This article highlights some of the tricky issues that a subcontractor is usually confronted with when it reviews a subcontract tender document. Whilst some of these issues varies based on the trades of work, there are general issues that are non trade specific. In other words, a building facade subcontractor may face issues similar to an electrical subcontractor during their respective tender processes. An understanding of such issues can facilitate consolidation of certain best practices for subcontractors. Additionally with such discussion, main contractors, project consultants and the Employer are able to appreciate issues from subcontractors’ perspective which helps to foster greater mutual understanding. 

Pricing Scope of Works Under a Dynamic Site Conditions

Subcontract tenders are carried out after the main contractor is appointed and when the construction works are likely to be in significant progress. Given the dynamic nature of construction works, circumstances changes on site resulting in reshuffling of priorities. During the procurement of various subcontract trades, subcontract tenderers should ideally be provided with the most up to date and relevant information to facilitate their pricing of the subcontract works. However, the constant changing circumstances on site meant that occasionally subcontract tenderers may be relying on obsolete or superseded information as the basis of their pricing. Not only this potentially affects the availability of competitive pricing, it may result in disputes after the subcontract is awarded if the subcontractor felt misrepresented. By way of example, a ceiling works subcontractor may have submitted a bid on the basis that it is required to commence works on site once the mechanical and electrical (M&E) services above the false ceiling are fully installed. If there are delays to the M&E works due to design changes, the commencement of the ceiling works will correspondingly be delayed. Occasionally, the ceiling works subcontractor may be subject to new arrangement where it is now required to install its ceiling panels in multiple phases so as to be in tandem with the progress of M&E works. These new circumstances could give rise to additional cost and additional time if it results in loss of productivity due to congestions on site and the need to share site resources such as scaffolding.  The entire duration of a subcontract tender may take two to three months and it is not uncommon for site conditions to change, critical path of the master programme to shift etc during this period of time. 

In light of the above, subcontractors will need to pay special attentions to certain provisions that are commonly included in its tender document that may affect their future entitlements to contractual relief. Whilst it is generally true that the subcontractor may claim for additional payments and time to the extent that it is aggrieved and prevented from completing its subcontract works, one should also be cognisant of the presence of any contractual provisions that may limit or even deny such claims. The presence of such limiting provisions in tender document should be the subject of review and negotiations during tender. To this end, there are a few notable examples of limiting provisions that can be found in most standard forms of subcontract included in tender document. 

For ease of reference, this article shall utilise the subcontract form that is used in conjunction with the Singapore’s REDAS Design and Build Conditions of Contract (Third Edition, October 2010). Under Clause 2.8 therein, the subcontractor shall amongst others, be deemed to be fully acquainted with and have obtained all necessary information as to risks, contingencies and other circumstances which may influence or affect the subcontract works. The subcontractor shall further ensure the smooth and efficient execution and coordination of its subcontract works with the works of other contractors, subcontractors and authorities. There shall be no entitlements to any additional payments or time due to the lack of such understanding. 

The language above puts a fairly onerous requirement on the subcontractor. Unless the subcontractor’s construction team is already deployed on site, be in attendance of all site meetings, in receipt of all reports and programmes etc it will be extremely challenging for a mere tenderer to be privy to such volume of information that will allow it to satisfy those requirements. It should be noted that the said Clause 2.8 states that the subcontractor shall “be deemed” to have obtained all necessary information. This implies that the tender document may not sufficiently communicate to the subcontractor all relevant information. Where more information is required, the burden is on the subcontractor to request for supplementary documents during tender that is necessary for it to discharge its obligations therein. The failure to request for supplementary information may extinguish any of the subcontractor’s entitlement to future relief. Therefore the subcontractor should not take the position that it could passively expect that it be given all necessary information so as to appreciate the risks and obligations under the subcontract.

Access to Main Contract Information

Based on the previous section of this article, there is no doubt that there is an expectation for the subcontractor to proactively seek out certain information by its own initiative during tender. This includes information contained in the main contract document. One should note that main contract document typically represents a full and final commercial agreement between the main contractor and the Employer. Therefore it invariably contains  details that could be commercially sensitive or confidential. If a main contractor had given special discounts or offered contractual concessions to certain property developer, it would be reasonable to assume that the main contractor would not want this to be disclosed widely in the market and be used as future precedents. In this regard, there is a delicate balance that had to be achieved by the main contractor when providing the subcontractor access to its main contract information. 

Under Clause 4.1 of the above mentioned REDAS subcontract form, the subcontractor shall be provided with access to main contract document, other than parts irrelevant to the subcontract works and the main contractor’s prices. Notably, such main contract document is not enclosed to the subcontract tender document for unfettered review and examination but merely be made available for inspection by the subcontractor, presumably at the main contractor’s premises. With the opportunity of inspection be made available, the subcontractor shall be deemed to have full knowledge of the provisions of the main contract applicable to the subcontract works, particularly the main contractor’s obligations and liabilities under the main contract. Once again, the burden is on the subcontractor to notify the main contractor in case of any discrepancy between the provisions under the subcontract and main contract. The main contractor’s clarification or decisions in respect of the identified discrepancy shall be complied by the subcontractor who shall in any case not be entitled to any additional payment or time arising from such clarification. 

The decisions made by the main contractor on what is considered relevant to the subcontract works can be subjective and evolved over time. By way of example, if certain of the main contractor’s construction method is adopted and is included in the main contract document as the basis of main contract pricing, such method may be subject to change depending on site conditions. The main contractor may also choose not to disclose such information to the subcontract tenderer on the basis that these information involve the main contractor’s pricing and may be perceived as irrelevant with the subcontract works. However, the subcontractor may disagree as it is required to price its subcontract works based availability of site resources for its use and the extent to which it may be required to work concurrently with other contractors. This could indicate the likely congestion on site which influences its productivity. If and when the subcontractor’s reliance on the information provided deviates from reality, the subcontractor may face difficulties in mounting a claim by virtue of the said Clause 4.1. Further, the subcontractor is not in possession of the main contract document that it had referred to and relied upon during tender since it was only available for visual inspection. The subcontractor is therefore advised to record any pertinent information that it gleaned from such inspection and to formally include such information in its tender correspondence. 

The question that remains is if the main contractor decides wrongly not to disclose certain information based on its mistaken perception of irrelevance, would the subcontractor bear the brunt of such mistake? According to Clause 4.2.2 of the said REDAS subcontract form, it appears that the subcontractor may be taking the short end of the stick. Under this clause, the subcontractor is required to assume all obligations and responsibilities of the main contractor under the main contract in relation to the subcontract works. This is on the basis of a “flow down” or “back to back” principle. Such obligations included under the main contract document shall be deemed incorporated in the subcontract by reference. Based on the plain reading of Clause 4.2.2, it appears that the subcontractor will have limited recourse if it is aggrieved by the main contractor’s failure to make the relevant disclosure. It follows that it is incumbent upon the subcontractor to proactively make the necessary enquiry to ensure it is aware of the full spectrum of responsibilities that may be foisted upon it. 

Programme

As pointed out in the preceding section of this article, there may be provisions under the subcontract standard conditions that stipulates the “flow down” or “back to back” principle where the main contractor’s obligation to the Employer could trickle down to the subcontractor. Whilst the main contractor may be willing to shoulder the main contract risks in return of the potential profit under a large magnitude contract, this calculation may not be applicable to a subcontractor with a very different financial standing. Therefore it is incumbent upon the subcontractor to be honest about its risk appetite and examine those back to back risks that it may be exposed to. To this end, the construction programme provides a classic illustration of how a main contract risk that flows down to subcontract may be magnified disproportionately. 

To appreciate this, one has to first understand that not all subcontract works are equally critical under the main contract master programme. Certain subcontract works may be more critical than other subcontract works from a timeline or schedule perspective. A subcontract works is said to be on the main contract’s critical path when any delay to such subcontract works will cause an equal delay to the main contract works. Using the example of construction of a simple house, the construction of a house cannot be deemed completed unless its front door is fully installed. In other words, if the door installation is delayed by 10 days, the completion of the house should correspondingly be delayed by 10 days. This example is simple because the house cannot be habitable and be completed if its main entrance cannot be secured. Therefore, in this example, the door subcontractor is described as being on the critical path of the main contract of construction of a simple house. In reality, construction projects are far more complex where different activities may be organised in a web of logic and sequences. In this regard, certain activities or subcontract works may not necessarily be on the critical path of the main contract programme. Such non critical subcontract works are sometime characterised as being on the construction programme float. Where a subcontract works is on the float, any delay to such non critical works do not give rise to delay to the main contract works. This can often be achieved when the master programme under the main contract is re-organised to achieve an alternative path of criticality. There are also certain types of subcontract works where its completion is not a condition precedent to the completion of the main contract. Certain subcontract works such as external landscaping works to a condominium development do not affect the development’s ability to secure its statutory completion certificate.

It is not uncommon to find certain subcontract works that are small in financial magnitude but are on the main contract’s critical path. In other words, such subcontract sum could be say a mere 1% of the main contract sum but its delay could potentially give rise to an equal extent of delay to the main contract works. Using the back to back principle alluded to earlier, whilst these subcontractors on critical path do not enjoy the profit under a large contract, however they shoulder every delay risk that emanates from it, disproportionately so. When reviewing a subcontract tender document, one of the key priorities is to determine whether such subcontract works are on the main contract’s critical path. Unfortunately such information is not readily available. Generally the subcontract tenderer is only provided with its subcontract duration and the stipulated subcontract completion date. If not already issued, the subcontract tenderer should request the prevailing approved master programme including clear indications of whether the proposed subcontract works is on the critical path. This information is crucial in various ways. Firstly, it allows one to learn whether the subcontract works is on critical path and if yes, be able to price the works and negotiate the terms accordingly. Secondly, it informs what are the preceding critical activities prior to the commencement of the proposed subcontract works. If those preceding activities are in delay, there may be reshuffling of activities resulting in potential change in critical path for the entire project. Alternatively, it may also affect any of the subcontractor’s entitlement to extensions of time. Lastly, the prevailing approved master programme provides insight into subsequent activities that commences upon the completion of the proposed subcontract works. If those subsequent activities are in delay, it is questionable whether the subcontractor should be made to bear the full brunt of delay to the main contract on a simplistic back to back principle. 

The above issues should be reviewed at length and negotiated if necessary in line with an appropriate risk to reward ratio. 

Subcontract Liquidated Damages

Under Clause 7.5 of the REDAS subcontract form, the subcontractor shall pay liquidated damages to the main contractor for delay to its subcontract works. Such delay is defined as failure to complete the subcontract works within the stipulated time for completion. Such sum of liquidated damages is usually stated in the Appendix to Conditions. 

One of the ways to commercially mitigate disproportionate risks arising from back to back principle is ensuring that the subcontract stipulates subcontract liquidated damages as opposed to main contract liquidated damages. A subcontract liquidated damages should be unique and distinct in its sum payable per day from main contract liquidated damages. The subcontract liquidated damages should also be a rate that is proportional to the magnitude of subcontract sum. The following is a mathematical illustration. If a main contract sum of $50million stipulates a main contract liquidated damages of $50,000/day, from a commercial perspective it appears disproportionate for a subcontract sum of $5million to be shouldering an identical liquidated damages sum of $50,000/day. If the subcontract profit is 5% of the subcontract sum, this could be entirely wiped out from a mere 5 days of delay. Therefore in any review of subcontract tender document, the subcontract liquidated damages should be lower than main contract liquidated damages and proportional to the magnitude of subcontract works. If the subcontract works falls on the critical path of the main contract works and there is difficulty in negotiating for a lower liquidated damages, it is not uncommon for the subcontract to stipulate a maximum cap to the total subcontract liquidated damages payable in the event of delay.

One should note that the concept of subcontract liquidated damages is not adopted universally. There are other forms of subcontract standard conditions that stipulates general damages as opposed liquidated damages. This is on the basis that certain subcontract works can be critical where despite its lower financial magnitude, its delay is capable to exposing the main contractor to the full brunt of main contract liquidated damages. Therefore particularly in the case where the subcontractor is nominated by the Employer usually due to commercial motivations, the main contractor may not accept such nomination if there is discrepancy between main contract liquidated damages and subcontract liquidated damages. Under a general damages arrangement, the main contractor is still allowed to recover the full damages it is liable for due to subcontractor’s delay but subject to proof. From a subcontractor’s perspective, there may be certain merit to such arrangement as it is liable to pay only to the extent that causation is proven and established. 

Instructions and Approvals

Whilst the subcontract is strictly an agreement between the subcontractor and main contractor, some have argued that the main contractor is substantively a “payment conduit” on behalf of the Employer and its consultants. In this regard, the subcontract works are inspected and approved by the consultants and that the subcontractors are to comply with instructions issued by the consultants. In the case of nominated subcontractors, they are generally selected by the Employer and its consultants with the main contractor being instructed to enter into a subcontract agreement with their entity of choice. Therefore, these realities and practical considerations are seemingly at odds with the undeniable fact that there is strictly no privity of contract between the Employer or its consultants with the subcontractor. Any subcontractor that deals with the main contractor as merely a proxy may do so to the detriment of its ability to recover any future contractual recourse. 

In view of the issues presented above, the following are some of the commonly found provisions in subcontract standard conditions that one should pay special attention to during tender document review. Clauses 8.1, 8.2 and 9.1 of the REDAS subcontract conditions state amongst others that any instructions issued by the Employer or its representatives shall be binding on the subcontractor, provided that such instruction is notified and confirmed by the main contractor’s representative. These provisions appear to reinforce the strict privity of contract between the main contractor and subcontractor in recognition of some of the practical realities discussed earlier. By contrast, under Clause 9 of the Singapore’s Public Sector Standard Conditions of Nominated Subcontract (Fifth Edition December 2008) the subcontractor is required to comply with the instruction of the Superintending Officer under the Main Contract. In this case, no confirmation in writing is necessary from the main contractor as a follow up to such instruction. Whether one prefers the REDAS or the Public Sector approach is clearly a subject of debate that may be dependent on the nature of the subcontract works. Subcontract works that are aesthetically driven such as marble claddings to grand lobby may be subject to more design approval scrutiny that are usually subjective as compared to other more ‘functional works’ such as casting of concrete. Where the subcontract works are aesthetically driven, the main contractor that does not have any design role would naturally have very limited input on whether or not certain subcontract works fulfils the architectural design intent. Whilst the main contractor is the counter party to the subcontractor, it generally defers to the Employer or its consultants on those subjective design decisions. If the subcontractor is aggrieved by having its subcontract works wrongly rejected by the consultants, the only contractual recourse is to commence legal action against the main contractor. The main contractor would not make payments to the subcontractor for the subcontract works that are in issue if the consultants do not correspondingly certify payments. The subcontractor should therefore anticipate these dynamics and reduce the scope of subjectivity as much as possible by increasing clarity in the specifications on what is acceptable and what is unacceptable. In the event that words may not accurately and sufficiently describe what would comply with the design intent, the subcontract document should at least be able to prescribe the steps that had to be complied by the subcontractor in the execution of its works. The costs of any legal action against the main contractor for actions of the consultants can be high and disproportionate to the magnitude of dispute.

Conclusion

One can only be effective in reviewing the subcontract document when it is able to identify commonly occurring problems that may arise in future. Reviewing a subcontract tender document blindly and aimlessly will only result in cosmetic and frivolous amendments. Therefore it pays to be critical and discerning when reviewing any subcontract tender document.

Koon Tak Hong Consulting Private Limited