Top 10 tips for appointing and managing subcontractors
February 2025Subcontracting in the construction industry often leads to multiple practical issues and potentially complex problems or disputes on projects. We are seeing an increase in the nature of the onerous provisions and risks that clients are trying to pass onto contractors and consultants, for example by requesting a single point of responsibility (either as a lead consultant or a design and build contractor with full design responsibility), and so it is particularly important to consider these risks holistically when administering contracts and subcontracting.
This article outlines ten practical tips for contractors and consultants to consider when subcontracting out work or services in the future, based on key issues commonly seen with subcontracting and negotiating such scopes or terms, and offers guidance in managing the associated risks.
Tip #1: Due diligence
In an evolving and tightening market, the competency of a subcontractor and its ability to provide the subcontract works/services in terms of experience, as well as having sufficient resources and skilled workers, is key to ensuring that you can deliver your main contract works/services to the required contractual standard and within any agreed timeframe.
Appropriate due diligence should be completed on any subcontractor by asking for details of previous work/services carried out by them on other projects, requiring specific worker credentials, and/or making appropriate enquiries around reputation and track record. This is particularly important following the introduction of the requirements under the Building Safety Act 2022 and its associated legislation. Businesses should also ensure that the subcontractor complies with the applicable requirements under the Building Regulations 2010 (and building safety regime) and the Construction (Design and Management) Regulations 2015.
Due diligence should also be carried out to ensure that the subcontractor has appropriate financial solvency and insurances in place (including in terms of the type and level of insurance, as well as the scope of insurance cover). Often, your contract will include minimum requirements for subcontractor insurance levels, which is something you should be aware of when completing such checks.
Tip #2: Insolvency
With continued economic uncertainty in the construction market, there have been reports of many insolvencies throughout the supply chain. Some of these insolvencies have been high-profile within the construction industry and had significant impacts on projects, parties’ relationships, and the supply chain. If a subcontractor in your supply chain were to become insolvent during a project, you could end up incurring delays or wasted and unrecoverable costs to bring in a new subcontractor to complete the remaining subcontract works/services.
As above, appropriate inquiries should therefore be made into the subcontractor’s corporate and financial position prior to entering into the subcontract. Additionally, consider whether it is appropriate for the subcontractor to be required to provide a performance bond, a parent company guarantee, or other form of security that protects against the risk of insolvency.
Tip #3: Collaboration and communication
Building strong collaborative relationships with a subcontractor can also help to progress projects efficiently and manage risks. A collaborative relationship should lead to the parties promptly addressing any issues or concerns that may arise during a project. Improved communication and trust can also lead to more timely and informed decisions and a more effective use of resources, which is usually beneficial to the project.
Certain standard forms of contract already incorporate contractual terms to address collaboration and working in good faith or in a spirit of mutual trust (i.e. the NEC suite of contracts and 2024 editions of the JCT contracts summarised here). As you have ongoing relationships with subcontractors, this will likely further develop organically overtime. Effective notice and communication requirements in your subcontract will also be useful to help set and manage expectations around what is to be communicated, how, and when.
Tip #4: Written subcontract
It is not uncommon in parts of the construction industry for there to be no formal written subcontract, but instead a purchase order or letter sent to the subcontractor which incorporates the essential terms between the parties. Without a formal written subcontract that includes all agreed contractual arrangements between the parties however, there is a real risk of future uncertainty on the terms which can often lead to disputes over the parties’ respective duties and obligations and the applicable standards of work/services. In particular, there is a risk that there could be a “liability gap” because the subcontract is not bound to equivalent terms as your main contract. Establishing explicit written terms in a subcontract helps set expectations from the start of the project, which can minimise the risk of disputes. Further, if the subcontractor has provided a separate tender or a quote, that document could contain terms and conditions that are more favourable to the subcontractor, which could then be incorporated into the subcontract if no written subcontract is entered into.
The timing of entering the written subcontract should also be considered. If the main contract is not yet agreed, you may end up with a written subcontract that fails to encompass the more onerous obligations imposed on you under the main contract, and which then cannot be passed onto the subcontractor – this could also leave a gap in liability. Equally, there may be express requirements within the main contract to include certain terms within the subcontract and/or to obtain the client’s prior written consent on such subcontracting. On the other hand, if it is left too late, your hands could be “tied” by the terms of the main contract and if the subcontractor takes a particularly robust approach (depending on the parties’ bargaining positions), this could force you to have to choose between a liability gap or looking to procure the subcontract elsewhere. Clearly if the services or works have already been provided to you, you could end up in a difficult legal and commercial position.
Tip #5: Contractual requirements
Linked to the above, ensuring back-to-back contractual requirements are incorporated into the subcontract is key to ensuring there is no broader gap in obligations and liability. For example:
- Consider including provisions requiring the subcontractor to not put you in breach of the main contract.
- The extent and duration of liability under the subcontract should at least be equivalent to the main contract if possible.
- The main contract and subcontract should include the same entitlements to an extension of time, as you will want to avoid a situation where you must grant the subcontractor an extension of time, when you are not entitled to one under the main contract.
- Increasingly main contracts expressly require certain provisions to be included in subcontracts and it is important that these are complied with.
- Any timeframes for notification under the subcontract will need to allow enough “buffer” time for you to notify the same within the timeframe required under the main contract.
- Termination provisions should be consistent. It will be important to have the right to terminate the subcontract in the event that the main contract is terminated.
Tip #6: Scope and price
Many disputes revolve around whether an item of work is included in the supplier’s scope of services or works and therefore whether that work is included within the agreed subcontract price. The subcontract should clearly set out a comprehensive definition of the project’s scope and the part that relates to the subcontract works/services, so it is clear what the supplier, subconsultant and subcontractor is to deliver for the price, and to ensure the parties have a common understanding of the agreed subcontract deliverables and deadlines.
Tip #7: Payment obligations
Cashflow is a key consideration in construction projects. Cashflow issues can arise when subcontractor payments fall due before you have been paid upstream by the client under the main contract. It is unlawful to include “pay when paid” payments provisions into the subcontract in England and Wales, so to assist with cashflow, you should ensure that the subcontract reflects any main contract requirements and includes appropriate/longer payment periods.
Some public sector clients have strict or prompt requirements around payments to suppliers. These should also be carefully considered and managed in practice.
Tip #8: Co-ordination and integration
Construction projects often include the involvement of multiple subcontractors, designers and other suppliers. This can often lead to problems with co-ordination and integration of the works/services as a whole, which can lead to potential delays and/or rework. Depending on the role you are performing, or the terms of the main contract, duties around coordination, integration and a duty to warn the client of safety risks may be implied.
Bringing key subcontractors onboard at an early stage and ensuring effective programming and clear lines of responsibility for the works/services will be essential to managing this risk. Regular site meetings, performance monitoring, and reporting will also assist in all parties having appropriate visibility on what is happening in real time on site.
Tip #9: Managing performance risks
Maintaining the accuracy and quality of the subcontract works are important considerations as you are typically responsible for the work/services carried out by the subcontractor under the main contract with the client. It is important to set appropriate performance and quality standards in the subcontract, not least so it is clear what the quality requirements are, as well as to require regular reporting from the subcontractor, regular inspections of the subcontract works/services (as appropriate), and continuous monitoring of subcontractor performance throughout the project.
Tip #10: Technology
Technology can be used to assist with data collection, decision-making, communication, collaboration and project management. On some recent projects clients have considered using a digital or cloud based management software system with a centralised up to date project data point that the parties can refer to. Such an approach will help you track progress of the subcontract works/services; communicate effectively with the subcontractor on variations, instructions and reporting; or as part of project completion and defects resolution. Allowing subcontractors to access and enter their own data into the system and see the real time status of the project can also help deliver a more successful project. Other tools and solutions have been used to prevent project clashes or to improve safety on site.
Concluding thoughts
It is important to manage subcontracts carefully from both a liability and commercial perspective; carrying out appropriate due diligence, having a good working relationship with your subcontractors, and clear contractual terms and conditions both parties are fully aware of are key in doing so.
If you require support in considering the above items or addressing these within your construction contracts, professional appointment or subcontracts, please contact Andrew Croft or the Contracts & Project Advisory Team. In the meantime, please see our recent note on key legal developments and practical points to note when reviewing and updating your terms and conditions for 2025 onwards.
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