Rudi Klein goes in search of the ideal integrated supply chain – and instead stumbles upon another subcontract that perpetuates inequality, unfairness and risk-dumping

I have a large postbag. The contents mostly consist of bundles of contract documents sent in by contract monitors based in all parts of the UK. Reading all this rubbish provides me with a regular reality check. All this talk of allocating risk to the party best able to manage it … and I’m struggling to find any hard evidence.

I pick out of my postbag a subcontract used for highway works. Ah, I think, surely this one will reflect a fair allocation of risk since the client is the Highways Agency (HA). I know that my friend Steve Rowsell, procurement director at the HA, has been doing some fantastic work in promoting integrated project teams. HA insists that its main suppliers provide regular health checks on their supply chain relationships. HA sets out to be an exemplar client and expects its main suppliers to follow its lead. In fact, HA goes so far as to say that there should be no difference in working for HA directly or through the main supplier.

So, with levels of expectation high I plough through some 90 pages of subcontract issued by one of HA’s main suppliers. I fear that Steve will not be pleased. Can I find anything resembling risk sharing and equality of treatment? I search but to no avail.

I alight upon the payment provisions. HA requires that main suppliers pay the bills of their supply chains within 30 days. This particular main contractor decides that it wants 35-day payment cycles, but that’s not all. Being, no doubt, unhappy at having to pay for work in progress within this relatively short cycle, it forbids its subcontractors to include in their applications for payment “the value of any services, materials, plant or work in respect of which the requirements of the main contract as to certification have not been met”.

Who will tell the subcontractors whether these requirements – whatever they are – have been met? Answer: the main contractor. We can, of course, trust the main contractor to be honest in this matter even though the ability to meet such requirement is solely in its hands.

When will payment be made for those items that cannot be applied for? I haven’t a clue. This provision will, therefore, contravene the Construction Act requirment that contracts have an adequate mechanism for payment.

Within the payment provisions there is a wide set-off clause allowing for cross-contract set-off. The main contractor only has to have a bona fide opinion that the subcontractor is in breach of its subcontract and that such breach is likely to cause it “loss, damage, expense or cost”. Retentions are deducted even though HA does not generally deduct retentions from its suppliers. Surprise, surprise! There is no protection for retention monies, the second half of which are returned to the subcontractor following the issue of a maintenance certificate under the main contract – not when the subcontractor satisfactorily completes his work.

Retentions are deducted even though HA does not generally deduct retentions from its main suppliers. Surprise, surprise!

I tire of this payment bumf so move on to other provisions. “The subcontractor is to assume all the obligations and liabilities of the contractor under the main contract in relation to the subcontract works.” The main contractor is either lazy or simply doesn’t trust itself to extract the bits of the main contract that are relevant to the subcontract (and, therefore, should be expressly included in the subcontract). This main contractor prefers its supply chains to incur a massive overhead in reading the documentation that it has fully negotiated. The subcontractor is required to carry out its obligations to the satisfaction of the contractor and the employer’s agent. What if the contractor and agent have different views about the subcontractor’s performance?

But worse is to come. The subcontractor has to check, ascertain and take responsibility for the sufficiency and quality of all prior works carried out by the main contractor or other subcontractors (which will involve checking all the designs) that may affect his work. It must also accept the “entire responsibility” for inspecting and examining the state of the site (including any existing structures above or below the site) as is necessary for the subcontract works. Not exactly a fair allocation of risk, then.

I cannot find any obligation upon the main contractor to compensate its subcontractors in respect of delay and/or disruption it has caused. The subcontractor’s entitlement to compensation is limited to a reasonable proportion of anything the main contractor receives from the employer in respect of the delay/disrupting event.

As I turn over the final page of this subcontract I wonder why HA’s procurement strategy is being ignored. This subcontract belongs to the age of the dinosaurs. I say “dinosaurs” advisedly – they did, at least, look after their own. It looks like I have got to have words with my mate Steve.

Rudi Klein is a barrister and chief executive of the Specialist Engineering Contractors Group