Jacob Austin 00:00:00 Hi all. Jacob Austin here from QS.Zone. And welcome to episode 124 of the Subcontractors Blueprint, the show where subcontractors will learn how to ensure profitability, improve cash flow and grow their business. Today's episode is continuing our mini series on the NEC4 Engineering and Construction subcontract, and we're rounding it off this week with clauses 70, 80 and 90 or 789, depending on how you want to look at it. We'll spend most of our time looking at termination, which is clause 90, because that is the most dangerous to you as a subcontractor. But we'll be covering title of materials and insurances as well. Understanding these clauses will help you to protect your materials and ensure you have the right insurance coverage, and head into termination scenarios with your eyes open. We'll keep it straight and critical. No sugar coating so you know exactly where you stand. So thanks for tuning in. And as ever, if you're new to the show, then stick around and subscribe for more user friendly advice on all things subcontracting. So we're going to start this week with clause 70 series, which covers title.
Jacob Austin 00:01:31 And no, it's not about job titles. It's ownership of materials in legal terms. Title means who legally owns plant and materials in our case on a construction project. And clause 70 defines when ownership of materials passes from you, the subcontractor, to the contractor, and then ultimately on to their client. This can be a big deal for risk and security of payment. So listen up because the neck for suite of contracts is really clear about title. As soon as a piece of plant or material that's intended for incorporation in the work is brought onto site into the working areas, then the title that you have passes to the contractor and the title that they have as the contractor passes to the client. So in plain English, once your materials are on site, they belong to the project, so you can't just drive off with them if things go awry. Legally, the contractor on behalf of the client now owns those materials. Clause 70.1 does also cover materials offsite, and it allows for situations where you might buy expensive materials.
Jacob Austin 00:02:41 You might fabricate them for the job and then not be able to use them right away. In that instance, by agreement with the contractor and the client, those materials can be paid for providing that they are clearly set aside, that they're carrying identification that ties them to the project and the contractor or the client must be able to inspect them essentially whenever they want. Again, in this situation, as soon as they're paid for. They become the property of the client so they can own them even before they delivered. There are some situations where some surplus materials might be delivered to the job or purchased, but again, if they've been delivered to the site, they are the property of the project of the client. So even if you think I've over ordered here, I've not used everything. And potentially if you haven't been paid for stock on site, then you might not have been paid for it at all. And this would feel really unfair in this situation. But you don't own that material because it's on site.
Jacob Austin 00:03:41 And if you were to take it back, you would have to get the contractor's permission to remove it from the project. So before you think about taking it to the next job, you need to get written permission from the contractor to take it away. Without that permission, you'd be taking somebody else's property, which is not a situation you want to be in. This also has an unexpected potential upside for you as a subcontractor, because once the title changes, the risk and the security surrounding that materials also changes. Once the contractor or the client owns the materials, they then carry the risk for theft or damage to those materials. But it also means that you can't use the materials as leverage if there's any kind of payment dispute, because you've handed over ownership. So all of that might feel unusual to you because other contracts like the JCT would only transfer title of materials, assuming you haven't been paid for them at the point that they become fully and finally incorporated into the work. So you need to be comfortable with the fact that once materials are delivered, you've given up the title.
Jacob Austin 00:04:50 So if the contractor, for example, has financial issues, those materials could be in limbo. You're not able to take them away legally, even if they haven't been paid for. One practical tip is to confirm in writing when materials are delivered to site, so that there's no doubt about when title is passed that can protect you if there's a dispute about them being paid for later. And another instance where the neck contract is admin heavy. Now let's move on and unpack clause 80 on insurances. This covers who is liable for what and who must ensure what against which risks for a subcontractor, especially an SME. This section is vital because it tells you what insurance you must carry and what risks the contractor and the client are taking on themselves. The next approach is pretty straightforward. Allocate the risks then whoever it's allocated to insures against it. Clause 80 and 81 define the liabilities that are held either by the client and the contractor, and then those by the subcontractor 80.1 lists events that our client and contractors liabilities, meaning that you aren't liable for them.
Jacob Austin 00:06:06 I'm not going to read them all out because it's boring, but these include things like occupation of the site by the construction project, negligence of the client and the contractor, and others that might come onto site under their banner. Faults in the design provided by either the client or the contractor, and some events that are typically known as force majeure under other contracts. Note they're not under NEC, but these are things like war, civil unrest, and discovery of radioactive material on site. Those are some big ticket risks that you can't control and quite rightly, the contractor or client insures against them. Clause 80.1 then says everything else is the subcontractors liability unless it's stated otherwise. So give clause 80.1 A quick read because everything else is on your plate. So if you damage the work by your negligence or you injure anyone due to your work, these are typically your risks. Also, any damage to your own plant and equipment is your problem. Then we have some insurance policies that must be in place in clause 83.
Jacob Austin 00:07:17 You're required to provide the insurances stated in that table, except where the contractor agrees to provide them in the subcontract data. So the practice here you need to read the subcontract data. This will say who provides for example the Or risks policy for the work. If it's marked that you provide it, then that's on you and what you'll find. There are things like loss or damage to the subcontract works, plant and materials, meaning that you need to ensure your own work. Minimum coverage the full replacement cost, including any materials which are gifted to you by the contractor. Then you have loss or damage to equipment. This refers to your own plant and equipment that we mentioned earlier. Of course, if you rent equipment that counts as yours under the contract, two, you have third party liability with a value associated with it. For example, it might say ÂŁ5 million per single occurrence and employer's liability insurance to cover your own workforce. This will be something that you're required to carry by law anyway. And typically there will be something like ÂŁ10 million.
Jacob Austin 00:08:22 You have to make sure you meet the legal requirement and any contract specific requirements. So that table between clause 83 and the subcontract data is your checklist of policies that you need to have in place. You then need to provide insurance certificates for acceptance before starting the work and at renewal. This is written into the contract. And so you're technically breaching contract. If you don't provide it, the contractor will want to see that your insurance is up to scratch with reputable insurance. And if you don't provide that proof, they can stop you from starting or something that might be worse is they insure on your behalf and then charge you for it. That will likely be more expensive than you doing it yourself. And of course you'll have a breach of contract on your hands as well. So get your insurance sorted. Submit the paperwork on time. It's easy to stay compliant and avoid unnecessary costs and issues. Of course, on the flip side of that, if the contract to our client is supposed to provide an insurance and they fail to do so, then you can step in as a subcontractor and ensure the risk.
Jacob Austin 00:09:30 You can then charge the contractor for it. It's a proactive measure to make sure that the project isn't left high and dry. It's extremely rare that that will ever come into fruition, but it's worth knowing about. You can ask for copy certificates to prove that the work is insured, and similarly, there will be breach of contract if the contractor hadn't done it themselves. Now, insurance might seem dry, but only one nasty claim can sink a multi-million pound hole, and you don't want that sat on your desk finding out the hard way that you're supposed to have a policy in place and you don't. It's another area you need to check before you sign the contract, because that's a very expensive area to run into later. Now let's move on to the big one. Termination. This is what nobody wants to happen, but you need to know how it works in case things go wrong. Termination means ending the subcontract before all work is completed, which means both parties are freed from any further obligations to complete the construction of the work.
Jacob Austin 00:10:35 The NEC contract has a typically NEC structured way to apply termination. There are specific reasons and then procedures to follow and payments are due calculated in accordance with pre-set rules. It's all laid out in a neat table in clause 90.2. Now I'm not going to go and read that out line by line, because again, it will be a particularly dull read. So I'll summarize what most of those reasons are because there are some patterns. Not every reason is available to every party. Some are reasons that the contractor can invoke to terminate the subcontractor, and some are subcontractor only reasons that they can use to terminate against the contractor. The first set is around insolvency, which are reasons 1 to 10. These are covering bankruptcy, insolvency and related events. There's nuances for solar traders appointment of receivers or structured arrangements with creditors. These are all covered by are 1 to 4 are 5 to 10 then covers companies and partnerships. And these are things like winding up orders provisional liquidators and similarly administration receivership and that same agreement with creditors.
Jacob Austin 00:11:51 Either party may terminate for reasons 1 to 10, and it's a symmetrical approach. So heaven forbid the main contractor goes insolvent, then you can terminate and walk away from them as you'd likely want to to limit your losses. The same will obviously apply in reverse. The contractor will terminate and they probably have to to protect the ongoing project. Next we have our 11 to our 15, which are reasons that the contractor can terminate the subcontractor due to their failures. These aren't a one strike in or out. The contractors first got to notify of your default and give you a three week chance to remedy it. If you don't fix things up in that time, then they can formally terminate. So you can consider this like receiving a suspended sentence. You're on real thin ice, and if you don't put your ideas up within the three weeks, you're in the slammer. Game over. The reasons behind these defaults are pretty big, substantially failing to comply with your obligations, not providing a required bond or a guarantee, substantially hindering the client or others from completing their elements of work, or substantially breaking a health and safety regulation.
Jacob Austin 00:13:04 I left one out, which is appointing a subcontractor for substantial work without the contractor's approval. Now, this is one that you could easily fall foul of, and I've seen many a subcontractor set up their management and then start subletting vast portions of the subcontract works to other people. If you do that, you have to ask for permission. You have to tell the contractor who you're going to use, and if they don't think they're a reputable enough company, then you've got to find somebody who they're happy to work with. If you don't, then that is grounds for termination. The next one is one that's very much on your side. 16 if the contractor hasn't paid an amount due within 13 weeks of its due date, then you may terminate. 13 weeks is about a quarter of the year. Three months, which is a hell of a long time not to be paid. This was lengthened from eight weeks under the neck three contract to that 13 week period, probably to discourage quick termination. But regardless, if you're not being paid for that period of time with no legitimate reason, you're entitled to pull the plug.
Jacob Austin 00:14:13 And in this instance, you don't even have to give a warning. That said, in practice you will be chasing for your money and you will be saying, we're nearing 13 weeks and I'm entitled to terminate then. And of course, if you follow the Construction Act by the book, 13 weeks will be well after you've already issued a suspension notice and withdrawn from site. We then have reason 17, which is frustration. Either party may terminate if the law or an event prevents you from performing the contract. This is where a legal impossibility prevents you from concluding the contract. So if some new law comes in that makes it illegal or impossible to carry out your work. Then this is like a no fault termination. Neither of you is to blame. But the contract can't continue. Then we have a trio of suspension reasons relating to scenarios where the work is stopped and it's not restarted. Depending on who is found to be at fault, determines who may terminate. So if you've defaulted, then the contractor can terminate and vice versa.
Jacob Austin 00:15:17 And then if there's any other reason, the fault of no party, for example, a funding freeze or something to do with planning permission, say, then either party may terminate in that circumstance. That mechanism is there to prevent indefinite suspension of the work. So after 14 weeks without an instruction to restart, termination can apply. We have the exceptional event, which is reason 21, which looks and sounds like exactly what it is. We have the good old corrupt act, which is where the contractor may terminate if the subcontractor does something corrupt. There is a caveat to corrupt acts, which is if it was completed by a subcontractor and you've taken action as soon as you found out. To put a stop to it, then in that situation, the contract gives allowances for you to do that. But otherwise, if you're involved in some kind of fraud or bribery related to the project as a serious reason for termination with a good cause. The final reason, 23, is that the contractor may terminate the subcontract if the contractor's own contract with the client is terminated themselves.
Jacob Austin 00:16:24 This makes sense. If the head contract is gone, they don't need the subcontract anymore. And there we have it. All of the possible reasons I told you it was exciting. The key point here is that the NBC four is explicit about what qualifies as a termination reason, and again, about who can terminate because of that reason. If a reason isn't listed, and unless there's an optional clause that allows it, which we will mention a bit, then you can't terminate without breaching your own contract. Similarly, the contractor can't terminate you for something that's not on that list either. That would be wrong for termination on their part, and there would be legal ramifications to that. Now, the caveat being that there is a secondary option, X11, which is a clause that basically allows the contract to terminate for any reason not listed. If that clause is in play, then the contract specifies the procedure, and usually you do get your fee on the remaining work, so you'd be compensated for the profit you would have made as if it were a no fault termination.
Jacob Austin 00:17:28 Now, as we alluded to before, there are termination procedures that follow each of those reasons. The contract doesn't just say.
Speaker 2 00:17:36 You're terminated, get out.
Jacob Austin 00:17:39 It sets out exactly what happens immediately after termination via four codes P1 to four. And they're set out in that famous termination table which allocates which procedure to follow. For which reason P1 can apply in any instance, and that is for the work to get completed so the contractor can take over the work and complete it either with a new subcontract or do it themselves. And they may use any plant or materials which they have the title of. Essentially anything on site or anything that they've paid for that's off site. This one, as I say, always applies. The contractor needs to finish the work somehow, and P1 basically legalizes that so they can use your materials to get the job done. Of course, you'll have to be paid for those materials, as we'll find out later. But P1 is telling you to step aside and the contractor will sort out finishing it.
Jacob Austin 00:18:32 Next we have P2. This usually applies where you are being terminated for some kind of default, and this involves you disappearing from the site and assigning any sub subcontracts to the contractor for them to have the benefit of to complete the work. It also includes things like hiring in special kit or supply contracts for materials for the site. They can ask that those are assigned to them so that they can continue the job. It doesn't usually apply if you're terminating the contract with your main contractor. The next similar but different process is P3, which allows the contractor to make use of your equipment. That's equipment that you own or that you have the title for to complete the works and then tell you to remove it when they don't need it anymore. So let's say you're a ground worker and you've left dumpers and excavators on site. They can commandeer that plant to keep using it to finish the work, and then you're supposed to promptly remove your equipment when they tell you they don't need it anymore. That's only applies in certain termination cases where the contractor is terminating you again for default scenarios.
Jacob Austin 00:19:41 And finally, we have the most straightforward of them all. Of course P4 demobilize and get the hell out of here. Remove all of your equipment and don't darken the doorstep ever again. This is essentially the default if you are terminating the subcontract, but it ensures that you clear the site in a timely fashion. Again, the termination table will tell you exactly which one applies to which scenario. The contract is black and white as it is everywhere else on these procedures, so there's no argument post termination about what should happen from your perspective. The main things to remember are to stop work immediately after termination. Don't linger and try and finish anything because you will probably not be paid for unauthorized post termination work. You safely remove your equipment or when you're told to, and hand over any bits of site and subcontract information that the contractor needs. This is a key part. Keep communication civil and documented well during this phase. I appreciate that. Emotions might run high in termination scenarios, but you are still obligated to carry out non construction obligations.
Jacob Austin 00:20:49 The contract terminates you completing the work. It doesn't terminate the rest of your obligations to be prudent. You want to have witnesses or records of what equipment and materials you remove. These are preferably photographic, written, signed and acknowledged by somebody authorized to do it. The key thing here is protecting your back and avoiding later allegations that maybe you took something that wasn't yours, or you didn't leave, something that you should have done. Next, we have everybody's favorite topic the money. Because the termination table not only less reasons and procedures, but also which amount due formulas apply. And you guessed it, these are labelled A1 to A4 and they each determine a different settlement calculation for final payment when the dust has settled. The crucial bit here is that depending on why the contract has been terminated and who's at fault, the subcontractor may be paid for lost work and other costs, Or they may be entitling the contractor to deduct costs and perhaps invoice them as a debt for costs to complete, depending on that all important reason.
Jacob Austin 00:22:00 So A1 applies to everything. And this says that you will be paid the basic amount of the work that you've completed. So that's work done plus materials plus retention regardless of reason. It's essentially what you're old for, for everything you've done up until the termination date is calculated as if it was a normal payment, plus a couple of other bits that you would have expected to have been paid by the end of the job. So if you've got the cost of demobilized plant, then those will be included in this calculation, for example, because you would expect to incur them and you would even need to incur them to get finished. Also included is any amounts retained, so any retention that's held back is now released. The idea behind this calculation is to calculate the true final cost so that neither party is ahead for completing whichever part of the job you've got up to next. A2 recognizes that there is a cost for you disappearing from the site, packing up, dismantling, transport, all of that good stuff and it reimburses you for that.
Jacob Austin 00:23:04 It pretty much is paid in the majority of terminations, but there are some scenarios where you weren't required to leave, let's say some kind of mutual termination where everybody just walks away. Then you might agree to leave certain bits behind. It's rare, but it could happen. A3 is probably the most important one to you, which is the cost to complete deduction. It's a negative number, a deduction equal to the forecast. Additional cost that the contract is going to fork out to complete the work. This only comes into play when you are terminated for a default. When the contractor then incurs expenses to get the work finished by somebody else, then these are effectively the damages for that breach. So simple example. If you were supposed to be paid another half ÂŁ1 million to finish off the job, but after kicking you off, the contractor then has to pay out 600,000 to another contractor to complete the work. Then that extra 100,000 can be deducted from your final payment. This can be forecasted at the time of termination, meaning at the time of making that final payment, the contractor isn't required to have incurred the cost yet.
Jacob Austin 00:24:17 It can be a reasonable forecast for what they're likely to incur. As I mentioned, A3 is only applied to the termination reasons that are essentially your fault. So if you've defaulted, you've gone insolvent. A3 will hit your payment. If it's a no fault termination or you've terminated the contractor. A3 doesn't appear in the table, so they don't get to recover additional completion costs. If it was out of everyone's hands or if it was their own issue. Now, if the contractor terminates you because you went insolvent is not a breach by choice, but A3 still applies because they will likely spend more money on somebody else finishing the work, and they're entitled not to be out of pocket for that additional spend. And now final item in the calculation quartet is A4, which is the fee for remaining work and without reading out the full clause. This is essentially saying where you terminate the contract or there's a no fault termination, then you're entitled to be paid the profit that you would have earned on the remainder of the job.
Jacob Austin 00:25:23 You obviously don't get paid for the completion of that work, but you do at least recover the fee, which is essentially your overhead and profit that you would have otherwise earned. Now rattle through that fairly quickly so that everybody isn't too suicidal by the end. But if you listen to that back with the termination table in hand, it should all make sense to you. There is one more thing to add, which is on the timing of the termination payment, and the contract says that the normal cycle now ends after the issue of a termination certificate. The next and only assessment is then the final assessment that's made in accordance with the contract with that table. It should be calculated within 14 weeks and then it's paid a further three weeks after that. So by 17 weeks you should be paid. Now that's of course with an unamended subcontract. If the contractor fails to make this assessment in time, then the contract allows you to submit your assessment and potentially escalate that to get paid it. So the news here is to not let them drag it out forever.
Jacob Austin 00:26:26 A common subcontractor complaint is I was terminated and it took me a year, 18 months to settle the final account. So the NEC for here is trying to prevent that by setting a strict deadline. That means create your own calculation and either table it for negotiation, or you've got the right to go to adjudication if you feel the need to. Now comes a major word of warning. Because termination is a risky, risky business, especially for subcontractors. So much so that a former commercial director of mine said under no uncertain terms, you are not to terminate any subcontract. And there might have been reference to some dead bodies or something as he said it. And that is because wrongful termination or termination that doesn't follow the procedure properly is a major breach of contract, and the legal ramifications for breach of contract can be vast. And I'm saying this to you because as the reticence of my commercial director points towards contractors who read the contract all the time get this wrong, and if you read the contract less than that, you're even more likely to get it wrong.
Jacob Austin 00:27:33 So if the process isn't followed properly, then this is effectively a breach. The consequence of that breach is that the calculation is different. You will get full compensation without a deduction, which is a very different calculation to the one that the contractor will inevitably put forward. So if you have even a hint that the process hasn't been followed properly, we're talking days overdue. We're talking muddy reasons. Then my advice here is to get some proper legal advice on it. I'm not suggesting you go all out and go to court, unless you've got very deep pockets to pay for the legal fees. But what I'm saying to you is don't just roll over. You can kick up a real fuss with the solicitor's letter and get your hands on your proper entitlement. This, of course, applies in reverse if you terminate wrongly yourself. So you need to be Uber cautious about termination. There are some other smaller risks. Delayed final payment and final reckoning on a termination is a common one, as I mentioned before. This is one that you need to actively monitor and force the issue.
Jacob Austin 00:28:36 You've also got the potential for a bond to be called. Termination for your default will almost certainly result in the contractor calling a performance bond if there is one, which will inevitably be another financial hit, because your bond provider will be coming after you for whatever they pay out, wrongful or not. Once you've been terminated for a default, the bondsman can't usually refuse the call. So avoiding giving cause for termination not just keeps you the job, but protects you financially from an angry bondsman. There's also smaller risk over loss of materials and equipment. If the termination is quick, remembering that materials on site need to be paid for or materials offsite now belong to the contractor, you don't want to get caught in an undue scuffle about that. This is where the documenting what has been delivered, what has been paid for really helps your case. And a final risk, of course not in the contract text itself, but a very real risk nonetheless is that termination can tarnish your reputation. What is quite a small industry? If you're terminated for default, then future work with the same contractor is very much at risk for future work with people that the contractor knows is also at risk.
Jacob Austin 00:29:52 So it's worth your while trying to resolve issues before they escalate. Be the issues that you're causing or issues that the contractor is causing. Either way, it might still be the right business decision, but you need to weigh it up very carefully and use it as a last resort. Because let's be real here. Termination is a situation where nobody truly wins. It's a salvage operation as a subcontractor, and your terminating your goal is likely to get out of there without a huge loss and without burning bridges that you can ill afford to. We'll help you some way towards doing that. Many subcontractors have been strong armed into accepting zero compensation after rough termination, simply because they don't know what they're entitled to. So I'm saying don't let that be you. You know about the reasons. Now you know about the procedures and you know about the payments. So use that knowledge if you're forced to. If you were to receive some snotty email saying, we're terminating your contract and you can respond with, all right, then we'll issue the termination certificate as per clause 90.1.
Jacob Austin 00:31:01 And noting that your reasoning appears to be reason are 11 and you haven't given a prior notice, which would make it wrongful, you'll have to pay me my remaining fee on top of any costs you're demonstrating. You know your stuff. That kind of response can change the conversation. It changes you from being a victim in the process to an informed participant. Ultimately, if termination does happen, take it as a route out. Exit gracefully, but exit with the determination to collect every penny that you're owed. And with that, I'm going to call it a day on today's episode, which also is the conclusion of our neck for mini series. Not saying that I'll never talk about NEC4 again because actually quite like the contract. As sad as that probably makes me, but we've heard enough about it for now. I do hope, though, that you feel better informed about the topics we've discussed today, and that you've taken something useful away from today's episode, and if you have, then I'd love it if you'd share the show and pass that value on somebody else who'd benefit from hearing it.
Jacob Austin 00:32:08 Because I really need your help to spread the word about contracts. And thanks for tuning in. If you like what you've heard and you want to learn more, then please do find us at www.QS.Zone for more information. Alternatively, you can find us on all your favourite socials again at @QS.Zone Thanks all! I've been Jacob Austin and you've been awesome!
