The danger of not getting subcontract programmes right
Jul 2021 | Construction & EngineeringContractors and principals generally understand the importance of a well thought out, detailed and comprehensive construction programme that is then administered by a superintendent. It is surprising then, how often subcontracts and consultancy agreements associated with major construction projects lack a programme with equivalent levels of detail or any programme at all.
This not only has significant impact on the day-to-day management of works but also on the rights that may be enforced under those subcontracts and consultancy agreements. There are a number of significant contractual provisions that are dependent for their application on a clear programme – extensions of time, liquidated damages, acceleration and termination or take out works in circumstances of excessive delay or failing to maintain progress. Aligned with these are a number of ancillary rights, such as calls on security, defects liability and ability to recover upstream under head contracts. The loss or diminishment of rights under these provisions can have significant impacts for contractors both in terms of financial costs and their relationship with the Principal and Superintendent under the head contract.
What are some of the key subcontract programming issues?
- There is no subcontract programme developed at the time of executing the subcontract so the contractor annexes the head contract/project programme.
- The duration of works is not defined – this is particularly common for consultancy agreements, where the consultant is working on a rates base, do and pay arrangement.
- The date for practical completion is unclear.
What are the impacts of these issues?
No subcontract programme at the time of executing the subcontract
It is often the case that subcontracts allow for a subcontract programme to be developed after execution. The problem with this is that frequently it is not done, and the parties then rely on the head contract programme (understandably once on site both parties tend to focus on getting the works underway and administrative issues such as an agreed programme tend to be come secondary).
There are a number of potential issues with this approach, detailed below.
Does the subcontract actually provide that the head contract programme is binding?
Often subcontracts are silent on the use and implications of head contract programme. Simply annexing it does not make its use mandatory or binding. The commonly used Australian Standard Subcontracts AS4901 – 1998 and AS4903 – 2000, in their unamended form, for example, make reference to a 'construction program’ and a ‘subcontractor’s program’ respectively but do not reference the head contract program. While there may be an unwritten understanding that the subcontractor is following the head contract programme, without it being clearly stated in the subcontract as being of binding effect, and how it is to be administered then it is left open to argument whether a head contract programme is binding.
The optimal position is to make it clear that a head contract programme is included for the purpose of the parties developing and agreeing a subcontract programme that aligns with the head contract programme and is acceptable to the contractor. Once the subcontract programme is developed it is binding, but is subject to adjustment where the head contract programme is adjusted (this may have extension of time and delay cost implications and these will need to be dealt with in the contract terms and conditions also). The process for developing and agreeing a subcontract programme should be within a short, delineated time frame (usually within 14 days of contract execution or site access) and will need to be enforced by the contractor. As a fallback position, the contract should note that in the absence of an agreed subcontract programme, the head contract programme will apply – this is however not without issue.
Even if a head contract programme is binding, the level of particularity with respect to individual trades or design requirements in the head contract programme, is often scant or unclear. This can have a number of flow-on effects. Firstly, with respect to a clear date for practical completion – simply having a milestone date for plastering completion in the head contract programme for example may not be a clear and unambiguous date for practical completion for the subcontractor undertaking plastering. That subcontractor may have numerous elements to their work scope that are not simply defined as 'plastering completion' in a general milestone including where there are other finishing aspects that could apply. The implication of not having a clear date for practical completion are set out in more detail below.
Another issue is that sometimes a head contract programme does not clearly reference the trade, the subject of the subcontract. For example, if a head programme refers to completion of kitchen installation, is that directly referable to work by cabinet makers in or around the kitchen? For consultants, head contract programmes often only reference the completion of the physical works not completion of the design. If the head contract programme is silent on design, how then is the consultant or contractor to assess how long before the relevant works commence, that a design must be complete and when must design drawings be provided.
Even if the relevant finish dates are clear, there is often little particularity in a head contract programme around the process for getting to that point. Commonly, extension of time provisions include an assessment based on critical path analysis and provisions that deal with overlapping delays. If there is scant information on the critical path or other elements of programming this may lead to disputes on extension of time assessment – disputes that can eat up valuable administration time and negatively impact on working relations with subcontractors.
Without a clear and detailed programme, there may also be disputes relating to acceleration. It is not so much the right to direct the time and manner in which the works are to be undertaken, but rather whether this would amount to an acceleration for which the subcontractor is entitled to recover costs. Without sufficient detail in the programme, it is open to subcontractors to argue that they are entitled to manage the minutia of day-to-day works so long as they are of the view that they could achieve practical completion on time, and that any adjustment to that where there is no detailed programme is grounds for cost due to an acceleration or change to sequence of works, not through a breach or delay of the subcontractor.
Lastly, a lack of clarity in a programme (whether it be in a subcontract programme or a head contract programme) may have impacts on the ability to terminate or take works out of the hands of a subcontractor for excessive delay. A recent appeal decision in the New South Wales Civil and Administrative Tribunal1 highlighted the difficulty in terminating or taking works out of the hands of the subcontractor for excessive delay, unless it could be shown clearly that the subcontractor has failed to proceed with the works diligently in breach of the contract. That case was decided on particular facts and took into account correspondence between the parties, the involvement of other contractors and variations. While the decision is binding on courts or adjudicators, its analysis of a number of key precedent cases is instructive. It is abundantly clear from the decision that a lack of certainty around timing of works was significant and that the onus is on the party relying on the delay as grounds for termination to prove the failure to proceed diligently. It follows that without a clear and detailed programme, the process of proving that delays are of sufficient gravity to give rise to grounds for termination will be significantly more difficult.
The duration of works is not defined
This is commonly an issue with consultancy agreements and arises where design is commenced before the full scope and duration of a project are known. The most often encountered complaint from contractors is that consultants are not providing design drawings in sufficient time to allow timely tendering and letting of subcontracts or performance of the works. From the consultant, the corollary is that they complain about being requested to provide everything on an urgent basis without any real 'look ahead' programming. Ad hoc or last minute instructions put pressure on all parties and again cause problems with enforcement of rights.
There is no perfect solution but there are a number of ways to minimise impacts. Firstly, if possible, there should be a broad outline program with key milestones or completion dates. If nothing else, the consultant should know the overall time frame within which it must work. Commonly, consultancy agreements do not include liquidated damages, but the consultant should be aware of when liquidated damages start to apply to the contractor so that the parties can work together towards avoiding that impact on the contractor. The parties should work together to develop staged programs, pending details of key delivery dates when they become known – this can be as simple as agreeing dates in periodic work orders or a more detailed programming process within the parameters of the broader project programme. For standardised tasks, the parties can also agree guaranteed turnaround times with penalty or pricing implications if they are not met. Again, it is difficult to enforce rights with respect to delay, unless there is a high degree of certainty as to the timeframe in which services are to be delivered.
For subcontractors, where there is not an overall known duration, it is advisable to break the works into separable portions and provide as many as can be ascertained with certainty. Details of the durations or completion dates should also be provided along with a process to either agree the duration or dates from others as they become known, or an option to proceed with an alternative subcontractor if a duration or date cannot be agreed.
The date for practical completion is unclear
This can arise in a number of ways but in all instances, it is likely to give rise to very significant implications for the parties to a contract. As noted above, it can arise if the date for practical completion is by reference to another document such as the head contract programme and that document is unclear or the date is unidentified. It can also arise if it is linked to another event and that event lacks certainty (commonly something such as '2 weeks after completion of works by the painters'). Lastly, it can arise where the date is to be stated in the contract and that date is not specified with clarity or at all. This can occur where more than one date is specified in different documents – the particulars, the scope documents or documents attached from a tender. Sometimes this can be resolved by applying an order of precedence but even then, difficulties may arise – if for example, the particulars refer to the scope but the scope has two different dates in different sections. A lack of clarity can also arise where there is simply no date stated or a placeholder such as 'TBA' is included where the date for practical completion should be.
Why is this an issue – because without a date for practical completion there is very strong argument that there is no basis to apply liquidated damages. If the parties have made the effort to calculate and include a rate for liquidated damages that represents a genuine pre-estimate of loss, then there is a presumption that the liquidated damages were intended to apply and generally be the sole remedy for delay. While there are number of cases on the validity or invalidity of liquidated damages where unclear words are included as to valuation, such as not applicable, nil or zero,2 this is a different situation. While the parties to a contract may have agreed as to the rate of liquidated damages to apply to late completion, it may well be impossible to apply with certainty if there is no clear date for practical completion to measure its application against (irrespective of the fact that a contractor, is potentially exposed to liquidated damages or other costs in relation to the head contract).
Can it be fixed?
Yes, but it will depend on the parties being aware of the issue and being willing to agree. It is always open to the parties to amend or update contract terms if they agree to do so. It is likely to be too late if the issue only becomes evident when the subcontractor is already significantly late. It stands to reason that a subcontractor exposed to liquidated damages is unlikely to be willing to agree a date for practical completion to facilitate the application of those liquidated damages. If the parties realise early on, then of course it is more likely that it can be agreed and a date for practical completion can be inserted or rectified. However, once the subcontract is signed, most parties focus on the scope of works and do not look at the contract particulars again until it has already become an issue.
Conclusion
The take-aways here are not surprising, but it is concerning how regularly parties to a contract do not adhere to what they know is necessary for efficient contract administration and to avoid disputes. An appropriate approach, in order of priority is as follows:
- Always include a clear date or time period for practical completion – do not rely on unclear secondary sources and never leave the date to be completed until sometime after execution.
- If possible, agree a subcontract programme prior to execution that aligns with the head contract programme and includes sufficient detail to allow delays to be assessed with certainty.
- If it is not possible to agree a subcontract programme prior to execution, include a mandatory process to agree a programme within a specified (short) timeframe after execution and ensure that the head contract programme is agreed to be utilised as a default programme until such time as the subcontract programme is agreed.
- If the head contract programme is to be relied upon rather than a subcontract programme, review it to ensure that it has sufficient certainty and detail so that it can be used to effectively manage the subcontract (if it does not then agree the relevant particulars with the subcontractor as part of negotiation and include this information in the subcontract).
- In circumstances where it is not possible to ascertain a duration or date for practical completion with certainty at the time of execution, periodically agree dates for portions of works as and when they become known, to at least give interim certainty.
1 Patel v Redmyre Group Limited [2021] NSWCATAP 132.
2 Temloc Ltd v Errill Properties Ltd (1987) 39 BLR 30; Baese Pty Limited v RA Bracken Building Pty Limited (1990) 6 BCL 137; Silent Vector Pty Ltd t/as Sizer Builders v Squarcini [2008] WASC 246; Adapt Constructions Pty Ltd v Whittaker [2015] ACTSC 188.
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The material contained in this publication is in the nature of general comment only, and neither purports nor is intended to be advice on any particular matter. No reader should act on the basis of any matter contained in this publication without considering, and if necessary, taking appropriate professional advice upon their own particular circumstances.
