We are beginning to see an emerging trend; one that could possibly be here to stay. We are increasingly experiencing a rise in the level of negotiation from sub-contractors on housebuilder's standard terms and conditions.
There are a few reasons that could be behind this change, including a more risk-adverse construction industry generally, rising inflation rates with pressures on pricing and energy costs and the hardening of the insurance market.
Where there is an ultimate client involved in a project such as a housing association or where there is a joint venture arrangement with external funding at housebuilder level, third parties are often seeking sub-contractor collateral warranties from key sub-contractors. The terms of the sub-contracts are therefore also important to those interested third parties. The granting of collateral warranties can impact the risk profile that sub-contractors are willing to accept (some viewing these as an extension of their liability).
So, what are some of the key patterns that we are seeing?
- Caps on liability are one of the most common points to be negotiated. We are noting that sub-contractors are increasingly looking to include caps on liability and/or exclusions of certain liabilities under the sub-contract (often to the level of sub-contract sum). Housebuilders should consider whether any cap on liability is appropriate to the value and nature of the sub-contract works, bearing in mind that the potential cost of defective works could far outweigh the sub-contract price.
- Given the current economic climate, another trend that has emerged is that sub-contractors are keen to renegotiate payment terms, by reducing the period between application and final date for payment. When agreeing to alter the standard payment terms, housebuilders must ensure that their administration systems are, in practical terms, able to process and make payments in line with the negotiated payment periods. Agreeing different time periods with different sub-contractors may become an administrative headache. Consideration should also be given to any cashflow implications arising because of the reduced timescales in sub-contracts.
- The hardening of the insurance market has undoubtedly had an impact on all players in the industry and sub-contractors are facing a hike in premiums. Sub-contractors are wary of committing to maintain professional indemnity insurance at a certain level for future years and looking to keep levels as low as possible.
Given the commercial pressures placed on all operating within the construction industry at present, it shouldn’t be a surprise that sub-contractors are becoming more risk adverse. They are trying to protect their business by mitigating it's exposure to risk under their sub-contracts to acceptable levels. However, housebuilders need to be alive to issues that may arise where there is a related contract further up the contractual chain which sets out obligations in relation to sub-contracts. Further, any housebuilder should be aware of putting their own business at risk by accepting terms which would expose it to a claim it cannot pursue fully down the line with its sub-contractors.
