Out-Law Guide 5 min. read
16 Jul 2021, 8:41 am
The NEC suite of contracts remains a stalwart of many important project procurements, from major utilities frameworks to small-scale local authority schemes. Getting the right supply chain arrangements in place, backed by appropriate subcontracts, is crucial to a project’s success – but the difficulties involved are often underestimated, and the problems that can arise from getting it wrong can be difficult, time-consuming and expensive to resolve.
The ultimate goal when drafting the subcontract is to achieve intelligent and appropriate allocation of risk. While responsibility for drafting usually sits with the tier 1 contractor, project employers and subcontractors also have a role to play.
Helpfully, the NEC has created a number of template subcontracts which sit under some of the most popular forms in the NEC4 suite. They include:
These template subcontracts may be the right starting point if you are using the NEC, TSC and PSC. They can also be amended to incorporate any bespoke amendments from the main contract which need to be included. However, they will be less useful if the main contract is based on another form of contract, or if the main contract incorporates hundreds of bespoke amendments and ‘Z clauses’.
If you are in a hurry, and don’t mind the supply chain seeing the main contract, a quick and easy option is to incorporate a ‘comply with the main contract’ clause into any form of subcontract. This should, however, be used with extreme caution as it will not properly define the tier 1-subcontractor relationship and risks ambiguity – and potential disputes down the line.
A clause of this nature should generally say:
Another potential option is to ‘flip’ the main contract into a subcontract, by effectively replacing references to the employer and tier 1 contractor with the contractor and subcontractor; to contract with subcontract; and to works with subcontract works.
If you opt for this route you must carefully check the resulting document to ensure that all appropriate risks are properly passed down, and that you have not introduced any errors that inadvertently put the contractor in breach of its obligations under the main contract.
Additional time periods or buffers will usually have to be given where any contractual time limits from the main contract are to be incorporated into the subcontract. For example, if under the main contract the contractor must do something within 10 business days which relies on input from the subcontractor, the timescale in the subcontract should be shorter – for example, five business days.
The ultimate goal when drafting the subcontract is to achieve intelligent and appropriate allocation of risk
The same principle works the other way too. If, under the main contract, the employer is obliged to do something within five days, the contractor may need time to reflect before passing any relevant information onto the subcontractor. In this example, the timescale in the subcontract should be longer – for example, 10 business days.
Time periods and buffers are also important in respect of payment obligations. The relevant NEC4 contract forms already incorporate time buffers into the payment provisions. For example, at clause 51.1, payments in the main contract are certified by the project manager within one week of the assessment date; and payments in the subcontract are certified by the contractor within two weeks of the assessment date. At clause Y2.2, the date on which a payment becomes due is seven days after the assessment date in the ECC and 14 days in the ECS.
In practical terms, there is therefore a seven day buffer both for certifying the payments and for making payment. There is scope to amend these periods so that there is a greater buffer – although care should be taken to ensure compliance with employer payment policies, for example the government’s prompt payment policy, which requires undisputed invoices to be paid within 30 days and for this payment term to be passed down the supply chain.
If the NEC forms of subcontract are not used, the draftsperson will need to ensure that adequate buffers are included and specifically drafted for.
Depending on the terms of the main contract, the contractor may be obliged to include certain provisions in the subcontract. We often see this in relation to policy clauses, such as those around bribery and modern slavery – for example, a contractor may be required to comply with the employer’s bribery policy and include provisions in its subcontracts to ensure its subcontractors do the same. It is not usually found in respect of the core contract obligations, because the employer will usually give the contractor discretion about how to procure its supply chain.
Where flowing down obligations under the main contract to the subcontract is not mandatory, you may still choose to do so in order to rely on the subcontractor’s assistance with those obligations at a later date.
A contractor may be required to comply with the employer’s bribery policy and include provisions in its subcontracts to ensure its subcontractors do the same
Care should be taken not to flow down obligations to a subcontractor that are not appropriate. For example, don’t ask a parts manufacturer supplying something according to a particular specification to take ground risk of the site; or ask a design professional to accept a construction contractor standard of skill and care. Understanding from the outset what is appropriate to flow down to a particular trade and what is not will save valuable negotiation time.
On top of reflecting obligations from the main contract, the contractor may also need to include additional provisions in its subcontracts which will allow it to properly manage and coordinate the works from a tier 1 level, in line with its own obligations.
For example, a subcontract may need some extra provisions about acceleration, allowing the contractor to force an acceleration out of the subcontractors where this is necessary to stay on track for completion under the main contract.
We are beginning to see employers take a more informed and intelligent approach to supply chain contracting, particularly on multi-billion construction programmes.
Some employers have begun producing subcontract templates for their contractors to use that reflect its desired approach to risk. Others may not produce templates, but instead have a schedule of what effectively becomes mandatory flowdown, setting out the employer’s expectations of subcontractors further down the supply chain.
Employers who spend time up front thinking about what is important to them will save time later, as they will be less likely to have to find other ways to mitigate risk or to argue with the supply chain about what is appropriate and what is not.