How can you protect yourself against ‘subcontractor abandonment’ – when your subcontractor disappears between tendering and starting work in favour of a higher rate elsewhere?
Are subcontractors burning more bridges than they are building? – By Stuart Robertson and Tamzin Dempster
Building subcontractors are enjoying a rare period of power in this current superheated market. Demand is far outstripping supply for skilled tradespeople. However, many of our head contractor clients are telling us of a current trend amongst some subcontractors who are seeking to capitalise on these circumstances at their expense.
We are hearing that subcontractors are abandoning head contractors between tendering and starting work, in favour of higher rates as they become available elsewhere. What can head contractors do to protect themselves against ‘subcontractor abandonment’?
As you know, developers limit their risk on price creep by putting to tender and securing a head contractor for all physical work on the project. In this way, the developer has certainty of price other than the usual variations and extensions of time (EOTs) that may arise. Either through in-house expertise or by seeking subcontractor tender prices, head contractors tendering for this work make up their tender price.
What head contractors have not historically been good at is ensuring those sub-trades are secured in the event they are awarded the project. Anecdotal evidence, especially in the Auckland vertical build market, is that subcontractors are bidding and ‘winning’ multiple subcontracts never intending to perform them all, either through winning too many tenders, or awaiting a better offer closer to the start date. Common examples are suspended ceiling, tiling, and waterproofing sub-trades.
If head contractors wish to avoid the inevitable consequence (having to urgently source alternate subcontractors at higher prices) then they will continue to face reduced margins and risk of liquidated damages for late completion.
- • Head contractor invites a number of subcontractors to submit tenders (known in legal terms as ‘invitation to treat’)
- • Subcontractors submit their tender (the ‘offer’)
- • Head contractor selects best tender and issues a letter of award (the ‘acceptance’).
In basic terms, an offer has been made and accepted, and a contract formed. However, on many occasions, the relaxed nature of the paperwork means that assumptions are made by both parties as to what the subcontract terms will look like, the extent to which the head contract terms apply, and – given delays in obtaining resource and building consents – when the subcontractor is meant to begin work. This poses difficulties for head contractors to enforce the subcontract they thought they had when the subcontractor takes up a better offer.
When inviting tenders, the head contractor should attach its standard subcontract terms, and make it clear that if accepted the subcontractor will immediately sign and return. Those terms should be back to back with the head contract requirements, including the start date.
With many subcontractors not starting on day one of the project, having provisions in the subcontract indicating when the subcontractor will be required is important. This may include annexing the head contractor’s tender programme.
Make sure your subcontracts specify that damages are claimable should the subcontractor fail to perform the subcontract works. With the changes to the Construction Contracts Act 2002 on 1 December 2015, it has been made clearer that losses arising from breach of contract, such as subcontractor abandonment, can be determined by an adjudicator.
The losses claimable will be the increase in price for the replacement subcontractor and any liquidated damages should the breach result in delay to the critical path.
The above, while being sound advice, is nevertheless a legalistic approach. Maintaining positive working relationships with trusted subcontractors is far better than setting them up to be sued.
It should also not be overlooked that accepting the lowest bidder may not only result in a lower-quality job, but it is that subcontractor who has the most to gain from abandoning and taking a more lucrative subcontract.
Despite these obvious steps, if you have followed the conservative contractual process of tendering subcontract works, you will be in a much better position to recover any losses in the event of subcontractor abandonment.
Stuart Robertson is a partner and Tamzin Dempster a solicitor within Kensington Swan’s major projects and construction team kensingtonswan.com