In the first of a new series on contract management, Martin Wade looks at what it means to be a subcontractor.
Are you a nominated subcontractor, a named subcontractor or a domestic subcontractor? It is important to understand what these different terms mean because if you are a subcontractor, the way your contract is awarded can influence the rights and remedies you have during the course of your work.
Until the mid-1970s, there were only two categories of subcontract: nominated and domestic. Very simply, a nominated subcontract is where a subcontractor is selected and appointed (or nominated) by the client. The client instructs the main contractor, through the architect, to use the nominated subcontractor for an element of work, usually an engineering package such as piling, m&e services or structural frame; the main contractor must use the quotation obtained by the client as the subcontract sum.
A nominated subcontractor is often appointed after the main contractor has started work, so one of the client benefits is that specialist design can continue after work has commenced on site.
A prime cost sum is included within the main contractor’s tender document (a bill of quantities or specification of work). On top of this the main contractor is required to price overheads, profit and any items of attendance it has to provide, such as the use of site facilities, provision of a secure storage area etc. The value of the prime cost sum is omitted from the bill of quantities and replaced by the nominated subcontractor’s accepted quotation and the main contractor’s on costs are adjusted as appropriate.
A domestic subcontractor, on the other hand, is selected and appointed by the main contractor using the specification issued by the client’s consultants. The client has no input into the selection of that subcontractor and often will not even know its identity. The rationale being that the client employs the main contractor to take responsibility for executing the work by whatever method it chooses, either by using its own operatives or by employing a subcontractor.
So what is a named subcontract? You could be forgiven for thinking that it is the same as a nominated subcontract; well, it’s not. Contractually it is the same as a domestic subcontract except the client states which contractors are acceptable without taking responsibility for their final selection and appointment.
The concept of naming rather than nominating started in the 1970s as relationships within the construction industry became more adversarial. It was first formalised by the Joint Contracts Tribunal’s (JCT) Intermediate Form of Contract in 1984. It is a procedure whereby a client selects a shortlist of preferred subcontractors, usually up to three, probably asks for quotations based on a common specification, and then passes their names and quotations to the main contractor.
Neither the subcontractors nor the main contractor are obliged to use these quotations as a basis for tender and can renegotiate as they see fit. Indeed, either party can decline to enter into a contract arrangement with the other if they have reasonable grounds for not doing so. The important thing is that it is intended to be an independent contractual arrangement between the main contractor and the subcontractor. While the JCT publishes standard conditions for named subcontractors under the Intermediate Form, often other forms such as DOM/1 or a main contractor’s bespoke conditions are also used.
There are mutual benefits to the client and subcontractor using the nomination route. The client can select the specialist contractor it wants, obtain design and value engineering input and have direct access during the progress of works. The subcontractor benefits by having much greater certainty of payment. The client or his quantity surveyor (not the main contractor) values the subcontractor’s work. This valuation is shown as a separate amount on the Interim Certificate and is notified to the subcontractor. In the event that the main contractor does not pay the stated amount by the due date, the subcontractor can then ask for payment direct from the client.
However, despite this preferential treatment, a nominated subcontractor is still in contract with the main contractor and has little protection in the event of an upstream insolvency.
The reality is that nominated subcontracts are now quite rare, with named subcontracts being far more popular with clients. Why is this? Most forms of contract allow the main contractor to claim an extension of time for delay caused by a nominated subcontractor, which the main contractor has taken all reasonable measures to prevent. This is often quite an easy claim to make and a very difficult one to refute.
For this reason clients now prefer to pass on the risk of appointing subcontractors to the main contractor. The naming procedure allows clients to keep some control on subcontractor selection without having to take responsibility for performance.
What’s in a name?
Electrical and Mechanical Contractor
Martin Wade is head of the ECA’s commercial, contracts and legal department.