Contract clinic: ‘A subcontractor is causing us delays. What can we do?’

Contract clinic delays

This month’s contract clinic question comes from a project manager frustrated with a non-performing subcontractor on a NEC4 contract. Stuart Bosley explains the options.

The question

I am a project manager of a construction project under an NEC4 contract. I am dealing with a major problem caused by a key subcontractor who has failed to meet their obligations, leading to significant delays.

Despite our attempts to address the issue directly, the subcontractor has not responded positively. Even threatening termination has not motivated them, making termination seem like the only option left. Our primary concern is the impact on stakeholders and the increased costs of retendering. What can I do?

The answer

Managing subcontractors is a complex and challenging task. The decision to terminate a subcontractor’s contract should be made with great care. You will need to consider the contractual provisions. Also think of the likely impacts on the business’s financial and reputational standing.

The case of Struthers and another v Davies highlights the critical importance of adhering to contractual protocols before considering termination.

Clause 16.1 of the NEC4 contract states you must inform the subcontractor of any concerns and allow adequate time to propose a resolution. If the subcontractor’s response is inadequate, you may issue an early warning to make them aware of the possible outcome of their non-performance.

The court in Henia Investments Inc v Beck Interiors Ltd held that the contractor had the right to terminate the subcontractor’s contract after providing adequate notice of non-performance. The subcontractor’s inability to present a credible programme or plan to address non-performance was deemed a repudiatory breach of the contract.

In response to the question, you could consider the following three solutions.

Negotiate a resolution

Direct, face-to-face negotiations at the right level are a means of resolving issues quickly. The process requires a refined degree of emotional intelligence and pragmatism to guide strong personalities towards resolution. A tailored approach to every matter is required. Taking a break from the project or meeting to gather thoughts is often a good idea.

Is the subcontractor experiencing difficulties completing tasks? Have they already been notified under clause 16.1? If so, it is strongly advised you adopt a proactive approach.

This can be achieved by participating in their processes and workshops. Demonstrate a genuine commitment to the common goal. Aim to foster an environment where all parties can find common ground. This approach can result in successful collaboration and positive outcomes for everyone involved. Giving space to process the situation is crucial.

Unforeseen circumstances, such as supply chain disruptions caused by political changes, may also lead to unexpected delays. Other contractual provisions may be available in such cases. These include clause 60.1(4), which allows for additional time in the event of a compensation event that is beyond the control of the contractor or subcontractor.

Issue a formal notice of non-compliance

If the subcontractor is unresponsive or unwilling to cooperate, and all other collaborative efforts have been exhausted, escalate the situation by issuing a formal notice of non-compliance under clause 91.2. The project manager must provide written notice to the subcontractor. The notice must state that they are not fulfilling their contractual obligations.

For instance, if the subcontractor is not completing their work on time or to the required standard, issue a notice of non-compliance. The subcontractor must then respond and propose a solution to resolve the issue. If the subcontractor still fails to comply, the project manager can consider terminating the contract by following the necessary steps.

The court in Jacobs UK Ltd v Skidmore, Owings & Merrill LLP held that the architect had the right to terminate the contractor’s contract. This was after issuing a notice of non-compliance due to the contractor’s failure to follow the architect’s instructions. The court concluded that the contractor’s non-compliance represented a material breach of the contract.

Terminate the contract

As previously stated, terminating a contract should be a last resort. However, it might be necessary if the subcontractor’s non-performance is classified as a compensation event under clause 60.1(19) or as a material breach of contract under clause 91.1.

Direct negotiations are effective in establishing rapport and overcoming obstacles. However, effectively managing subcontractors calls for a nuanced approach. An approach that combines firmness and adaptability. Maintaining open and transparent communication is crucial for positive working relationships and achieving project goals.

Stuart Bosley is managing director (Quantum & Project Advisory) at DeSimone.

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