14 Dec 5 Essential Precautions Subcontractors Must Take To Prosper Within The Supply Chain
Throughout this article, I will be explaining the 5 essential precautions subcontractors must take to prosper within the supply chain.
Whilst the construction industry is engaged in the production process, it does not have a commensurate manufacturing mentality. The supply chain concept encourages that mentality, which drives a more cohesive integration of the diverse professional skills, crafts operatives, plant, tools, equipment and materials required in the production process. This should lead to greater efficiency, shortened delivery times, reduced costs and increased quality of projects.
The problem is that the standard forms of contract and procurement methods used in the industry remain ad-hoc and cost-centric in nature with extreme imbalances in their risk distribution profiles.
Given that disproportionate levels of risk are always borne by the subcontractors lower down the supply chain, there are 5 essential precautions they must take to prosper within the supply chain…
Contractual Risk Assessment
It is important to assess the likely risks in any contractual relationship before entering that relationship, rather than afterwards. Proper understanding of the proposed contract terms and conditions is therefore an essential first step. Although subcontractors are less cautious in recessionary times than during the recovery, there is never an excuse for an inadequate understanding of the contractual risk burden.
The level of commercial risk in subcontracts is neither zero nor 100%; they are somewhere in between. Therefore, the additional objective must include ascertaining the principal contractor’s financial, personnel and project management ability to deliver the project. Subcontractors must then price into the tender their level of tolerable risk.
Subcontractors must also clearly identify the thresholds below which they cannot operate and must obtain proper advice on how to legally exit a subcontract that can no longer be performed.
An effective collaborative relationship between the principal contractor and subcontractor is an essential ingredient of every successful project. Thus the onus is on both parties to cultivate a relationship based on trust, confidence and mutually shared delivery outcomes.
It is imperative to avoid any blame culture, although that remains the default position. Nothing destroys contractual relationships more than apportioning blame once a difficulty arises in the course of a project. Commit energy to solve the problem first and then the reckoning can follow. This minimises rather than maximises the impact of the initial problem on the overall project.
The free and timely flow of information whether by drawings, schedules or specifications facilitates the success of construction projects. Production information is however rarely perfected before the operatives arrive on site, so managing information flow becomes a very important task. Inadequate information adversely impacts the ordering of materials and could lead to crafts operatives spending more than allocated time which adversely impacts profits.
The subcontractor must have an internal template for promptly requesting information, as well as recording their timely receipt and should have no hesitation in highlighting possible delays that late information could cause.
The construction industry has a chronic late payment problem. In 2015, a survey by Jack Sadler CN 10, found that a third of contractors face 60-day payment waits. However, in 2021 a survey found that nearly a third of major contractors now pay faster than 30 days – which is a substantial improvement. If you do find yourself the victim of a late payment, you may benefit from attending my upcoming webinar: How To Avoid Disputes And Payment Delays In Construction.
If prospering in the supply chain is something you are finding challenging, Mercantile Barristers can help. Our members have worked with a variety of construction and development firms in the UK, handling the procurement; management; and delivery of complex high-value projects across the UK and internationally.
Please contact me directly for more information.
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