Jacob Austin (00:00:17) - Hi, everyone. Jacob Austin here, owner of QS.Zone. And welcome to episode 38 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 38, is going to cover seven key areas that you should be checking before you sign a subcontract. If you're new to the show. It's nice to have you here, and please subscribe for more user friendly advice on all things subcontracting. So let's dig in. We should start by understanding who exactly you are contracting with. It's a really important point to consider, because we've seen the headlines of late, of all manner of sizes of contractors going into administration, going into liquidation or any other kind of insolvency, and actually did an episode number 11 about insolvency. And since recording that, I've seen further headlines, sadly showing some really big names, certainly within regional contracting, becoming insolvent. So that's why this needs to be front and center. Item number one for you to think about who am I trading with? How long are they going to be around? Because at the end of the day, if you're going to commit to doing some work for somebody, you want to make damn sure that you're going to get paid for it.
Jacob Austin (00:01:39) - So it's not just a question of whether they are a good long standing company. It's a question of are they going to be around at the end of the job, and are they going to pay you throughout that job? And you might even consider doing this right at the start when you're pricing that inquiry before you've spent hours and hours committing to building up rates, reading drawings, doing a takeoff, planning how you would undertake the works, I would suggest right at that very start point, is the best time for you to run a credit score and see what the company's financial standing is, and credit scores need to be taken with a pinch of salt because they're run and they might not tell you the whole truth. Sometimes they are only as good as the latest submitted accounts, and sometimes it's a case that since those accounts have been submitted, things change. Financial struggles happen, particularly in the times of massive inflation and uncertainty in the housing market. Companies that a couple of years ago were trading really strongly, really well.
Jacob Austin (00:02:41) - That combination of big inflation and the hike in interest rates have really brought the sale rates of big housing contractors down to a minimum. And unless they're doing a backbone of contracted work, they might well be struggling more than their accounts are pointing out. And the credit score will tell you some more information on top of that. So you're likely to get a more up to date picture of the amount of debts that are racking up, whether accounts are in credit or debit for a long period of time, and the better ones will also give you an indication of how many invoices are outstanding. And on top of that, it's particularly worth asking around if it's your first time working for a new contractor, other contractors that you might know within the industry. How are they to deal with? Are they contractual? How quickly are they likely to make set off and country charges against you? What is the culture like within that particular contractor, and how helpful are they to their subcontract supply chain when it comes to payment? And crucially, you need to find out how often they get paid, what they want and when they get that money, is it on time or not? And suddenly you can't rely on the size of the company because some of the biggest boys out there are amongst the worst payers.
Jacob Austin (00:03:55) - And another useful thing that you can do if the company is a large one, i.e. they're turning over in excess of 35 or £36 million per annum, you can actually search their payment record and it's available for you to find on the Gov.uk website. And there's also a schedule on the build UK website, build uk.org, where the largest clients, contractors and some of the main subcontractors out there, with their latest payment records showing what percentage were paid outside of terms, what their average payment period is, and also what percentage of their payments were made within 60 days. And it does make for interesting reading, and it's something that I would recommend that you get aware of, especially if you're going to work for a new contractor to make sure, one that you're going to get your money, and two, how likely it is you're going to get it on time. Because as we all know, cash flow is everything. It's also worth noting as well if you're working for a contractor and they are themselves working for a small developer or quite a high risk developer, it would be worth checking your contract to see what the terms say around the contractor paying you.
Jacob Austin (00:05:05) - If their employer becomes insolvent, some contractors out there will introduce clauses to say that they don't have to pay you in the event that their employer goes insolvent. So that means if their employer is but -Two, it might be worth considering for at least this contract whether some kind of payment insurance would be the best bet. And if you know about that in advance, then at least you can price it into your work knowing that should that happen, you're covered. And effectively, you're getting the contractor to pay you to take out that insurance. So again, this is why it's best to do this in advance, because these are quite costly policies. And if you're not going to get paid for it, you may well be risking more than you can afford by not doing it. And item number two, this stays on the topic of payments. Make sure your payment terms are clear. Now the JCT form, as a standard document reads in line with the Construction Act in that there is a due date and then a final date for payment.
Jacob Austin (00:06:07) - And it can be an area for confusion, particularly if both of the periods set against these items are the same. So if you are going to have a due date which falls 30 days after the valuation date, you can't interpret that to say that that's a 30 day payment period, because then you have to add the period to the final date for payment onto that to determine when your payment is going to be due. So let's say there were both 30 days. So you've got 30 days to the due date and 30 days to the final date for payment. You then need to add both of those together so your actual payment period is 60 days. In that instance. It is obvious once you've read through the contract and if you read the legislation. But these are not always straightforward to understand documents. Hence me telling you you need to add both of those periods together and that then determines your overall payment period. So you might see any one of a multitude of combinations 21 plus seven giving 28 days overall, 28 plus seven giving 35 days overall, 30 plus 15 giving 45 days overall, and so on and so on.
Jacob Austin (00:07:14) - Then you want to look for one of two things. There will either be a statement to tell you how regular the valuation dates are, and this might be every calendar month on the penultimate working day of that month. Or there might be something like a schedule listing out a set of dates when valuations can be submitted. If there is a schedule, it is sensible to check that there are enough dates because once the dates have expired, there is actually no entitlement, and I've seen an adjudicator rule in the same manner to say that once those dates are finished, there are no more interim valuations, so you ideally want those dates to run on past the end of the job, just in case the job runs on for any reason. If there's any delays, you don't have the same issue. If there is a regular date as in the statement that I mentioned previously, because that runs on until the job is finished. But in that scenario where you've got a schedule, you want the schedule to expire well after the completion of the contract to make sure that you can carry on submitting valuations if things get delayed.
Jacob Austin (00:08:22) - And the final point under payment terms is to watch out for pay when paid clauses. Now these have been outlawed, but that doesn't stop certain contractors from trying to introduce them in their terms and conditions, and then trying to rely on them to pay you either late or avoid paying you at all. Now, as I say, it has been outlawed via the Construction Act. But why wait until you've not been paid to have that argument? You want to pick that up and kick it back as soon as you see it. Save yourself the argument and the hassle and the time whilst you're waiting for that money, particularly if you have to go to an adjudicator to overturn the unfair contract terms. I said that was the final point, but I've just thought of one more check that the terms that you've agreed are what come out to you in the subcontract, particularly if you're giving an early payment discount or some kind of main contractor's discount to get your hands on the money early. Because, as I've said before, once you've signed the document you are signing to say that everything that you've read in there has been agreed with the contractor.
Jacob Austin (00:09:26) - So before you put pen to paper, get it right now. The next three items I like to call the Holy Trinity of subcontracts. And these are the price, the program and the scope. So we'll start with price as number three. The first thing that we want to do here is to make sure that the price reflects the quotation that you've submitted. If it doesn't, there might be some genuine reasons for it, as in, the contractor might have seen that there's a little bit more of a particular bit of work and adjusted it or a little bit less in the same. And you can query that with them and understand it quite easily, but you want to check that all of your rates are the same rates that you've priced. And you want to ideally see that your subcontract sum comes to the quoted sum that you submitted in your tender. The next item to check is whether there are any qualifications or value engineers. Earring have been taken into your price. Obviously, if there's value engineering, that means that the scope has been changed.
Jacob Austin (00:10:23) - So alongside the price being changed, you want to see that the scope has been changed to reflect it or mention that in a bit as well. You want to check the qualifications that have been submitted as part of your quote are part of the tender, because it's quite regular for you to pick up certain things that you can achieve for a price in a given way. But if that way changes, then the price goes up. A really simple and obvious one would be the use of the standing scaffold to construct some cladding to the outside of the building as soon as that scaffold is gone. If your qualification to say that you need to use that scaffold and you haven't priced for your own access equipment, as soon as that's gone, then there's no record that you are entitled to a change. I say that you may well check whether there's an attendance schedule set out in the contract, which describes whether the contractor is providing access equipment or not, and that might offer some protection. But other things that might not be covered might be the number of visits that you assumed.
Jacob Austin (00:11:23) - If that gets omitted and you've got to take away all of your plant and then bring it back for within the cost, then you're obviously losing money by covering that cost. So these are important distinctions that you need to make. Because as I've said before, if you're signing the document, then you are signing to say you agree it's correct and you will lose your entitlement to charge extra if things change. The next check is that the understanding of the contract is the same. Have you submitted a lump sum price, a measurable price, or a price on a cost plus basis? Because that should be reflected in your subcontract some analysis. This is a costly issue to get wrong if you don't spot it, because it could effectively tie you to a lump sum that you didn't intend on submitting. If you've priced, say, a contractor's bill of quantities and then they send you a subcontract on a lump sum basis, then it's a naughty thing for the contractor to have done, but it wouldn't be the first time.
Jacob Austin (00:12:19) - And then you're tied to that lump sum contract, having not come up with the quantities yourself, and you're then not entitled to remeasure your contract to overcome that difference. The next thing would be the discount if you offer a discount. So some discounts are offered on a payment terms basis, and you would expect those to be applied to the whole of the contract as well as any variations. Now that's as long as the payments are made on time, but some discounts are offered as a lump sum, an inducement to get down to the right price, and they're not intended to be then taken off. Variations. So as you're checking your subcontract, some check that the discount has been applied in the correct place. And if it is a lump sum adjustment, then make sure it says that it is, and it would be sensible for you to write something to that effect when you're signing and returning your subcontract, just to make sure that everybody understands and they're on the same page. Now, the next item in the Holy Trinity is the scope of works.
Jacob Austin (00:13:21) - And the easiest thing for you to do here is to check that the drawings that you are being sent are the same drawings that were in your enquiry document. Hopefully that's an easy enough thing for you to do. You're going to run down your drawing register and check that the revisions are all the same. If things have been revised, they might well be incorporating extra bits of work that one you don't know about and two you haven't priced. And again, once you're signing to say that you've agreed those documents, you're agreeing to the price and you're agreeing to whatever's on those drawings to be completed for that price. So it definitely bears you checking. Now, there isn't always a written scope, but if there is, it needs to reflect what you've priced. And particularly if, as I mentioned earlier, if there are any value engineering options that have been taken in, then you want the scope to clearly state which value engineering options apply and be revised to suit those options so that you're not stuck with providing a more expensive product for a lesser price when you get onto site.
Jacob Austin (00:14:24) - Now, some contractors are reasonable about this, and they will correct that error to later date by referring back to your quote, but others will stick by what has been signed and approved. So if you've signed a document that says something different to what you've priced, you could well be on the hook for it. So another point get it right before you sign. And the final item in the Holy Trinity number six is program. You want the contract period to be agreed and properly set out before you start the work. So whether that means you're working to a program with a period on it, or you're working to a fixed period, that doesn't really matter, but you want it to be clearly defined when you're going to start. If there are any sections, when you're going to start those sections and finish those sections, and overall when you're going to finish the time aspect is there to protect you. And. The contractor, so that you are both bound to the periods that are set out. And what that means is that you've got a finite period for you to complete the work, and if you complete within that period, then you golden.
Jacob Austin (00:15:28) - You don't want to agree to work in accordance with the contractors program or just in accordance with the contractor's directions, because this leaves you in a really tricky place of being unable to coordinate your resources. You could be on site for a lot longer than you anticipated, and you're there standing all of the cost of your supervision. Whatever site set up you might need. If there is one and one old favorite that I would watch out for is sections which are triggered by independent notices to commence. Because if there's no linkage between the sections, what that means is the contractor can stagger them at their choosing, and it means that you might need to be on site for a whole lot longer without any option to ask for extra money. So typically you would expect section one to start, section two to start, section three to start on particular days. And then you can resource appropriately. Some of the sections might overlap, but you know what you need to get done and when. If the contractor gives you notices to commence for each section.
Jacob Austin (00:16:29) - And what this means is they can start section one on whatever the particular day was, then they can let section two drag on and start it when they're ready, so that they're not incurring your cost of your site. Set up your site supervision, and as long as they give you the same period to complete section two and section three in, then you lose any opportunity to charge more money for the delay to those sections. And whilst were mentioning program, you need to watch out for any contractual terms that limit your right to extension of time and limit your right to charge costs in the event of any delays. I think I missed out item number five earlier because I got all excited about the Holy Trinity of contracts, so I'll just pretend that design liability number five was in there in chronological order. Don't tell anybody a quantity surveyor can't count. It's embarrassing. Design liability doesn't apply to everybody. And if you haven't priced to design anything, make sure that you're not entering into a contract that says that you are.
Jacob Austin (00:17:29) - Hopefully that should go without saying. If you are designing something, then you want the contracts to clearly say the items that you're designing, and you need it to say in written form that you are designing to reasonable skill and care. If that phrase doesn't appear in your subcontract, then what that means is your liability falls back to a far more onerous standard of fitness for purpose. Now, I discussed fitness for purpose and Design liability in episode 24. It would be worth you circling back to listen to that. If you are designing, there are some key risks that you get exposed to. If you're designing to fitness for purpose, which will void your professional indemnity insurance or your product liability insurance cover. So it's very important that you see the phrase reasonable skill and care associated with any design you're carrying out. And just to remind you that the courts and adjudicators will see if there is no reasonable skill and care statement that you have to design. Selecting materials and workmanship that are reasonably fit for the respective purposes, even if you don't know what that purpose is.
Jacob Austin (00:18:37) - And the whole point of reasonable skilling care is that even professionals are allowed to make mistakes. So if something were to go wrong, you could only be prosecuted if you were proven to be negligent in your design. And on the flip side of that, under fitness for purpose, you could be prosecuted if your product fails, whether or not you've designed it to the best of your ability. And the final point, number seven, is dispute resolution. And there are two key points that you should remember here. You will more than likely be working under the Construction Act, but you may want to check whether the Construction Act is applicable. And there are two key remedies in the Construction Act that you have, which are the right to suspend performance if you're not paid, and the right to have a dispute heard by an adjudicator. Now, both of those things can be tampered with by any amendments to the standard subcontract. So what I would be watching out for here is that the suspension for non-payment hasn't been prolonged.
Jacob Austin (00:19:34) - The standard period is seven days, but some contractors may well extend that to any other longer period. And that means that even if you give a notice, you then have to wait for that longer period to elapse before you can withdraw from site. So you want to see that the seven days that is set out in law is in the contract. And you want to remember that you can rely on that. If you're not paid, you submit a notice and seven days later you can pull off site and at least you're not on the hook for any further losses. If you do suspend work and it's valid, then you're automatically covered by an extension of time. And just that threat that writing of the notice is likely going to be enough for you to get paid and again. Adjudication is the default under the Construction Act because it's a short turnaround way of resolving a dispute. Unless there's been an extension to the adjudication period which both parties have got to agree to, then that period has got to be less than 42 days.
Jacob Austin (00:20:33) - So you want to see that that right is maintained and not struck out within your subcontract or puts any obstacles in the way of you adjudicating, because going to court to resolve a dispute is a hell of a lot more expensive and time consuming process, and one you want to avoid if you certainly can do. Okay, that concludes my seven key points to watch out for before you sign a sub contract. If you do come across any of these, it's absolutely vital that you address it before you sign your agreement. Because as I've said a few times throughout this show, the wording at the very start of your subcontract is set out to say that the two parties signing the agreement agree to be bound by the content. So if there's something wrong, regardless of whether you've got a different document, you can point out that says something else that subcontract is the binding agreement and you will be stuck with it. So get it right before you get to site.
Hopefully you'll enter a new realm of awareness, off the back of today's episode! My mission is to help the million SME contractors working out there in our industry. If you've taken some value away from today's show, I'd love it if you'd share the show and pass on that value to somebody else who would benefit from hearing it. And of course, subscribe yourself if you haven't already. And 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 and S and zone. Z-O-N-E, 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. And 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. Thanks again! I've been Jacob Austin and you've been awesome.
