Practical tips for Contractors: Stepping "Main Contract" terms down into Sub-Contracts

Upon entering into main contracts, contractors should take time to consider any provisions of the main contract which require to be specifically stepped down into its standard form sub-contracts, particularly where there is a schedule of amendments incorporated into the main contract which includes a number of bespoke, and at times quite onerous, obligations.

In many instances, contractors rely on stepping down the terms of a main contract by having a standard 'main contract' provision in their style sub-contract, obliging the sub-contractor to consider the terms of the main contract, to comply with such terms and to ensure that in carrying out the sub-contract works they do not put the contractor in breach. However, in some instances, a more express step-down clause within a sub-contract may be more appropriate.

Here are some key provisions which contractors should consider:

• Delivery of documents (e.g. collateral warranties): contractors should ensure that in so far as they are required to deliver any documents under the main contract from a sub-contractor, such obligations are expressly set out under the relevant sub-contract along with any appropriate forms of documents, such as collateral warranties. If the employer is entitled under the main contract to withhold sums for non-delivery, contractors should also consider stepping such financial deductions down the chain.
• Payment: contractors should give consideration as to payment processes and timescales under the main contract to ensure obligations downstream to sub-contractors align – this can be important in terms of cash flow. Contractors should, however, in no circumstances apply 'pay when paid' clauses – i.e. clauses which provide that the sub-contractor's entitlement to payment is dependent upon payment by the employer to the contractor. Such clauses are prohibited under the Housing Grants, Construction and Regeneration Act 1996 (except in specific instances in the event of insolvency).
• Additional time and money: contractors should take care to ensure the events/circumstances under the sub-contract which entitle the sub-contractor to claim additional time or money are consistent with the contractor's entitlement to recover from the employer under the main contract. Similarly, the period for notification of any delays or circumstances giving rise to increased cost or loss/expense should ideally be more limited than to the employer under the main contract in order to give the contractor a 'buffer period' in which to process and pass on.
• Practical completion & defects: in so far as the main contract is prescriptive as to pre-conditions/requirements of PC (e.g. delivery of documents/technical requirements/testing and commissioning requirements), such should be stepped down into the relevant sub-contracts. Also, if the main contract contains specific timescales/requirements for the making good of defects during the relevant rectification period, such should be aligned in sub-contracts to ensure that if a defect is notified under the main contract, the contractor is entitled to require the relevant sub-contractor to return to site and make good.
• Professional Indemnity Insurance: schedules of amendments incorporated into main contracts often specify minimum levels of professional indemnity insurance required from sub-contractors (or in some cases product liability insurance). The level can apply to all sub-contractors or sometime vary depending on the sub-contract works package and its anticipated value. It is important that any such professional indemnity insurance requirements set out in the main contract are stepped down into the relevant sub-contracts and that the sub-contractors provide suitable evidence of cover. Ideally sub-contractors should maintain insurance cover in line with a contractor's requirement under the main contract, but very often that is not the case, with the recent hardening of the insurance market resulting in some sub-contractors being unable to maintain cover at levels they once did.
• Termination: contractors should ensure that in the event of termination of the main contract by the employer they are equally entitled to terminate any sub-contracts in place, and that sums payable payable on such termination align with what the contractor is entitled to be paid by the employer in such circumstances. 'Termination at will' provisions are not unusual in the market.
• Caps on liability/liability periods: sub-contractors very often request caps and/or exclusions of liability, and it is important contractors carefully consider the appropriateness of such relative to its potential liability under the main contract in the event of a defect in design and/or workmanship. The same consideration should be given to liability periods. In so far as the contractor is liable under the main contract, sub-contractors should remain liable. 12 years from practical completion of the works under the main contract would be the typical market position, however, some sub-contractors may seek to limit to 12 years from completion of the sub-contract works (which could be considerably earlier than the main works, depending on the package).
• Project specific risks: contractors should always consider any project specific risks which are of particular relevance to a sub-contract works package, and whether a bespoke provision is required in a sub-contract to cater for such (e.g. ground or site risk/interface with neighbouring infrastructure etc).

Whilst not all duties or obligations upon a contractor under a main contract are appropriate to step-down to sub-contractors, in so far as possible, contractors should consider any key provisions which should be reflected and take appropriate steps to minimise risk and any gaps in liability.