Subcontracting under construction contracts

Out-Law Guide | 29 Jun 2021 | 10:20 am | 7 min. read

This guide outlines what subcontracting in construction contracts involves, and the main issues to consider.

What is subcontracting?

A subcontractor is a party which agrees to perform part or all of the obligations of another party (main contractor) under a separate contract (master contract) with the ultimate employer (employer).

The subcontractor will usually be engaged by a main contractor to perform a specific task as part of the master contract.

Why subcontract?

Main contractors usually subcontract obligations because they:

  • require additional resources - for instance if they undertake a particularly big job, such as a multi-site construction project;
  • are responsible for making the professional appointments - for instance the architect, structural engineer, mechanical & electrical engineer and project manager;
  • require additional specialist advice or expertise - more specialised consultants include archaeological consultants, traffic management consultants and surveyors;
  • are required by law to appoint them - for instance a CDM co-ordinator in relation to health and safety.

Drafting the subcontract

The main contractor will be responsible to the employer for its obligations under the master contract, regardless of whether any breach is caused by the subcontractor failing to perform its obligations under the subcontract.

The subcontractor has to understand its obligations and must deliver in a timeframe and manner which will enable the main contractor to perform its obligations under the main contract.

From the main contractor's perspective, it will be important that the terms of the main contract are reflected in, or 'stepped down' to, the subcontract. This avoids 'gaps' in the main contractor's obligations under the master contract and the subcontractor's obligations under the subcontract. Any gaps are likely to mean liability sitting with the main contractor.

There is no fixed approach to subcontracting, and different approaches have their advantages and disadvantages.

Standard form subcontract

There are many different standard forms of subcontract which are recognised in the construction industry. These seek to provide an "off the shelf" contract for the parties to use.

The main advantage of using this method is avoiding the need to draft the subcontract from scratch and hopefully saving time negotiating it. Standard forms can also be useful if the same parties are involved on repeat projects.

The main disadvantages are:

  • they will not reflect project-specific risks or unusual provisions in the master contract;
  • they will usually be drafted to benefit one party more than the other. It is important to remember that it will still be necessary to review the subcontract and it is possible that amendments will be needed;
  • some obligations cannot be stepped down to the subcontract;
  • the same standard form will not suit all subcontractors on all projects, and should be reviewed regularly to ensure that changes in the law and lessons learned on previous projects can be taken into account.
Incorporating the terms of the main master contract by reference into a framework contract

This is commonly a short subcontract obliging the subcontractor to identify and comply with the relevant terms of the master contract.

Advantages of using this method are:

  • there is no need to amend or redraft the subcontract if changes are made to the master contract, as these changes will simply be incorporated by reference;
  • any issues caused by having to cross-reference between the two documents will be reduced or eliminated.

This method also encourages the subcontractor to focus on and carry out a proper review of the provisions of the actual master contract.

The main disadvantages are:

  • the risk that the subcontractor will not identify everything, creating 'gaps' between the master contract and subcontract (see above);
  • having to determine the contractual effect of master contract terms if these are not clearly drafted - it is not always clear how certain terms would have been stepped down to the subcontract;
  • some terms are only relevant to the master contract and should not be stepped down to the subcontract. This could lead to ambiguities and disputes about whether or not the subcontractor should or should not have done something;
  • certain clauses which are unique to the subcontract will still need to be drafted.
Bespoke sub-contract

This is the most common approach, particularly on complex projects. Each master contract clause is reviewed to consider whether the obligations in that clause should be stepped down to the subcontractor. Amendments and additional drafting will be required to ensure that the clauses work correctly in the subcontract.

The main advantage of using this method is that it allows the parties to address any unique issues.

The main disadvantages are:

  • subcontracts will take longer to complete;
  • subcontract redrafts are generally necessary each time the master contract is amended.

The employer's involvement in sub-contracts

The employer, while negotiating the master contract with the main contractor, will want to make sure the main contractor will meet the performance requirements set out in the master contract and that the subcontract costings match up. It will therefore want to review the main contractor's subcontracting arrangements.

The main contractor should be allowed to manage the delivery of the construction project, but best practice is for the employer not to sign the master contract until any subcontracts are agreed and ready for execution.

Examples of the issues which the employer should look out for are:

Subcontracting assignment and novation

The employer will want control over the subcontractor's ability to further subcontract its work. For example, it will want any future subcontractor to have the technical expertise and financial strength to perform its obligations.

For more detail on assignment and novation, please see our separate Out-Law guide.

Liquidated damages

If the master contract requires the main contractor to pay liquidated damages to the employer for late completion of the works, the employer should ensure that the main contractor will be able to recover enough under its subcontract to pay the employer. This will avoid the main contractor not having sufficient funds to pay the employer.

For more detail on liquidated damages, please see our separate Out-Law guide.

Collateral warranties

Collateral warranties create a direct contractual link, which would not otherwise exist, between the employer and the subcontractor. This allows the employer to make a contractual claim against subcontractors, should the subcontractors fail to perform their obligations under the subcontract.

Should the employer have to step-in and replace the main contractor in the subcontract, it will have to ensure that it is happy with the subcontract as a whole and the obligations it might assume.

For more detail on collateral warranties, please see our separate Out-Law guide.

Breakage costs

The employer should ensure that it is comfortable with any breakage costs payable if the subcontract is terminated early, since it will be potentially liable for various termination scenarios under the main contract.

The main contractor's principal concerns in subcontracts

The main contractor should give itself sufficient time or 'headroom' under the subcontract to enable it to perform its obligations under the master contract, bearing in mind that the subcontractor may be 'on the ground' and in possession of the relevant information.

Examples of the issues which the main contractor should look out for are:

  • notifications and time limits - if the main contractor is obliged to notify the employer within for instance 20 days of an event which might cause delays and therefore give rise to an entitlement to an extension of time, it will need to ensure that the corresponding period in the subcontract is less than 20 days, to give it time to pass information up the contractual chain to the employer;
  • exercising rights - if the employer has 20 days to exercise a right under the master contract which has been stepped down to the subcontract, the main contractor will want more than 20 days to exercise the right under the subcontract;
  • information - the same principle applies to information which the subcontractor will need to give to the employer under the master contract. The subcontractor should be obliged to provide the same information under the subcontract;
  • extensions of time and other reliefs - the main contractor will want to ensure that it is entitled to the same remedies and reliefs under the main contract as the subcontractor is entitled to under the subcontract. This avoids the situation where the subcontractor may be entitled to for instance an extension of time under the subcontract, to which the main contractor is not entitled under the main contract;
  • certification of completion - again, the main contractor will want to ensure that certificates issued by third parties confirming completion of the works apply to both the subcontract and master contract, to avoid inconsistency and potentially achieving completion under one, but not both, of the contracts;
  • payment - the main contractor will want to ensure that it is not obliged to pay its subcontractors before it has been paid by the employer. Recent changes to the Construction Act are aimed, among other things, at the abolition of conditional payment clauses and introducing a 'fairer' payment regime, and improving rights for contractors to suspend their work in non-payment circumstances;
  • dispute resolution - the main contractor will not want to be bound by a decision under the dispute resolution procedure (DRP) in the master contract while it is still involved in the subcontract DRP. Recent changes to the Construction Act are aimed among other things at to encouraging the use of adjudication for the resolution of disputes;
  • is there more than one subcontractor? The main contractor will wish to ensure that each subcontractor is obliged not to do anything which would harm the project by preventing other subcontractor from performing its obligations. For an example of how this is dealt with in PPP projects, see our guide to interface agreements;
  • caps on liability: are they lower in the subcontract than in the master contract, and does the main contractor want to take the risk of the gap? What about small, specialist subcontractors who are unable to accept the same level of liability under the master contract?