Jacob Austin (00:00:17) - Hi everyone. Jacob Austin here, owner of QS.Zone. And welcome to episode 26 of The Subcontractors Blueprint, the show where subcontractors will learn how to ensure profitability, improve cashflow and grow their business. Today's episode number 26 is about Unquantifiable Risks. Now. I wanted to do this episode today because there is this trend starting from the top, starting from your client organizations and particularly the educated client organisations who do a lot of repeat work and a lot of projects to want to mitigate and avoid any risk whatsoever.
They want to enter into a contract that gives absolutely everything to the contractor. And then the contractor finds himself in an impossible situation because in order to win the work, he would have to take a view on all of these risks, probably turn a blind eye to most of them, or he would have to price them all in. Oh, and look now his price isn't competitive. I just want to remind you of the real narrow margins that there are in the construction industry, and the typical contractors are working on somewhere between one and a half to 2.5% when they take a margin on turnover.
Jacob Austin (00:01:34) - And where a contractor has to be clever is in securing their work at the right price to enable them to turn over cash multiple times and sometimes take the cash from the construction portion of the business into another, more profitable portion of the business and use it as free money to either build a house or buy a piece of land. And whereas that might cost them money if they're borrowing that from a bank, when they're making use of cash that they've temporarily been paid for another reason, they're effectively being paid one and a half to 2.5% to then go and earn an increased margin elsewhere.
Now, not all businesses operate that kind of model, and many of them are just reliant on that repeat business, that repeat turnover of the same cash to generate that 1 or 2% profit margin with very little actual cash laid out. And arguably, once they funded the first month of direct work, they will hopefully be paid more in value than the cost of what they've completed. And then it becomes sustaining. But where it all falls down is these risks.
Jacob Austin (00:02:40) - So why does this advice come out to clients to pass on absolutely everything they can? The presumption is that, oh, the contractor will fund all of this. The contractor can price it. All the contractors've got a crystal ball. They can tell me whether this is going to come off or not. And it's actually worse than that, because not only is it a case where clients are expecting the contractor to be able to price and include for things that are just unfathomable, they're also often drafting amendments to the standard contracts to exclude any time or loss an expense. So no entitlements whatsoever for things that you can't stand a chance of allowing for. And also quite a lot of the time the program dates are dictated to by the employer, so they will have a particular end date in mind, whether it's the start of a term, the run into Christmas, the end of a financial year, or just some arbitrary date when their funding is going to be withdrawn. All of these things make perfect sense when you're their employer, but when you're the contractor and you're told, I need this building by this date.
Jacob Austin (00:03:43) - Oh, and by the way, here's this long list of risks that I expect you to take and build in. Then how is it in the slightest bit reasonable to strike out clauses for extensions of time? You've dictated the program, so you've got things like asbestos fossils, archaeology or other antiquities, unexploded ordinances, statutory authorities, work ground risk. Ground risk might not be a particularly harsh one, but when the employer is the person who's carried out all of the ground investigation work, and then they want the contractor to take on board the risk based on whatever limited survey they've done. You're either going to seek silly prices back from the marketplace, or you're buying a project with a hole in it. And what happens when the contractor has won the contract off the back of your tender? Or you guessed it, all of those risks they want to transfer elsewhere. So now you've got the situation where the person who's the best equipped to deal with it in terms of they are the holder of the budget for the project, has kicked the can down the road.
Jacob Austin (00:04:43) - The contractor probably doesn't really know what to do with it, and so he kicks the can down the road to his supplier as well. And the subcontractor and the subcontractor is now holding the baby. And on some jobs the baby will be a real sweet little darling and then others it'll be a right little bastard. And of course, contractors seem to get the rap for these things. It's all their fault. But really, for me, the bad decision making starts at the top, shit rolls downhill and it's the client that flicked it. And let's face it, what happens when these risks are transferred is somebody gets a shit deal. If you can't quantify a risk, either the subcontractor or the main contractor puts a price against it, that is either too much money or it's not enough. There isn't a magic eight ball in the land that you can shake and give you the answer. So as the client, you're either buying something and paying far too much for it. Or you're buying something with a hole in it, and don't be surprised when it all goes awry and you end up with a claim, whether for this or for something else, because the contractor is trying to recover losses.
Jacob Austin (00:05:49) - Or even worse, you end up with a member of the supply chain going bust because of circumstances outside of their control. Making a different party responsible for something that can't be quantified doesn't make the risk go away. So let's look at ground risk. No matter what you do in terms of a site to ascertain the ground conditions, there is always the potential to come across something unexpected. It happens on brownfield sites, it happens on greenfield sites. There's plenty of farmers up and down the land who've demolished some old shed with an asbestos roof and probably asbestos walls. And rather than use the specialist, they've ploughed it into the ground and buried it. And once the grass has grown back, they've let their sheep graze in there or whatever they do. And it's not until 20 years later and it's long forgotten that some unwitting builder has their ground worker on a lump sum contract, and they're digging it up by the bucketload. But oh no, Mr. Subcontractor, you took the risk on the ground, and when the contractor approaches their client, they get the same answer.
Jacob Austin (00:06:52) - And the thing with these issues, these risks, is that you can always do a bit more investigation. You can go to town on doing boreholes, trial pits, soak away tests and really understand what the ground conditions are. But you will still end up with odd things that don't match. If the site is big enough, there will always be bits that you've missed. Now let's take statutory services. Those guys are a lawn to themselves. They rock up with these joint industry conditions that they won't deviate from, and they basically say something to the effect of, you'll give us some program dates and we might work to them if we want to, and even if we try to, but we can't find the labour, it's not our fault anyway. And maybe those guys are really overworked, God knows. But you do always get the feeling it's all about excuses and spinning things out. Then it is about actually getting the job done, and there can be no end of delays arising from statutory undertakers. Substation dates missed, go live dates missed for power, gas and water mains don't get connected or there's some kind of chlorination test failure because of nothing to do with what's in your newly laid main, but something that's trickling through from some old Victorian pipe that somewhere feeds into your system.
Jacob Austin (00:08:07) - These kinds of issues can cause months worth of delay, so how can you expect the contractor and the subcontractor to price for them? You just can't. It's not reasonable. And the same happens for other risks. Risks in the ground. For example, client organisations that seek to pass these off and hold no risks themselves. All they end up doing is passing the risk down the chain, most likely to the people who can least afford to deal with it. If you're negotiating a job via some kind of a framework and there's actual time set aside to properly survey and try and understand what the risk is, then you've got half a chance of doing that properly. But a lot of the time work is placed following a competitive tender. The client has done some kind of investigation to start the site off to inform some of the design, but it's usually minimal, and it's usually just enough so that the structural engineer has got something to work from, and it's nowhere near enough to really back off that risk altogether and inform a contractor who's pricing of exactly what they're going to come across, and then the client within their contract amendments will have a phrase something like the client does not warrant or in any way guarantee the validity of the reports, tests and surveys included in their tender documents.
Jacob Austin (00:09:17) - And what uses that? It should either be comprehensive enough that the employer has got the confidence in it to stand by it, and should let the contractor and the subcontract supply chain price accordingly, or they should allow a period of time in the programme, in the design development stage and tell everybody that they've got to do that survey again. And this is where some early contractor involvement is really beneficial, because your contractor will know, by and large, what they need for their supply chain to price on. And if they don't, they typically will ask their specialist supply chain for their advice. If I give you this information, is it going to be sufficient for you to put a robust price together? But often when you get an inquiry as a subcontractor, it's too late to have this kind of an impact. So what can you do to protect yourself against these unquantifiable risks? So start with your inquiry and start by looking at your proposed subcontract. There will likely be a statement to say which subcontract it is your pricing under.
Jacob Austin (00:10:17) - And then there will be the typical schedule of amendments that the contractor has put together to either back off the main contract amendments into the subcontract, or to incorporate some of the standard amendments that the contractor makes downstream. And many do this as a matter of course. And within that, you want to be looking out for amendments which restrict or. Omit the relevant events and relevant matters under a JCT contract, and amendments under NEC which delete or amend some of the compensation event clauses so quickly. Looking at any. See the compensation event 61.1 12. This covers physical conditions which have such a small chance of occurring that the contractor or subcontractor wouldn't have reasonably allowed for them. This would cover for unidentified asbestos, non-hazardous or hazardous waste in the ground, unexploded ordnance, bombs and all of these things. If they're not contained within the work source site information, it wouldn't be reasonable for you to have priced for them, so you'd be entitled to recover time and cost. If you discovered them, then you've got 60.17.
Jacob Austin (00:11:28) - This covers instructions to deal with fossils and antiquities and any other items of interest or value. So if you make an archaeological discovery, you can again claim your time and cost, and then you've got 60.15. And the trigger for that is the statutory undertaker not working in accordance with the scope or the accepted programme. Then there's also a little interesting thing that the client and contractor can do in the neck form of contracts, and that is that they can state additional risks which are held by the contractor or held by the client. And what this does is it, in essence allows them to create an extra compensation event. So if they know they've got an unknown or a problem, they can write that into the list of clients or contractors risks. And if that risk occurs, then it is treated like an extra compensation event. Now looking at these from a JCT point of view, there isn't actually a clause which deals with unexploded ordnance, and there might be a small chance of that being a risk on one of your sites.
Jacob Austin (00:12:29) - But you know, if you're working in an area that used to have RAF presence or any other military for that matter, that this is something that you should worry about, particularly if there hasn't been a survey done, and particularly if you're working on a military base, which I'm sure you will from time to time. So in that instance, what you're going to have to do is highlight within your tender that you haven't priced that as a risk and that you need it to be included within the subcontract. And you might do that, say within a pre start meeting. As in any other business item, statutory authorities do have a relevant event under the subcontract. And that is two point 19.10. Now that event doesn't carry any costs with it. And this again going back to the episode I did on delays, which is number 13. Notice the subtle plug there as statutory authorities are not in the subcontractors control, but they are neither in the control of the client nor the contractor either. The premise here is that you get the time which stops you then being charged for lads, but you don't recover the cost of being on site, then the Antiquities Clause is slightly different in the subcontract to the main contract, but it essentially obligates the subcontractor to assist the main contractor with their obligations.
Jacob Austin (00:13:44) - If they find antiquities on site and the then is irrelevant event and a relevant matter to allow you to claim for time and cost. So if you see these being written out within the subcontract amendments, this should be an alarm bell to you now, because you now know that the contractor is asking you to take on board risks, which you cannot quantify and you therefore can't price. These are just some examples of what you might come across. There are other things, so you might be asked to provide an all in, write for, say, curb remedial cause at the end of a job. And equally, this is something that you're just not going to be able to put a meaningful price to. So any price that you do put in is just a finger in the air. And all right, that might be a bit of a silly example, but let's use that to illustrate the point where you get these kind of items. The contractor is likely asking you to price for things that they know are going to happen, you know, is going to happen.
Jacob Austin (00:14:37) - But what neither of you know is how much of it is going to happen. Another example might be asking a decorator to price in for all of the decorative snags, regardless of who's caused them. Now, of course, you have to correct your own decorative snags, but all of those things where, say, the electrician has lent his access equipment up against the wall, somebody dinged a wall with a large piece of material. This will happen multiple times in each room and certainly multiple times in each plot or section of the job. So can you realistically price it and what should you do with it?
So there's a few approaches that I would encourage you to take. One would be a series of provisional sums. So it is sensible to hold some budget for each of these items for those curb and edging remedial for those decorative snags. But the introduction of a provisional sum means that some budget is ringfenced, but it allows for the actual cost when you're instructed by the contractor to complete that work to be recovered.
Jacob Austin (00:15:34) - And it might be that one provisional sum covers everything. It might be that you. Should use a provisional sum per section, and that you size those provisional sums depending on how large each section or each plot is, so that you can at least try and put some kind of science behind your budget without fully taking the risk.
The next thing that you can do is to price items where they're sensibly can be priced. This is a good example for the curb and edging replacements, because you can sensibly work out how much it's going to cost you to break out a curve, to break out an edging, maybe with an extra rate for breaking out the haunching. If the haunting is damaged and put together your price to reinstate them. And so in that instance, what you can do is give a firm rate but with a provisional quantity. And that gives slightly more certainty because the rate is a given. But it leaves that quantity free to fluctuate so that you've got a means to value the final quantity.
Then my third suggestion on this is to state clear exclusions of these risk items.
Jacob Austin (00:16:32) - But to suggest that the contractor keeps a provision on their risk register for if they come to fruition, and you could make a statement to the effect of something like the following. We've been unable to fully quantify the insert name of risk, and we would be unable to do so without significant further investigation. We therefore suggest that this risk is held by the contractor, and that a suitable sum is set aside to deal with it should it arise. We're happy to discuss this further and help you to mitigate this risk. Should we be successful with our tender? Now, whether you choose to actually do that will depend on whether you're a gambling man or not. But in the interest of protecting your business, you know what I would do...
Now I hope you've got something useful after today's show.
My mission is to help the 1 million SME subcontractors working within our industry. If you've taken some value away from today's episode, I'd love it if you could share it with someone you know and pass on that value if they'd benefit from hearing it.
Jacob Austin (00:17:30) - I really would like to see some change to the industry's approach on risks, and actually think the positives of it are that the industry gets better pricing overall, the clients get better value because they understand they're not trying to just wash away everything. They make provisions for things that they can't sensibly get the contractor to price. That then prevents the flow downstream to the subcontractors for the very same reason they benefit from the more competitive price, and the contractor and the subcontractor benefit from that reduction in risk. Well, let's see if it happens. The industry has been grappling with this conundrum since Jesus was a boy.
Well, thanks for tuning into today's show. If you like what you've heard and you want to learn more, please do find us at www.QS.Zone, where you can subscribe to our training and support system for like minded subcontractors. In there you'll find templates, how to videos, interviews, and more. It's less than the price of a cup of coffee per day, and you can cancel any time. We're also on all your favourite socials at @QS.zone.
Jacob Austin (00:18:32) - Thanks again! I've been Jacob Austin and you've been awesome!
