DFA Law – sponsor of the University of Warwick Science Park’s Ignite Alumni Network – contributes our guest column on a challenge many businesses face: managing subcontractor relationships. Too often, these arrangements are poorly defined, leading to unnecessary risk. The column explores how to structure and manage subcontractor relationships more effectively.
Whether it is due to the need to have a specialist input into a particular project, or because growth or demand requires the assistance of others, managing the relationship with sub-contractors and third parties is a commercial reality for many businesses. Where those parties perform well, they can be a seamless addition to the service offering, but where issues occur, businesses can be left wondering “why are we in this position?.”
Whilst it does not resolve every issue, it is often at those times when it is appreciated why it is so important to address the terms of the underlying legal relationship at the outset. Whilst these vary from situation to situation, the following sets out some of the key considerations;
1) Written Agreements and Standard Terms
As solicitors, where any issue arises the first document we would look at is the written contract between the parties. However, often there is none, or where there is, they are based on standard terms and conditions that do not reflect the nature of the work being undertaken. Further, the contract is often so basic, that it does not properly set out the scope of work being undertaken, deadlines and consequences if they are missed, payment terms, inter party responsibilities and how they will be achieved, duties of confidentiality to protect intellectual property, and sometimes most importantly, how any issues or disputes are going to be resolved and the rights to terminate the contract.
2) Subcontractor Requirements
Often subcontractors are hired on the basis of their reputation, or recommended skill set, whether that is in computer coding or engineering. However, even when those credentials are genuine, it is important to ensure that the party carries adequate and appropriate insurance, complies with any statutory and/or governing obligations, and has adequate financial status to avoid risk. There is nothing worse than a subcontractor entering into insolvency part way through a project.
3) Liability
Whilst this is typically covered in the contract, and can hopefully be protected by insurance, reviewing and agreeing the liability of subcontractors is crucial. Often those with standard terms and conditions will seek to limit that liability as much as possible, and this can leave you with little to no comeback. Customers and clients may have little sympathy that any issues have been caused by the subcontractors, and will just take action against the business as the main contractor. As such, it is essential to ensure that a) the ability to claim against the subcontractor is understood and managed, and b) where appropriate the sub-contractor is giving warranties to the customer/client so that direct claims can be brought against that subcontractor (hopefully bypassing the business).
4) Communication and Review Policies
All good relationship typically have one thing in common, and that is good communication. A subcontractor relationship is no different, as they often need to function as a seamless extension of the business. As such, whether it is a contractual term or just part of underlying working agreements, a clear line of communication must be agreed with subcontractors throughout the project, at an appropriate level. Best practice would be to have named individuals for both parties to contact, and consideration given to whether scheduled discussions should take place to ensure progress is being made and issues being addressed promptly.
5) Do not be afraid to involve solicitors
The use of solicitors is typically seen as a threat between businesses and subcontractors when things go wrong. However, use of solicitors at an early stage, on a non-adversarial basis, can ensure that the contractual documents reflect the project, and any issues that do arise are properly addressed before they become a problem.
Paul Currie
