Some will argue that this is tantamount to insolvency. But, why do they need substantial assets if they sublet all their work? Their viability depends on generating positive cash flow. In order to achieve that, they have to operate according to the basic rules of business.
That is, they buy in at prices that are cheaper than those they will offer to their clients. Furthermore, over the duration of their projects, they have the added advantage of access to funding from their clients, which they can invest in the short-term money markets before paying their subcontractors. They are unlikely to relinquish this advantage voluntarily.
Let us examine management contracting for a moment. This was, indeed, popular in the 1980s, although there is some evidence that it is making a bit of a comeback. It failed because many clients that experimented with it came to the conclusion that it did not give them any particular advantage over traditional procurement.
The main drawback was that the management contractor was not just managing the works. He also handled the funds intended for works contractors. Therefore, he had plenty of opportunities to bolster his fees by investing the money before passing it on. By resorting to spurious set-off claims and imposing unauthorised discounts, the management contractor was able to build up his coffers even further.
So, clients tried something else – construction management. At least, in this way, they could get more transparency in pricing. The construction manager did not have access to the cash although, at the beginning of the 1990s, this apparently did not stop one or two construction managers indulging in unwarranted set-off claims and discounting. Nonetheless, the consequent reduction in the risks to trade contractors – particularly the risk of late and non-payment – has meant that clients get a better deal.
The responsibility of the construction manager is to ensure that project costs are kept within the bounds of the cost plan agreed with the client. If the construction manager fails in this regard, he could incur a contractual or legal liability to the client.
But the real point is that, under most other methods of procurement, subcontract pricing has to take into account the risk of payment delays. This is more likely to prevent clients from getting the best deal, rather than main contractors "going soft".
The solution is for clients to give active consideration to procurement policy. Why, for example, do some clients still allow major parts of their projects (such as M&E installation) to be sublet? Other arrangements, allowing for greater transparency, are possible, such as direct contracting or joint venturing. Furthermore, partnering provides opportunities for developing an "open book" relationship, thereby revealing the true costs incurred by all parties. It is the client that is in the driving seat and, therefore, it should be the only party to steer.
