Jacob Austin 00:00:00 Hi all! Jacob Austin here and welcome to episode 141 of the Subcontractors Blueprint, the show where subcontractors will learn how to ensure profitability, improve cash flow and grow their business. Today's episode is a major warning. It's all about ten hidden dangers that are regularly buried in subcontracts by main contractors, and it's highlighting clauses that will often cost subcontractors real money, often without them knowing they're there. So let's dig in. Today's episode is a bit of a warning, and it's for good reason, because a lot of subcontractors don't even read their subcontract before they sign it, and many that do. Just give it a quick skim through and move on. Some hand it to a sheet who glances at the payment terms and the program dates. Some sign it because the main contractor is pushing for a start, and there isn't time to do a proper review. Some sign it because the contract is threatening not to pay them, and some sign it because they've worked with this contractor before and they're sure it'll all be fine. And that might sound harsh, but it's true.
Jacob Austin 00:01:28 And it costs the industry an enormous amount of money every year. Money that leaves subcontractors businesses and doesn't come back, money that eats into their margin. And here's the thing. Sometimes even reading the subcontract isn't enough because buried in there between the amendments and the standard clauses are mechanisms that some experienced commercial professionals wouldn't even flag on a first read provisions that the main contractor has worded very carefully so that they look routine. They sound reasonable on the surface, but then they carry a sting that you find out later when something's gone wrong on site, when the contractor's budget is run out, and when they're fishing for excuses not to pay for anything. So that's what today's episode is all about. Not just the obvious stuff, but the hidden dangers lightly. Provisions that appear regularly in subcontracts in different forms from different contractors that consistently catch out subcontractors at the worst possible moments. Sadly, I'm only bringing you a top ten because the list could be absolutely huge. And importantly, as I have to point out, main contractors will vary their terms between each other, between different types of contract that they're working on, different frameworks that they're working on, and sometimes even different projects.
Jacob Austin 00:02:49 So the safest thing for you to do is to assume that every single subcontractor you receive is bespoke, so that means you've got to read it. And after listening to today's episode, you'll have some pointers of what you should be watching out for. As I run through ten common dangers, telling you what each one is, how it operates, and what it means commercially if you miss it. So let's start at the top with danger number one. This one sits at the top of the list because everything else flows from it. You signing it before you've read it. The subcontract is a legally binding document the moment you execute it, whether it's a wet signature, a DocuSign, or some email confirming acceptance, you are bound by the clauses in it. It's written there on the signature page that both you and the main contractor agree to enter into a subcontract on the basis of the terms and the documents enclosed. So that means every obligation, every time bar, every limitation of liability, every payment condition, every document appended to it.
Jacob Austin 00:03:58 If that's sounding really obvious, it should do. But every one of those documents you are bound to. If you signed the subcontract, the commercial reality is that subcontractors regularly find themselves arguing against a clause that they didn't even know was in their contract, and the response from the main contractors commercial team is always the same. You've signed it. That's not them offering you a defence. It's a door closing in your face. Your subcontract isn't a formality to be dealt with after you've mobilised. It's a document that sets out your entire commercial relationship with the contractor on that project. Every pound that you earn, every pound that you lose flows from that document. So it's an absolute must to read it before you sign it and get the right eyes on it. If you don't have those eyes in-house in your team, then find them. The cost of paying somebody to review a document for a day, maybe two days. It's nothing in comparison of the loss that you might make. If you miss something important, and then you can't act on it after the event.
Jacob Austin 00:05:10 Let's move on to danger number two. And this one is about day works. This is one of the most common sources of dispute on construction projects. There's always an argument about day works, and some of those arguments are clearly preventable when work is instructed on a day works basis. It's typically where it can't be valued by any other method. Most subcontractors understand that they need to record the time, record the materials and the plant, and then get it signed off. What they don't always do is check the specific procedure in their subcontract to see what they need to do to get those day work's paid. And here's the issue. Because many subcontracts don't just say keep records, they prescribe an exact process, they might say day. Works are only valid if they're instructed to be completed on day works in advance. That means the contractor identifying a change and saying get on with it on day. Works. Not one of your lads turning up to see the site manager with a sheet. Looking for a signature of 2 or 3 hours of day work that they've known nothing about before.
Jacob Austin 00:06:17 On top of that, there's often additional procedures, including notifying the site manager that they're going to complete that day, work during the course of the day, and allowing the site manager, therefore, the opportunity to come and have a look at it so they can get an appreciation for how long it's being spent doing that day's work, whether they're doing any other work alongside it that needs to be taken into account. The day work might then need to be signed by a named individual within a particular time frame of the work being carried out. That probably means finding a particular site manager or certain engineer, and it's that person that needs to be visiting the work, checking what's going on and then signing it off. They might then ask for day works to be submitted on a specific form that's referenced in the subcontract documents, and then might specify other things like repeat day works being automatically subject to a variation at a price that you both agree. Any one of these steps, if they're in your subcontract, if you miss them and the main contractor then has contractual grounds to reject your day work out of hand, not reduce it.
Jacob Austin 00:07:30 Reject it. The work might well have been done, labor paid for, materials bought, and you're missing out on payment because you've not followed a procedure. The commercial lesson here is simple before any work is carried out. Know what to do in order to get paid. Who signs when you submit? What form? What accompanying documentation? Build that process into your site managers book of procedures from day one and you golden. This is a simple one that you can establish at your pre start meeting whilst you're all set around the table, whilst everything's still looking rosy on the job. If you forget about it, you're probably forgetting some profit along with it. Let's move on to danger number three, which is time bars on variations and loss in expense. This one arguably runs hand in hand with day works, but it goes much wider because a time bar is a contractual provision that says if you don't notify this event within a specified period, then you lose the entitlement. Not partially, not subject to negotiation. Gone lost time.
Jacob Austin 00:08:43 Bars appear in a lot of self contracts. Then one of the fundamental principles of any C Subcontracts, and they're so effective that main contractors have built them into JCT style subcontracts as well. They apply to variation instructions, meaning if you carry out varied work without notifying properly in time, sometimes beforehand, if that's what your subcontract says, then you may have no entitlement to additional payment. They can also apply to loss and expense claims, meaning disruption, prolongation and increased costs arising from events outside your control. They will almost certainly apply to extensions of time, meaning if you don't notify a delay correctly and within the required window, you might lose your right to additional time, which can in turn expose you to damages for the delay that you are never responsible for in the first place. This is a crucial fact. The countdown on a time bar starts when the event occurs, not when you get around to raising it. Not when you submit your next application when the event happens. And this is where so many subcontractors can get caught.
Jacob Austin 00:09:56 The site team deals with the issue. It goes in the diary. Someone says we'll pick that up in the next application and by the time it surfaces, the time bar is expired and that entitlement is gone. The fix for this is needing to embed some robust commercial culture on your site, encouraging your team to essentially feed in early warnings. I was asked to do x. I don't think it's in the price. I think a different contractor is going to overrun on their section, so we'll be late starting hours. Feed in these little facts and then you start catching instructions. Delay events disruption. Reward your team about the crucial facts that are going to change the position or result in a change, etc.. Knowing is the start. Next thing you need to do is obviously notify it and do it on time and of course, how your subcontract tells you to do it. Danger number four is set off without adequate notice. Set off is the main contractor's right to deduct money from sums otherwise due to you.
Jacob Austin 00:11:04 It's a legitimate contractual mechanism, but the conditions that it can be used upon vary absolutely hugely depending on what your subcontract actually says. In well drafted subcontracts, set off is subject to proper pay less notice provisions. The main contractor must notify you of their intention to pay less than a notified sum, state the amount they intend to withhold and give their grounds, or within a defined period before you're due to be paid. That process is supposed to give you the chance to respond and dispute the deduction and, if necessary, pursue adjudication. but some subcontracts contain provisions that significantly water down those time protections. They give the main contractor wide rights to set off against any alleged breach. Any ongoing claim. Any contra charge with minimal notice requirements. And if you've signed that subcontract. Those mechanisms are active and they can be used against you. The danger here isn't just the deduction itself, it's the cash flow hit that arrives without warning. And at a point in the project where you have ongoing costs to meet. So before you sign, you need to understand what your subcontract says about setup, what notice is required, what grounds are acceptable, what process do you have to do to challenge it? If the answer to those are then very little notice broad grounds and limited opportunity to challenge, then that's a risk that you need to price or negotiate before the job starts.
Jacob Austin 00:12:44 You'll find it very hard to dispute after the money has gone. Let's move on to danger. Number five delay damages. No fixed rate means no cap. Most people in construction are familiar with liquidated and acetone damages. LEDs a fixed rate, usually expressed as a sum per day or per week, that the employer deducts from the main contractor for delays to completion. The principle is that the loss that the client would incur for their inability to inhabit the building is calculated in advance. The rate is fixed and everybody knows where they stand, and that is actually a good thing. These have historically been subject to arguments because employers often sought for those damages to be punitive. Large sums of money way beyond the cost of not taking that building. So the first principle is they have to be a genuine pre estimate of the loss incurred. And if they're reasonable, everybody knows where they stand. The main contractor and the client are reasonably happy, but that certainty doesn't necessarily flow down to you. Many subcontracts either apply a fixed LED rate flowing out of the main contract, sometimes at the full rate, sometimes prorated to the value of your package, but they can often do something even more dangerous.
Jacob Austin 00:14:10 They expose you to the main contractors actual and proven losses arising from any delay that you've caused or contributed to. And what that means is that if the subcontract says you're liable for the main contractor's losses, there's no cap. The main contractors, lads, is not the limit of what they can recover from you. It's a starting point. On top of that, they might pursue prolongation costs. Site preliminaries. Running on supervision. time extended plant hire, other knock on costs that other subcontractors incur because of that delay. That number might be significantly larger than anything a fixed LED rate would have produced, and you've got no way of knowing when you price the job what you're in store for, because the subcontract doesn't tell you what that exposure is. So before you sign, you need to understand how a delay damages are structured in your subcontract. Is the right fixed? Is it capped? Is it back to back with the main contract Alds or is it open ended and actual loss? If it's the latter, then factor that exposure into your risk assessment.
Jacob Austin 00:15:23 That's probably a number that's going to keep you up all night. So you need to negotiate that before the contract is executed, not after a delay event occurs. Danger number six is termination for convenience. Most subcontractors understand termination. For a default, you breach the contract badly and persistently, and the main contractor terminates your performance. It might be painful, but it's understandable. Termination for convenience is different. It gives the main contractor the right to bring your subcontract to an end at any time, for any reason or for no reason. As long as there's a specified notice that's been given, no default is required and no breach. They just don't want you on the job anymore. It could happen for absolutely any reason. And that clause likely limits what you can charge the main contractor to a defined set of recoverable items. And what will probably hurt you is that those items are usually watered down and heavily limited to include things like the work that you've already done. The materials that you've got on site, and certain costs like demobilisation that you would incur as a consequence of termination.
Jacob Austin 00:16:42 They will almost certainly exclude loss of profit on the on complete works. So the margin that you priced into the second half of the job contribution to overheads, the return on the risks that you took could all be gone. You've mobilised, bought materials, committed resources, perhaps even turned other work down to carry on performing under this contract. And the subcontract allows the main contractor to walk away, owing you what you spent, not what you were contracted to earn. This is one that you want to try and negotiate out. If you can't, you definitely need to know that it's in there. You need to know what it allows recovery of and what it excludes. Front loading your drawdown might help you to protect yourself from this so that you can get your hands on profit earlier. Danger number seven is back to back obligations that you can't meet back to back. Subcontracting is standard practice. The principle is that obligations, liabilities and risks in the main contract are mirrored into your subcontract. What flows down to the main contractor flows onto you.
Jacob Austin 00:17:52 It kind of sounds fair in theory, and it creates alignment between the two contracts, but in practice, it's one of the most consistently dangerous provisions in any subcontract. And a lot of times, subcontractors can sign back to back agreements without ever reading the main contract. Just think about what you're agreeing to in that situation. Materials and performance specifications. Key program and milestone dates that are now yours that you probably didn't know about. Specific testing and inspection regimes. Restrictions on working hours that affect your program. Notifications tied down with very tight time bars. We've already talked about time bars, of course, but those time bars. If you're back to back now, we'll apply downstream to you. The main contract may also contain certain provisions about desired liability, fitness for purpose, employers, agents, requirements that have specific implications on your scope and your P.I.. You simply can't agree back to back provisions with the document that you haven't seen. If your subcontractor is requesting a back to back position with the main contract, then you need to read that main contract.
Jacob Austin 00:19:08 That's going to be a dull day. You need to review the scope review drawings that are pertinent to your work. Identify obligations, restrictions, procedures that might interfere with your package. Is there any differences shortfalls in the design that you're being asked to complete against that client's design? You would potentially be on the hook for them if you sign up to a back to back position. If there are provisions as well that you can't meet. You need to negotiate them out. And if you don't read it, then you're signing up to. Obligations that you don't even possess. You don't know about. You haven't read. And how are you going to achieve them? Sensibly you can't. But if you sign up to that subcontract, you're agreeing that you can. So you need to be really careful about that one. Danger number eight I've spoken recently about retention in relation to the change in law that's coming up. Retention is still a regular argument. It also appeared in the recent pay one paid episode, citing the regular problems that subcontractors find themselves with when the main contractor has written something potentially illegal into their subcontract.
Jacob Austin 00:20:19 Tying your retention release up to the main contract, retention, release conditions and dates. Some subcontracts can do some baffling other things, like tying retention up to the main contract final account settlement that process can take years. And in some cases, they might tie your attention to the rectification of all defects under the main contract, including those caused by other trades. That means your attention is being held as security for the entire job, not just your scope. In reality, the main contractor during that time is just using your money, avoiding a slither of interest on their revolving credit limit. And of course, if the main contractor becomes insolvent before it's released, the retention is unsecured and your an unsecured creditor before you sign. Understand exactly what triggers retention release. Challenge it. If it doesn't sound like it's directly related to your work. If it's linked to anything outside your control, then it's a commercial risk that you've got to price into the job or try and negotiate a long stop date if you can. If you absolutely can't change the clause, then at least understand what you're agreeing to and manage your cash flow expectations in the same fashion.
Jacob Austin 00:21:37 Danger number nine is the final account time bar. We mentioned time bars on variations in loss and expense earlier. This danger is a repeat of that, but only at the end of the job, because many subcontracts contain a provision requiring you to submit a final account within a defined period after practical completion of your work. That period might be four weeks. It might be eight weeks. It could be three months. The consequence of missing it varies from subcontractor subcontract, but in some cases the drafting is clear that any entitlement above and beyond sums previously applied for uncertified is forfeit if the final account isn't submitted on time. So think about what that means. In practice, you've got outstanding variations that you might have even notified, but you've never claimed for you've never valued. Maybe you've had your hat out for loss and expense, and the contractor has been sympathetic with you and agreed something in principle, but you've never claimed it. You've never quantified it. And on top of that, you've got day works that went in during a busy period and they haven't been formally signed off and incorporated.
Jacob Austin 00:22:48 You could have built up a big commercial entitlement that isn't part of your application on a running basis, and all of that commercial entitlement can disappear if the final account isn't submitted. How your subcontracts tells you to when site teams demobilize. Attention moves to the next project. The SHS, on the meantime, is probably working three jobs, has got one eye on the next job, and the final count on this one is just something that can slip the mind. It gets pushed back, maybe for good reason. Maybe there's a really lucrative job that you're pricing and you're focused on winning it. But if you've forgotten your final account and there's a time bar clause in your subcontract. By the time you submit it, that window could have gone. Now, whether those provisions could be overturned by a judge might actually vary depending on the specific drafting of your subcontract terms. And that's worth thinking about. And it might be worth verifying if you've missed the window. But the reality is it's cheaper, it's faster, it's better for your cash flow not to have to go to an adjudicator to settle your final account.
Jacob Austin 00:23:58 So if there is a time bar, treat that as a hard deadline, not just an administrative goal or a nice to have. Put it in a calendar, put it on a program, build your final account as the project goes. Be ready so that you can meet that date. Final danger number ten is dispute resolution clauses that work against you. Adjudication is your statutory right under the construction accident. I seem to be mentioning every week at the moment For construction contracts, you have the right to refer a dispute to your adjudication at any time. That right can't be taken away by contract, but it can be made significantly harder to exercise. Some subcontracts insert internal escalation requirements before adjudication is permitted. Be that senior management meetings, mediation attempts, and formal dispute notice periods. All of these things can eat into the time available before you need to have your referral prepared and submitted to the adjudicator. Some subcontracts impose predetermined splits on the cost of the fees. Some restrict the types of dispute that can be referred, or attempt to require disputes to be referred to a named adjudicator or named nominating body that might not be appropriate for your dispute.
Jacob Austin 00:25:19 None of these provisions necessarily strip you of your statutory right, but they can make exercising that right. Slower. More expensive. More complicated by the main contractors design. This is one to read to understand. See what internal steps are required before you can adjudicate according to the subcontract. Or you simply strike these clauses out and say you'll stick with the Construction Act. Thank you very much. The common theme with all of these dangers is timing. Subcontractors getting caught out because they engage with the subcontract too late. The document is signed before it's read. The time bar expires before the commercial team gets involved. The day work procedure isn't understood until the first sheet comes back rejected or the final account deadline passing before anybody's checked when it was. There's also a confidence problem, because experienced site teams and QZ sometimes assume that they know what a standard subcontract looks like. They assume the form is the standard form. The amendments are minor. and those assumptions contain real hidden dangers, because it's in those amendments, in the special conditions, in the appendices that look like admin detail, that the real amendments with hard commercial consequences are hiding.
Jacob Austin 00:26:41 The reality is that no two subcontracts are exactly the same, so you have to read every one. And ultimately, that's how you protect yourself from the dangers of a contract as a subcontractor. You read that document before you sign it, all of it, not just the payment terms in the program, the conditions, the appendices, the documents listed as contract documents. If you don't have the main contract and the subcontractor ties you to some of the performance criteria, you need to ask for it. Before you can sign up to that, you have a right to know what you're agreeing to because that subcontract is binding from the moment you execute it. Ignorance of a certain clause or a certain specification that you didn't know about is not a defense, and it's not going to get you far in front of an adjudicator. You also need to connect your site team to your commercial processes. That means potentially staff doing the work need to know what the day work procedure is. Certainly your supervisor does. They also need to know what notification requirements are, because ultimately, commercial risk on a construction project is found out about on site, not just in the office.
Jacob Austin 00:27:54 And if your site team or the people doing the work aren't communicating those issues back to somebody that can notify them, you're always going to leave money on the table. These things don't have to be complex, but they require discipline. And that discipline pays for itself every time a time bar doesn't expire because somebody flagged the issues straight away on the day it happened. So you've got your variation paid for, you've got your extension of time because you are able to notify on time. And now I'm going to wrap things up there today for this week's episode. My mission with this podcast is to help the million SME contractors working out there in our industry. So if you've taken some value away from today's show, then I really need your help to share the show and help pass that value on to somebody else who'd benefit from hearing it, so I can help as many people as possible. And thanks for tuning in. If you like what you've heard and you want to learn more, then you can find us at www.SubcontractorsBlueprint.uk and we're on all your favourite socials again at @SubcontractorsBlueprint.
Jacob Austin 00:28:59 And remember, miss the contract detail and the commercial risk falls on you. Thanks all. I've been Jacob Austin and you've been awesome.
