Understanding construction contracts: A guide for sub-contractors
Posted on 25th September 2023 at 16:02
In the complex world of construction, a well-drafted and understood contract is the foundation of a successful project. For sub-contractors navigating this industry, understanding the details and responsibilities of different contract types is vital.
Often, the type of contract and the allocation of responsibility will be largely defined by the contractor. However, understanding all of the options will help you negotiate the best deal for your business. It will also help you complete your estimates and tender submissions in a way that manages your risk.
At SubPort, as your trusted construction QS consultant, we can provide you clarity on the different types of contracts. This helps navigate the potential pitfalls in contract negotiations, helping you to achieve a successful and profitable project.
We only work with sub-contractors, and we provide a cost-effective and flexible service. You may need us just to look over a contract for you as a one-off project, or you may need regular on-going work helping you navigate a series of complex contracts. With no fixed contracts, you are in control as to how you work with us.
An overview of construction contracts
All construction contracts address critical aspects of a project, including its scope of work, price and payment terms, schedule, dispute resolution procedures and an explanation of each party’s rights and responsibilities.
You will already have an understanding of the challenges within a construction project. And the contracts that serve such projects can be vague, over-complicated, and biased towards your clients.
A well-structured contract ensures that all parties are protected, with risks distributed in an agreed manner.
Different types of construction contracts
Fixed-price contracts (lump sum)
This contract has a pre-determined fixed price for the services provided.
It provides certainty in terms of budget for the contractor and the sub-contractor. But it demands an accurate estimate at the outset. If the costs go above the agreed amount, the sub-contractor might have to bear the brunt unless variations or claims can be justified.
Despite the increased financial risk of lump sum contracts compared to some other types of agreements, sub-contractors can still receive many benefits.
Under a lump sum agreement, your clients must provide you with thorough documentation, and drawings. Lump sum contracts also require you to produce less paperwork, management and accounting and decrease your administrative costs.
Another advantage of lump sum contracts is that they do not require you to disclose how costs have been calculated, allowing you to provide estimates with sufficient risk to avoid going over budget. If the project is under budget, you keep the profit.
Cost plus contract
Here, the contractor agrees to pay the sub-contractor for the actual costs of work plus an additional amount, which is either a fixed fee or percentage of costs.
It offers more flexibility in terms of project changes, but can pose budgeting challenges for the contractor. For sub-contractors, the risk is reduced since they are reimbursed for your costs, but you must maintain transparent accounting and record keeping
Also, from our experience in these types of contracts the project owner or contractor requires more input into methods and materials used. This may affect your project as you may need to work with products and suppliers you are unfamiliar with.
Time and material contracts
Here, payment is based on the actual time (labour hours) and materials used to complete the project.
These contracts usually work well for sub-contractors as all costs are outlined before the work begins. There is a necessity for rigorous documentation which can be difficult to maintain and record, similar to the above.
Also, it is difficult to account for unforeseen or additional costs, which only become apparent once work is underway. Contractors sometimes stipulate for a guaranteed maximum price to be in place which ensures the budget will not go above a certain threshold. A drawback for sub-contractors is that if the work goes above this limit, it eats into your profitability.
Understanding risk distribution in contracts
Allocating risks in construction contracts can ensure that they are accepted by the party best equipped to manage them. It is crucial that sub-contractors understand the allocation of these risk:
• Fixed-price contracts: The risk is generally on the sub-contractor. If project costs increase, it can eat into your profits unless claims for variations are approved.
• Cost plus contracts: The contractor assumes the risk of escalating costs, but sub-contractors need to be transparent with expenses.
• Time and material contracts: Risk is shared, with contractors absorbing material price surges and sub-contractors ensuring efficiency in labour to maintain profitability.
Michaela Menga, Commercial consultant based in the Manchester office at SubPort, comments,
“Understanding construction contracts can be hugely challenging. As a sub-contractor, your skill and expertise lie in your specialist trade. Not necessarily in law and understanding contractual requirements.
This is where SubPort comes in. We only work with sub-contractors therefore we understand the common pitfalls they face in contract agreements, and as a result we can help them navigate their way through successfully.
Having a formal contract in place that suits your requirements and business scope will benefit sub-contractors. And adversely, having a poorly drafted contract or a contract that isn’t in your best interest will leave you at risk of misunderstandings and dispute.”
Common pitfalls in contract agreements
In the UK construction sector, understanding the common pitfalls can be the difference between project success and damaging disputes.
• Vague descriptions and lack of clarity: Ambiguous terms and vague scope descriptions can lead to disputes. It is paramount to clarify every detail.
• No provision for variations: Without this, sub-contractors can find themselves at a financial loss when changes within a project’s scope occur.
• Payment terms: Ensure that payment schedules, terms, and conditions are clear. Delayed payments can severely impact cash flows.
• Dispute resolution: Always include a clear mechanism for resolving disputes. Mediation or arbitration clauses can save time and money compared to court battles.
• Ignoring site conditions: Sub-contractors should be aware of site conditions before quoting. Unforeseen ground conditions can be a significant risk.
• Biased and unfair contract terms: Risk allocation sits with the Sub-contractor
How SubPort can help
At SubPort, we understand the intricacies of construction contracts and the UK's construction landscape.
We understand how main contractors work, our management team have all held senior commercial positions within main contractor businesses.
As a result, our experience and expertise is invaluable for sub-contractors who are looking to work with improved contracts in place and improve their relationships with main contractors.
Our services include:
• Contract support: We help you understand and draft contracts that protect your interests.
• Cost management: Our expertise ensures that your projects remain financially viable and profitable.
• Dispute support: Navigating through disputes requires expert knowledge; we provide guidance to resolve them amicably.
• Tendering and estimating: Get competitive while ensuring profitability with our tendering and estimating support.
Simon Robinson, Director of SubPort, comments,
“Our team here at the Manchester office recently helped a cladding sub-contractor in the local area. They had been awarded a contract to install cladding at a city centre project, and was a ‘step-up’ from their usual projects.
As a result, they approached us to help with reviewing the contract. After our team reviewed it, it was found to contain an imbalanced approach to risk. We then helped them to negotiate more favourable conditions for the contract, which were accepted by the contractor.
This meant they entered into the project with mitigated risk conditions and with the prospect of a more profitable outcome.”
Understanding construction contracts isn't just about reading the fine print. It is about comprehension, foresight, and having the support needed to navigate potential issues.
With SubPort on your side, we give you experience, knowledge, and expertise to help you navigate the complex world of contract agreements. With better contracts in place, you will give yourself a better chance of building a more profitable business.
Contact our team of commercial consultants today, telephone us on 0333 200 7205 or email at firstname.lastname@example.org
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