At the beginning of the 1990s, Olympia & York – the developer of Canary Wharf – went into administration. Unfortunately, this drama tended to obscure the fact that the working relationships on the project were generally good and the quality of work was of the highest standard. Overall, it was a highly successful project. Why?
One reason was that O&Y took an active interest in the treatment of specialist contractors engaged on the development. The client supplied the subcontracts and ensured that payment flowed downstream. Specialist contractors could not believe they were receiving payment on time every fortnight.
Today, as more and more clients demand value for money and seek partnering and teamwork arrangements, should they not be much more active in monitoring risks that are passed downstream? There is very little point in investing effort to develop harmonious relationships if disharmony exists at another level. Should they not be ensuring that risk is sensibly allocated and managed between all members of the team? This requires a much more holistic approach to risk allocation on the part of clients, rather than simply letting the work to a contractor and allowing it to sublet packages on whatever terms it considers appropriate.
It seems that clients do not always appreciate the waste incurred as a result of inappropriate risk allocation downstream. If a client is told, for example, by its contractor that all subcontracts are let on a back-to-back basis, is this a sensible and cost-efficient allocation of risk? Is the contractor saying it has passed on all its liabilities and responsibilities to each and every one of its subcontractors? If so, is it expecting all its subcontractors to absorb and manage such an array and burden of responsibilities and liabilities? Hardly. Or does the contractor mean that its subcontractors will get no more and no less than it has got? Therefore, if it is refused an extension of time, or does not receive a payment certificate, its misery will be shared by its subcontractors even where the reasons for such refusal or non-receipt rest with the contractor.
Furthermore, is it sensible and cost-effective (as far as clients are concerned) to have contractual arrangements that perpetuate bottom-up funding by subcontractors? Take the standard provisions on final payments in subcontracts. Most subcontractors do not receive their final payment until someone issues a final certificate under the main contract. If, as usual, the subcontractor has substantial money tied up as a result of variations, it could become very expensive for it to borrow enough to finance the long period of waiting for final payment.
Such back-to-back arrangements result in unnecessary waste. They also breed hostility and impede efforts to improve working relationships. I am sure Ann will agree.
Postscript
Rudi Klein is a barrister and chief executive of the Specialist Engineering Contractors Group.
