Jacob Austin (00:00:17) - Hi there all. Jacob Austin here, owner of QS.Zone. And welcome to episode 33 of the Subcontractors Blueprint, the show where subcontractors will learn how to ensure profitability, improve cash flow and grow their business. Today's episode, number 33, is about unclear contracts and how they affect the supply chain. So we're going to run through a top ten today. The top ten most common issues caused by unclear contracts. And then we'll talk a little bit about what you can do to prevent your contract from being unclear.
So kicking off- Financial Strain, unclear contracts can lead to disagreements about scope of work and pricing, and commonly that results in unexpected costs for the subcontractor things that weren't allowed for in their initial proposal. Things that haven't been clarified properly, or things where there's competing requirements between the subcontract, the scope and perhaps the quotation, then that can be exacerbated with frequent change orders or variation requests without proper recompense from them, which can then double down on that financial strain.
Second off, we commonly see Project Delays arising from unclear contracts.
Jacob Austin (00:01:32) - There's inevitable bit of argument back and forth about I'm not doing this. This wasn't part of my scope, wasn't part of my price. The contractor thinks that they bought this as part of their price, part of their scope. There's the inevitable back and forth over it, the meetings that get held, the arguments as parties negotiate and try and reach an agreement. The domino effect of that is that the timeline keeps going. Nobody told the clock to stop whilst we had an argument. So whilst the voices keep marching on, so does the time. The project gets later and before you know it, somebody's going to be angling after a country charge for a lost time or a loss an expense claim. This might happen when any significant period of time has elapsed, but particularly when a handover date or a deadline is prejudiced by a clear delay, which could have come down to an unclear contract term.
Number three in our top ten of doom- Reduced Profit Margins, particularly if there's been a commercial view to win a piece of work.
Jacob Austin (00:02:33) - When you then find that following on from that, you've got to throw in elements of work which you'd never costed for this can quickly eat into a tight margin that was already there to start with, and if that crosses into one or 2 or 3 jobs at the same time, those financial losses could start hindering your ability to stay competitive in the marketplace.
Coming in at number four, Relationship Strain- disputes caused by unclear contracts, a constant arguing back and forth over whether things are included or not quickly damages any relationship between a subcontractor and the main contractor, turning into an atmosphere as distrust and hindrance rather than open communication and collaboration that we want to strive for.
Number five Productivity Loss. Time spent addressing disputes and negotiating changes can be time lost from critical path activities, forcing your own resources away from completing work, reducing productivity and potentially increasing inefficiencies, which then hurts the project overall.
Strolling in at number six. Reputational Damage- protracted disputes can damage your subcontractors reputation within the marketplace. We all know that construction is a particularly small world, and everybody knows somebody that works in a different organisation and once a subcontractor is reputation is damaged.
Jacob Austin (00:03:56) - It can make it difficult for repeat work and future projects to be one.
Number seven- Reduced Morale, dealing with the stress and uncertainty of unclear contracts and continually working to a tight price, or even potentially at a loss, can be damaging to the tradesmen completing the work on a daily basis. Decreasing motivation and ultimately hurting productivity.
Number eight- Difficulty in Planning and Budgeting. It's difficult to cash flow a project with large uncertainties in it. It's difficult to plan resources and form an accurate budget and cost to complete that can hinder the ability to complete work. And it also seems to lead to a bit of a bad job syndrome, whereby people make decisions that they wouldn't normally make on a decent job, or one that's making money, but they're making it in this situation as a means to stop spending money when they know that it isn't really the best thing, one for the good of the job, or two to help you get finished and get out of there quicker.
Number nine- Reducing Capacity for Growth. Financial strain overcommitting resources to a particular job.
Jacob Austin (00:05:10) - Additional time consumption. All of these things restricts your ability to complete other projects. To reinvest in resources, training, expansion to tender and turn over new projects against new work.
And finally, the big number ten in the top ten of doom.- Increased Legal Costs or even Legal Costs at all. Ultimately, should a dispute escalate beyond your ability to negotiate your way around it on a site, you may find yourself in front of the adjudicator or that man with the crinkly wig. And we all know lawyers know how to charge, which can be an especially big problem for subcontractors on a tight budget.
So you've heard my top ten. Now, what can you do about unclear contracts? Well, there's two clear things in my mind that are the biggest single points you can try and get right. The first of those is during the tender stage. And this goes back to an episode I did previously. 15 on tendering and quoting, you may well receive large tender inquiry packs that have got multiple multiple drawings, some of them that compete with each other.
Jacob Austin (00:06:17) - Perhaps you've got scope of works and specifications, documents, an inquiry from the contractor. Then you might have a bill of quantities or some kind of pro forma to price up against all of these things. Take a while for you to digest, understand, review. This is where your clarifications and exclusions are key. And this is also a good place where some clever presentation can try and identify areas where other contractors might have tried to take advantage, might have tried to seek exclusion of things. You might also exclude these things yourself, but price extra covers and make the contractor aware. These are things that get commonly missed out and that come back to bite you later. But I don't want to present my price in a way that prejudices me. But I want you to be aware that it may be an extra cost. So I'm giving you this option and then they can take that away. Challenge the other subcontractors who are tendering against you to see whether they've included for it or not, and they've always got your rights that they can easily plug into their comparison to bring people's prices into line.
Jacob Austin (00:07:21) - That might happen, say, on Cranach. Some people just exclude lifting, but say that they've priced a supply and install package. That exclusion might get missed, but it's less likely to get missed if you put some pounds and pence against it. And you say, I've excluded the Cranach because I need to discuss with you in a bit more detail how the lifting arrangements might work, how many plots, or how many areas I can get access to at any one time. But my Cranach will cost this much per visit, and I would conservatively estimate eight visits would be required for a job of this size. So in that way you can clearly create an exclusion. But giving a budget cost that your contractor can one use to assess other people's competitiveness to, as I say, to level up the comparison if people have excluded it. And three, it starts off the negotiation about that particular part. And by doing things in this way, it protects you because you've put your cards on the table. It starts off the relationship in the right way of an open conversation about what's included, what's excluded.
Jacob Austin (00:08:27) - But by putting certain things below the line, you're keeping your competitive edge. You're keeping your price competitive, but you're doing it in a clear way, which hopefully avoids conflict. Now, the other thing that you need to do during Tender stage is clarify on risks, because quite often the contractor will want to place, say, an all risk lump sum package with you. And sometimes that includes certain aspects which can't be very readily quantified or put a price to. And again, it might be best to treat these in a similar way of perhaps including rate only items, or perhaps suggesting a provisional quantity goes against this particular piece of work. But you put some detail into how much it's going to cost, and you're trying to create that limit on the amount of risk that you're holding. The same thing can sort of happen when you're pricing information that's lacking. If there are holes in the information, you might price what you think is the right thing to do. But in doing so, you might be pricing something unduly cheap or unduly expensive.
Jacob Austin (00:09:29) - And on the one hand, you might win the tender by pricing cheap. But you might also find yourself pricing something that you can't then properly deliver on site. So in these sort of situations, you need to request additional information if specific details are missing, particular detailed drawings, specifications, material lists or surveys. Perhaps you need to request these from the contractor ideally before you price, but if you can't do that, then you need to clearly state an exclusion and say that you need to site of these documents before you can commit to delivering the order and negotiate for clarity at what is likely the last point before the order gets placed at the pre start meeting. This is a time when you can discuss things that you've seen that might not be fully clear. You can try and introduce some understanding for both. Artists of what's in the price, what's excluded. Those are tendencies that you need to be able to deliver the work. And if you have found things that are competing within the contractors inquiry documents, then you really need to bring these to the contractors attention.
Jacob Austin (00:10:30) - And the pre start meeting is your last opportunity to do that. And you can establish like I've priced on the basis of this drawing. I've also seen this other drawing has a different arrangement on it. And let them clarify what needs to happen. The important thing is to try and establish that clarity over what you're needing to do and what you're going to get paid for that, and that is really your last chance to negotiate. And if the contract is as is reasonably experienced, they will probably have in mind a number of things that they need to clarify. Have you allowed for the right access? Have you allowed for the right materials distribution? Does the spec work? They should probably be picking these things up as they go through, and they should be able to identify themselves where the information is lacking. But that's not to say that everybody will. And there's always 1 or 2 things that have to get placed in a rush, and the due diligence isn't quite done to the same degree, and it's these orders that can trip up people the most.
Jacob Austin (00:11:26) - But what you don't want to happen is for you to be holding the can when the problems get discovered. So now you've done that pre start meeting and you're expecting the order to come through the next and final thing that you need to do before you start any work is to read that contract. Because either by design or by ignorance, you might find that certain drawings have been revised. The contractor is including new drawings in your order that you might not have seen before. Sometimes they replicate things that have been negotiated, like if they know or drawing. Revision is coming up and they've asked you to price in some extra bits of work that they know is going to be on that drawing, then it perhaps isn't the wrong thing for that drawing to then appear in your order, but it's worth checking. It's worth checking it matches up with what you've priced, as in drawing revision wise. And if there are schedules or bits of amendments that have been made to your quote. We've added this in. We've added that on.
Jacob Austin (00:12:22) - They should be replicated in the information that goes into your order, and that design information should speak to each other. They're not entirely separate silos. So if there's some value engineering taken out of the bid, then you expect the drawings to be amended to show that that value engineering has happened. If there's some clarifications that have gone into your price and those clarifications have been agreed, then when your bill, of course, and your scope of work's come out within your order, you expect those clarifications to be taken care of within that. So if the contractor's standard scope of work says you'll paint the entire house white with a special feature wall in each room to be out of pillar box red, but during negotiation stage that gets watered down and you offer a saving just to paint the entire house white. So understandably, you will expect the design to replicate that the house is now white if the drawings still show red feature walls in every single room and you've priced a lump sum, then if you sign that lump sum contract with those drawings in there, what you're doing the way that the subcontracts are written is that you are agreeing that the drawings included within your subcontract are what you're going to deliver for the price set out in the subcontract some analysis.
Jacob Austin (00:13:37) - So if you haven't checked that. And all right, this is just a stupid example for simplicity's sake, but you're going to be on the hook for painting all of those red feature walls because that's what the contract says. And the same goes for all of the little items within the scope that you might have negotiated out, or you might have excluded. If these are still in there at the point of view signing the contract, you're agreeing that those documents are right, and this is how these ambiguities can sneak in. So your absolute last gasp before you start doing any work is to read that contract and check it's what you expected. As I say, check that the drawings match the ones that you tended against. Check the same with the spec. Check the scope reflects the scope that you're going to deliver. Check your attendances are what you agreed and what you've priced upon. Check that the bill of contents or your subcontract some analysis is reflective of your quote. These ambiguities and inconsistencies are the worst for causing argument's ambiguities, and a lack of clarity is the cause of a lot of dispute.
Jacob Austin (00:14:40) - And the absolute best time for these to be ironed out is before anything has happened. Get it right before you get to site. These are absolutely basic things to do, but so many people miss out on doing them, and they're such important steps to protect yourself. And why wouldn't you? Because as we saw earlier, the consequences of not doing these things can be absolutely dire.
So there we have it. The top ten ways unclear contracts can hurt a subcontractor and the steps you can take to avoid it. I hope that's piqued your interest. If you've taken some value away from today's show, I'd love it if. You'd share and pass on that value to somebody else who would benefit from hearing it and help me achieve my mission to help the million SME contractors working in our industry.
Thanks for tuning in. If you like what you've heard and you want to learn more, please do find us at QS.Zone. That's the letters Q S dot zone: Z-O-N-E where you can subscribe to our training and support system for like minded subcontractors.
Jacob Austin (00:15:42) - 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 or also on all your favourite socials at QS.Zone. Thanks again! I've been Jacob Austin and you've been awesome.
