Jacob Austin 00:00:00 Hi all, Jacob Austin here from QS.Zone. And welcome to episode 104 of the Subcontractors Blueprint. So this marks two years since I first started the podcast. And if you're listening to this for any reason, then thank you for your support. So welcome, as I say, to episode 104 of the show, where subcontractors will learn how to ensure profitability, improve cash flow and grow their business. Today we are following on the theme from last week's show. We were discussing whether or not it's time to grow your business as a small subcontractor, and we mentioned some key indicators that you are ready to take on bigger projects and how to manage the bigger risks that you're going to face when you start taking on bigger work. So today we're following that on in this mini series, and we're going to look at some commercial and contractual considerations that you'll want to consider before you start completing larger schemes in another must listen episode of the Subcontractors Blueprint. So, as I said, this episode builds on the foundation of last week's show.
Jacob Austin 00:01:24 And today I'm going to discuss some commercial and contractual considerations that you want to have a good idea about before you start taking on larger work, because winning a larger project isn't just about doing more work. It often will mean signing up to more complex contracts and fulfilling more commercial requirements that you just might not have come across on smaller jobs. We're talking contracts, insurance, bonds, warranties, and compliance with law and standards. Now, many of these are topics that I've covered in more detail throughout previous episodes. So if there's something that you want to learn more on, then I would encourage you to look back through the back catalogue for other episodes you can brush up on. But we're going to start with contracts. And I've said this a million times on the podcast. You've got to know what you're signing. Larger projects will typically use a formal written contract, and you'll see standard forms such as JCT or NEC for subcontracting, but almost always with the contractors amendments involved. It's critical on a large project to read that, subcontract or have it reviewed by somebody competent.
Jacob Austin 00:02:38 If you don't think it's within your skill set. If you look for nothing else when you read the contract, look for the Holy Trinity. What am I doing? When have I got to do it by, and how much do I get paid and when? So let's start with what am I doing? This will be the scope of work and the specification. The contract's description of the work needs to match what you've priced. Bigger projects are going to involve big sets of specifications, drawings, perhaps even a BIM model. And all of this may refer to standards that are outside the written words. For example, British Standard 804, which you might just read and skip over. But that is a specific standard relating to screeds and in-situ flooring. The reference to that can incorporate requirements that aren't written anywhere else. It will cover materials, design and installation, the tolerances that your finished surface has to achieve, and a host of other things that may not be written anywhere else in the spec. Now, of course, as you're a specialist, you'll want to get to know the relevant British standards you're going to come across for your trade.
Jacob Austin 00:03:47 On top of that, you want to check that the order represents the price that you've submitted, and it aligns with your understanding of how you've priced it. So if you've made assumptions, are those assumptions there? If there are site conditions that you've got to take into account, have you visited and inspected the site? Are you responsible for some of your own attendances, like your own access equipment or clearing your own rubbish? These are things that will cost you money if you haven't priced them into the job. If it's not written in the scope, the contractor will probably be assuming you're providing it. These kind of assumptions can trip both of you up, so better to be clear on them upfront. Next we have the program. How long have you got to build what you need to? This needs to be a sensible period. You will doubtless see a liquidated damages clause in there, and if the whole project finishes late because of a delay that you've caused, then you could see liquidated damages applied to you.
Jacob Austin 00:04:47 And this relates back to that program, period. If the work that you've got isn't achievable in that period. Now is the time to shout up before you sign any agreement. You also want to check when it comes to program that you can achieve the levels of output that the contractor wants. You might have priced for ten men to be on site, but they want 20 men and half the time can you achieve that and does the program make logical sense? Do the work faces follow on from each other nicely so that you can keep your men gainfully employed? Or are you going to have to break and come back and cost yourself in potential demobilization? These are questions to start looking at and ask the questions of your contractor. Now we have payment. Everybody's favorite part of the job. We already mentioned that any assumptions need to be translated into the scope. But now we're also asking does the order that you've received replicate your tender price? And if it doesn't, then is there a simple answer as to why not? It could be.
Jacob Austin 00:05:48 The contractor is just adjusted a couple of quantities because he's seen that the measures were slightly out, but then you also want to check as the discount if you've agreed on been properly applied to the rates, tally up with the rates that you quoted, and have any savings that you might have offered been captured in adjustments to the scope and change of descriptions in the Bill of quantities. You've also then got to check the basis on which you've quoted. Were you just pricing a bill of quantities? And is that what the order says making it a measured contract, or were you being asked to price a lump sum and take on board the price risk whichever way round you've priced it? The contract obviously needs to align with that. Now. Those are the absolute must must checks the Holy Trinity. But if you were to read the contract in full, you'd be amazed at how much of that actually can relate to how much you'll get paid by the end of the job. And so I'll pick out some key areas that you might want to explore in a little bit more detail.
Jacob Austin 00:06:50 Let's start with payment terms. Large projects typically will have a structured payment schedule, setting out valuation dates at which you can apply for payment for your work. These are the dates by which you must submit your applications for payment. If you miss it, you're likely to not be paid until the following valuation date. Which can be a hell of a wait, especially if you're a small business dependent on the cash flow. And given that you're working on bigger contracts here. This is going to mean bigger sums of money that you don't get in your bank account. So you need to find this and have it front and center so that you can submit your applications on time. What you should then see is a set period from the application date to give a due date, and then a further period to the final date for payment. You have to add these two up to get to the overall payment terms. It might look something like 21 days to the due date and then a further seven days to the final date for payment to make a 28 day payment period.
Jacob Austin 00:07:57 Next, I think you want to look at how you need to ask for the money. Some contractors will accept invoices from you and others will only accept applications for payment. What you can't do is mix and match both. A lot of contractors will insist that you sign a self billing agreement if you're going to submit applications, and that means that you ask for the money. They tell you how much they're going to pay you, and then they invoice themselves and send you a copy of it. That copied invoice is what we term a self billing invoice. So that becomes your exact document in the eyes of HMRC when it comes to determining turnover and how much VAT is due. Ask for the money in the format that the contractor wants, so if they tell you it's an invoice then send them an invoice and vice versa. If they want a cumulative bill, Then make sure that's what you're issuing. There is no benefit to be gained in rigidly sticking to what you want to do. If it doesn't get you paid.
Jacob Austin 00:08:58 Next, you want to look out for retention. This will likely be a fixed percentage between 1 and 5%, which will be deducted and held by the contractor until you've completed certain milestones. Make sure this replicates what you've agreed. It can be a large chunk of cash on a big job, and by letting the contractor keep it, you're effectively loaning them some money for a period of time. You should be due the first half of whatever that percentage is at the practical completion of your work, and the second half after you've made good. Any defects that have been discovered in the defect period? That defect period might be 12 months. It might be 24 months. It should be stated in your subcontract, and that is when you can expect a final inspection of your work to be completed and any defects test out to you to make good. You'll need to complete these in order to get your hands on the money. Next up, let's consider variations and changes. The contract will have a mechanism for variations. These might be termed variations or changes or compensation events, depending on the type of contract you're looking at.
Jacob Austin 00:10:10 You need to read your contract to understand how and when you submit quotations for those changes. On a complex job, changes are almost guaranteed. Be it minor design tweaks or whole additions to your scope of works, and you will need to follow the proper process set out in your subcontract to get paid for them. If the contract says no payment for variations unless confirmed in writing by X, then make sure that Mr. X has confirmed it. Paperwork matters. If there's a big change, then make sure you've got the records of that agreement. As the saying goes. Change is the only constant, and that makes it vital for you to know how to deal with it when it happens on your job. Next, we want to consider liquidated damages. I mentioned this last week, but I'll mention it here. Again, this is a specified amount that represents the amount of money that the employer, which is the main contractor's client, will lose for every week or day that the project is late. It can be specified in any period of time or part thereof.
Jacob Austin 00:11:19 And you need to know what your risk of it is. Now it may be, depending on the trade that you're completing, that the chances of you having damages deducted is pretty slim, particularly if your work isn't usually on the critical path. Now, most subcontract work is somewhere along the way, and so you need to ask yourself, have you got enough time during the critical points to complete the work that you're being asked to do? You need to consider that if you're delayed, that you submit extensions of time to see off the risk of liquidated damages being deducted from you is a complex subject, and it's one that gets a hell of a lot of heat considering how often it's actually enforced. Ultimately, the way to avoid liquidated damages is to administer delays properly. If delays aren't your fault, then ask for extensions of time. Next, we have indemnities and liabilities. Many big contracts include clauses which require you to indemnify the main contractor for certain things, like damages arising from your work, injury caused by you, breaches of law and so on.
Jacob Austin 00:12:27 These are all relatively standard, and it's not uncommon for subcontracts to cap liability at, say, the contract value or a multiple of that contract sum. And it might be absurd to you, but if there is a cap in that fashion, then that is actually there to protect you. Because if there's no cap, then theoretically a major issue could impose unlimited liability on your business. Though your insurances will probably step in up to the limits of the policies. Beyond those policy limits, you might be exposed yourself. So if a contract requires a ÂŁ10 million public liability and you only have a ÂŁ5 million public liability, guess what? You're going to need to increase it. There are other insurances as well as we've discussed at length previously, but make sure you carry the right levels of public liability, which is for third party injury or property damage coming out of your operations. Professional indemnity if your role in the project is going to include any design, then you will need this insurance to protect yourself against design errors or advice that causes a loss.
Jacob Austin 00:13:37 Many subcontractors avoid design responsibility, but even things like selecting a particular product or providing calculations can be seen as design. And certainly if there's a collateral warranty involved where you warrant design to a reasonable skill and care, you will need Pi. Then we have contract work insurance, which is also called contractors or risk. This covers physical loss or damage to the work before the job hands over. And this is in addition to planting equipment, insurance and any insurance of motor or fleet vehicles. Insurance is a line of defense. It might cost you money, but without it, you could be going in with big risk on a project and then copying for some significant costs if there's a problem. If you're a small contractor and you're taking on larger work for the first time, it wouldn't be uncommon for the main contractor to ask you for a performance bond. Now, that is usually a bond for 10% of the contract value, and it's there to To protect the contractor. If you fail to perform, and the contractor will carry out things like credit scores on your business and assess whether they need to ask you for one, particularly if your trade is a high proportion of a job or if you're particularly critical to the build.
Jacob Austin 00:14:57 Don't be surprised if they do that. This will require you to get a surety company that could be by your bank or an insurance broker to issue a bond, and often you and maybe other directors will have to sign indemnities, which mean that essentially if you default and the bond pays out, then the surety will come and collect the money from you. So the bond is there to avoid you having to tie up that amount of cash in a particular account to be drawn down upon. But don't assume that your giving a bond means you don't have to stump up the money if you fail. The bond cost is usually a percentage of the contract value, and that's highly dependent on the stability of our business. If you've got high cash reserves, then you might be seen as a relatively safe prospect and the bond might be cheap. If you've got low cash reserves, and also if you've got a low credit score, then you can expect it to be more expensive. Make sure you include the cost of the bond in your bid if you need to provide it.
Jacob Austin 00:16:02 Now, those are some of the headline issues that you'll want to look at from your subcontract. But nothing is going to beat reading the whole document yourself. That will likely require you to refer to two documents at the same time, one being the standard form of contract that you're entering into and the other being any amendment that the contractor has made to that standard form. Changing the wording as per the list of amendments, is what gives you the understanding of what you're signing up to. Now, some other considerations outside of the contract itself. Construction. Design Management regulations. CDM. Bigger projects will almost definitely enforce CDM duties. As a contractor or a subcontractor. You must plan, manage and monitor your own safety whilst you're completing work and coordinate with the principal contractors policies. This will involve you submitting risk and method statements for your work to the contractor to review, and also evidence that you've got workers with the right training, the right CSCS cards, even your company's safety policy. Some of these might be required in advance if you are receiving a tender, and often contractors these days are subletting the review of those requirements to various accreditation houses, such as Cha's construction line and thousands of others.
Jacob Austin 00:17:29 They might not let you price works if you haven't got one of those accreditations. Worse than that, they might let you price the work at inquiry stage. But when it comes to placing the order, they'll want you to start but won't pay you until that accreditation is in place. That is one to watch out for because it can really hurt your cash flow at the start of a job when you most need it, so be on your toes on that one. Now, if you've never had formal safety policies or method statements, now is the time to develop them. And there are consultants and templates that can help if needed. The principal contractor has to manage you amongst all of the other trades that they appoint on the site, and that is likely going to include coordination meetings to discuss program and to discuss safety. These aren't just nice to haves because these meetings can have implications on your program, your ability to complete the work and can inform the method and the access and other factors that may impact how long it takes and of course, how much it costs.
Jacob Austin 00:18:34 So my advice to you on these is to attend them, make notes, take records, feed in your safety concerns. Demonstrating good safety and coordination will mark you as a reliable partner for the contractor on future work, particularly if you underpin that by delivering. Next, I would encourage you to be mindful of regulations relevant to your trade. That might mean British standards like we mentioned earlier, under specification it might mean building regulations. If the law changes and it impacts your finished work, you need to comply with the law, but you can likely also recover that from the contractor. What you can't do is leave something behind you that's illegal because of change of legislation. The fact that you didn't know is not an excuse in the eyes of the law. The contractor also will have their own quality management standards, and they will need you to comply with them so that they can demonstrate compliance under ISO 9001. And that's their way of saying audit proof and compliant with employers requirements. That might mean that you procure certain materials from certain approved suppliers, or that you conduct testing in a particular fashion, providing quality assurance documents on completion.
Jacob Austin 00:19:51 That might be as simple as providing concrete test cubes. If that applies to you at given intervals. But it might also mean more elaborate QA and QC checklists, inspection and test plans, or IPS for your work. Adopting a quality management mindset will help you a great deal. Having the right records, the right tests, carried out as proactively and early as you can can save a lot of arguments later. If that means pressure testing all of your drainage install whilst it's still visible, think about how easy it is to do then versus when it's covered up by a floor slab. Doing it at the right time will save you money. One other thing that is a growing trend within the industry is sustainability and social value. CSR, corporate social responsibility, as many contractors are calling it, has become a big thing because large public sector clients and even some private sector clients are demanding it from them, and they're wanting to see things like responsible use of materials, waste management, recycling, carbon reduction and engagement with the local community about the project, as well as things like local employment and taking on apprentices from the local community.
Jacob Austin 00:21:09 Having done a lot of local authority work myself, this is something that local authorities can be really passionate about. They want to see they're spending their money on their community and in addition to the building that they're gifting to that community, they want the investment to flow out into the local supply chain. These can win you big brownie points when it comes to winning the work, but they're also something that you will be contractually obliged to deliver if you sign up to them. Luckily, most of these are quite straightforward to do and reasonably inexpensive, and it can help you win jobs. Just make sure that if you sign up to it, you can follow through. And with that message, I'm going to call time on today's episode within my Growing Your Business mini series. As I said at the outset of today's episode, many of the topics that I've discussed there I've covered in a lot more detail in earlier episodes. So something does pique your interest and you want to learn more about it, then do have a look through the back catalog of the subcontractors blueprint, because I'm confident you'll find exactly what you're looking for there.
Jacob Austin 00:22:14 You can also reach out to me on any of your favourite socials at @QS.Zone, or find me at the website www.QS.zone. If you have any further questions, there's a huge market of main contractors and clients looking for new competitive Positive suppliers. In an industry where tradespeople are becoming more and more in demand. And I hope that over this mini series, you'll feel that you're more competent and capable to grow your business to new levels and take on bigger work. My mission with the show is to help the million SME subcontractors working out there in their industry. So if you've taken some value away from today's episode, I'd love it if you'd share the show and pass that value on to somebody else who'd benefit from hearing it. And of course, subscribe yourself if you haven't already. And thanks for tuning in. As I mentioned before, if you want more information then please do find us at www.QS.Zone Or check us out on social media @QS.Zone again. And thanks for tuning in. I've been Jacob Austin and you've been awesome.
