally protected?

As either an end client or main contractor on a construction project, when faced with negotiating the terms of a contract with a sub-contractor, there are multiple significant elements to consider. Amongst other external pressures such as the economic climate, the physical climate and funds flow, protections throughout the whole web of parties which are engaged in a construction project can be pivotal for a successful and compliant project in which your interests are adequately protected.

1. Consider the structure of the project

It is important to consider the structure of the construction project and the procurement route to be used. There are many structures of construction project employed across the industry, for example, two of the most common are:

  • design and build – this is where the design and build elements of a project are left completely to the contractor instead of the responsibilities being split out, and risk is usually allocated to the contractor.
  • traditional build – this is where the responsibility of the contractor is limited only to build, and the design works are the responsibility of the design team who are appointed by the end client.

Once it is ascertained as to how the project is to be procured, consider how many parties are involved and the complexities and nuances of the legal relationships. This will help you to ensure you are in line with statute and regulations governing the type of procurement route for the project. For example, if you are the end client and there are multiple contractors and designers for one single project, you will need to appoint a Principal Designer and Principal Contractor, and if you don’t, their duties could fall back on you.

Which procurement route you choose will depend on many factors, such as how many parties are employed for the project, the costs, how much control each of the parties has, the timescales and the efficiency of the parties and their obligations and their various supply chains. It will be important to get the structure right for the benefit of each party and also for the efficiency of the project.

In any circumstances and for any procurement route, it is important have the appropriate legal documentation in place.

2. Consider your relationship with the funder

As a primary step, it would be important to review the funder’s requirements in detail so that you have the best knowledge of the contractual obligations they are imposing on you.

Crucially, this knowledge will help you to:

  • Ascertain which requirements the funder places on you, and such steps which are necessary to take in your sub-contracts to ensure you meet those funder requirements – these could be from administrative processes to provisions relating to the funders’ ESG strategies, for example.
  • Take steps to make sure you have the systems and processes in place during the project and throughout the chain of relationships to keep the funder satisfied and ensure a legally protective project from your point of view as a project owner or main contractor.
  • Ensure you comply with the measures required, such as any funder consents to appoint sub-contractors and also any insurance requirements they impose for the project.

3. Structure your relationship with sub-contractors as determined by the sub-contract documentation

Depending on whether you are the end client or a contractor for the end client, there will be certain contractual protections which you may seek to include in the contracts further down the chain to ensure you are protected from a legal perspective during the project as project owner or main contractor.

If you are a main contractor, when appointing sub-contractors, you will want to flow down as many of the obligations imposed on you by virtue of the contract you have with the end client. This is to ensure you aren’t liable to the client for actions of your sub-contractors but left without a remedy against those sub-contractors.

Whether you are engaging sub-contractors in your position as an end client or if you are the main sub-contractor, you will be considering the following examples of legal contractual protections:

  • Seeking to decrease/increase (depending on which side of the fence you sit on) the opportunity for the sub-contractor to apply to you for price increases of materials. However, this may be a balancing act because you may not want a sub-contractor to struggle to finish a job because the cost to it of sourcing materials has risen. The position will vary depending on the nature of the project, leniency of the funder and timescales, however you would seek to legally limit this fluctuation as far as possible. The recent economic climate has led to a sharp increase in contractors looking to have greater flexibility around prices and fees e.g. through use of fluctuation provisions.
  • Depending on which side of the fence you are sitting, a sub-contractor and end client or main contractor would negotiate the terms of when payment is to be made to the sub-contractor for off-site materials and what requirements must be in place before the contractor can apply for payment in respect of them.
  • Limitation of liability – as an employer of a sub-contractor you may seek for the sub-contractor to be liable for as many heads of loss as possible because of the commercial and legal impact of breaches of the sub-contract. Conversely, the sub-contractor will want the opposite by limiting the heads of losses it is liable for and capping its overall liability under the contract.

4. Insurance

Naturally, insurance plays a significant part in construction projects. A significant point of negotiation is the determination of which party is responsible for taking out the insurance, and which party is covered by the insurance policy. The detailed elements of responsibility for insurance and coverage will need to be documented fully in the sub-contract and how they align (without any gaps) with the limitation of liability provisions.

It is also important to ascertain which insurances are required, what is covered by those insurances and on what terms. This can be particularly complex on office fit-out projects. Nevertheless, it is crucial at the outset to agree the obligations of each party to avoid a situation of under insurance arising.

If you would like to have a conversation about preparing for contract negotiations with sub-contractors, please get in touch with the construction team at Herrington Carmichael.

This reflects the law and market position at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought in relation to a specific matter.

Cesare McArdle

Cesare McArdle

Legal Director, Commercial and Construction Law

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