Sub-Contract and Sub-Contract Conditions

Conditions of Sub-Contracts
ERA Sub-contract Framework Management
Important aspects of the contract such as scope of work, care and diligence of work, approval of
work, performance and payment guarantee, taxes, insurance, permits and licenses, extra work, time
and completion, defaults and termination, guarantee of work, environmental and safety, way of
solving disputes and etc. has been undermined.
Option - 1: Using standard forms sub-contract: There are many different standard forms of sub-
contract which are recognized in the construction industry. These seek to provide an “off the shelf”
contract for the parties to use:
 The main advantage of using this method is:
o The main advantage of using this method is avoiding the need to draft the sub-
contract from scratch and hopefully saving time negotiating it. Standard forms can
also be useful if the same parties are involved on repeat projects:
 The main disadvantages are:
o They will not reflect projectspecific risks or unusual provisions in the main contract;
o They will usually be drafted to benefit one party more than the other. It is important to
remember that it will still be necessary to review the subcontract and it is possible
that amendments will be needed:
o Some obligations cannot be stepped down to the subcontract:
o The same standard form will not suit all subcontractors on all projects, and should be
reviewed regularly to ensure that changes in the law and lessons learned on previous
projects can be taken into account.
Option - 2: Incorporating the terms of the main contract by reference in to a framework contract:
This is commonly a short subcontract obliging the subcontractor to identify and comply with the
relevant terms of the main contract:
 Advantages of using this method are:
o There is no need to amend or redraft the subcontract if changes are made to the
main contract, as these changes will simply be incorporated by reference;
o Any issues caused by having to crossreference between the two documents will be
reduced or eliminated;
o This method also encourages the subcontractor to focus on and carry out a proper
review of the provisions of the actual main contract;
 The main disadvantages are;
o The risk that the subcontractor will not identify everything and creating ‘gaps’
between the main contract and subcontract (see above);
o Having to determine the contractual effect of main contract terms if these are not
clearly drafted – it is not always clear how certain terms would have been stepped
down to the subcontract;
o Some terms are only relevant to the main contract and should not be stepped down
to the subcontract. This could lead to ambiguities and disputes about whether or not
the subcontractor should or should not have done something;
o Certain clauses which are unique to the subcontract will still need to be drafted
Option - 3: Bespoke sub-contract: This is the most common approach, particularly on complex
projects. Each main contract clause will be reviewed to consider whether the obligations in that
clause should be stepped down to the subcontractor. Amendments and additional drafting will be
required to ensure that the clauses work correctly in the subcontract;

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 The main advantage of using this method is:

o It allows the parties to address any unique issues.
 The main disadvantages are:
o They will take longer to complete;
o Subcontract redrafts are generally necessary each time the main contract is
amended.
From the current adverse relation between the Contractors, Subcontractor, Employer and
Supervision consultant, the following contractual relationships has been emphasized in designing
subcontract contract agreement.
I. Back-to-Back Application
Back-to-Back application of the main contract to subcontract [Sub-contractor’s knowledge of the
main contract]:
 The subcontractor shall be deemed to have full knowledge of the main contract less details
of the main Contractor's price [subcontractors Right].
 The importance of the Subcontract being read together with the applicable Main Contract,
putting in mind that the main contract and subcontract are independent contract documents.
 The Subcontractor is required to "promptly" give notice of any ambiguity or discrepancy
which the Subcontractor discovers in reviewing the Subcontract and the Main Contract. The
Subcontract does not expressly deal with the consequences of a discrepancy if there is any.
 The Subcontractor will have no obligations in respect of Main Contract since; it is the main
contractor's obligation to comply with the main contract requirements.
II. Payment to Subcontractor under Subcontract
The payment terms of the subcontract includes "paywhenpaid" clauses. This “paywhen-paid”
provision applies both when the amounts are not certified by the Engineer under the Main Contract
and when they are not paid by the Employer. When the amounts are not certified, the Contractor is,
however, prevented from relying on this failure if it was due to his act or default. In addition, where
payment has not been made by the Employer, the Contractor takes the risk for Employer
insolvency, with the insolvency of the Employer not being a ground for the Contractor withholding
payment. With respect to the payment for works executed by the subcontractor, the following risks
were identified:
 Non-certification risk: This is related with the power of the Engineer under the main contract.
The Engineer is the one, under main contract, to certify payment to the Employer. This
certification process is conducted by the Engineer after the monthly statements [including the
subcontract works executed by the subcontractor] submitted to the Engineer by main contractor,
under the procedure established under main contract. In such case, the noncertification risk can
be happened, when the Engineer being late in certifying the main contractor's monthly statement
or when the Engineer is not certifying the monthly statement of the main contractor in whole or
in part. The reason for noncertification may or may not relate to the subcontractor. The risk,
however, is shared by the subcontractor in question.
 Non-payment risk by the Employer: This may arise from the side of the Employer. Any certified
payment has to be paid by the Employer to the main contractor under the main contract. The
Employer might be late in paying the certified amount or refuse to paying the certified amounts
in full or in part; due to disagreement with the Engineer's certification or inability to pay the
certified amounts by reason of its financial difficulty, insolvency, bankruptcy or bad faith. What
so ever is the reason for any late payment and/or inability to pay on part of the Employer may

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not have any connections with the subcontractor. However, the subcontractor shares such kind
of nonpayment risk under its subcontract.
 Non-payment risk from the main contractor: which may arise from the side of the main
contractor [even if paid by the Employer] under the subcontract. This may be the case, if a
dispute between the subcontractor and the main contractor arises, or if the main contractor
suffers financial difficulty, insolvency, bankruptcy, or is in bad faith. Having noted all the possible
risks, the subcontract conditions of contract have been prepared to cover the possible risks as
much as possible. For instance, as long as the subcontractor make to the Engineer that it has
not been paid in accordance the payment terms of the subcontract, the Engineer can make a
determination the main contractor is not in compliance with the subcontract and promptly advise
the Employer to effect the payment for the subcontractor after deducting from the main
contractor's certified amount as appropriate.
III. Interest [Payment due; Paying interest to Subcontractor]
The subcontractor is entitled to the payment of interest, where the Employer has failed to pay any
amount that the Engineer has certified or the main contractor has failed to pay any amount.
The Main contractor shall upon receiving a written notice of claim for interest from the
subcontractor, pay interest to the subcontractor at the rate payable by the Employer to the main
contractor under the main contract.
IV. Access to Site
The main contractor shall, from time to time, make available to the Subcontractors much of the Site
and such access Provision of quarry sites and borrow areas shall also be the obligation of the main
contractor. The Subcontractor shall permit the Contractor, the Engineer, and any other authorized
person to have reasonable access to the Site.
V. Sharing of materials on site and construction equipment, plant
The main contractor shall provide for the subcontractor the exclusive use of the main contractor's
equipment and/or other facilities including sharing of laboratory and Use of Temporary Works.
Provision of explosives and detonators for use of the subcontracting works is the obligation of the
main contractor.
The subcontractor shall indemnify the main contractor against any damages arising from the misuse
by the subcontractor, his agents, servants, or workmen, of the temporary works, equipment and
other facilities.
VI. Liquidated damage
The general conditions of the subcontract contain no clause on liquidated Damages, since the
financial consequences of a subcontractor's delay are often unpredictable. However, a general
breach of the subcontract provision on the general conditions of the subcontract is included under
the provision of subclause 4.4 "possible effects of subcontract's breaches of subcontract", which
deals with breaches by the subcontractor of the subcontract that cause damage to the main contract
under the main contract. If the subcontract commits any breaches of the subcontract, he shall
indemnify the contract against any damage.
VII. Termination and replacement
Termination of the subcontract could be because of failure of any of the parties or by termination of
the main contract as discussed in the conditions of subcontract. In any event of termination of the
subcontract, the contractor should inform the Engineers as well as the Employer in writing by stating
the ground for termination.
Termination of subcontractor's employment due to termination of the main contract

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The Subcontract contains quite standard provisions on termination with the Contractor having the
right to terminate whenever the Main Contract is terminated, but with the perhaps notsostandard
entitlement of the Subcontractor to both costs and loss of profit. It is the right of the main contractor
to terminate the subcontract by notice upon termination of the main contract.
Termination of subcontract due to the default of the subcontractor
The main contractor has a right to terminate the subcontractor on notice in relation to the time,
quality and other breaches or defaults of the subcontractor. Grounds for termination can be:
Bankruptcy or insolvency; Repudiation of the subcontract; Failure to commence or proceed with the
subcontract; Failure to commence or proceed with the subcontract; Failure to remove defective
materials or remedying defective works; Neglecting to comply with any of its obligations under the
subcontract; Removal of the site as per the request of the Engineer.
VIII. Dispute resolution/Settlement of dispute
If a dispute of any kind arises, the main contractor and the subcontractor are recommended
attempting amicable settlement before they submit their respective claims against the other, to
arbitration or other dispute settlement procedure. However, any dispute arising between the
contractor and the subcontractor and the agreed dispute settlement procedure shall not have any
impact or implication on execution or any other activities of the main contract. Accordingly, the
subcontract agreement should obey the rights and obligations of the main contract.
IX. Extension of time clause and its enforcement
The main contractor shall give extension of time (EOT) to the subcontractor due to:
 EOT under the main contract (not more than given under main contract to the main
contractor. It is main Contractor's obligation to notify such case to subcontractor.
 Instruction given by the main contractor even if Main Contractor may not be entitled for EOT
in relation to this instruction under the main Contract
 Breach of the subcontract by the main contractor
The subcontractor shall submit to the main contractor notice of circumstances and detailed
particulars to justify the EOT. Interim EOT may also be granted to the subcontractor in case of an
event has a continuing effect as stated in the subcontract conditions.
General Remarks as a Conclusion
 In principle, there is no privity of contract between the employer and subcontractor. But a
direct legal relationship may be created by way of the assignment of rights of the main
contractor, under the main contract, to the employer, as it is regulated as per the provision of
Article 1962 of the Civil Code - Assignment of Rights.
 Assignment is only possible for rights, but not for obligations
 The main contractor is only allowed to partly to subcontract up to a maximum of 40% of the
main contract amount, out of which the 20% of the contract sum is a mandatory requirement
for projects of ≥ ETB 500 million.
 The Subcontract is intended to be "back-to-back", with the Subcontractor generally under an
obligation to perform all duties and obligations of the Contractor under the Main Contract
 No liquidated damage clause in the General Conditions of Contract of the subcontract
document (since the financial consequences of the subcontractor’s delay are often
unpredictable and may depend on whether the subcontractor’s work is on the critical path of
the actual main contractor’s actual progress of work].
Annex -1: Performance based selection process [Prequalification process]

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A selection process which emphasis price (lowest bidder) can easily ignore competent
subcontractors in the selection process. A lower tender price does not equate to competency nor
does it guarantee good performance and therefore other factors should be taken into consideration.
Haksever et al, 1995, Kerfoot, 1994, Latham, 1994 and Oluwoyee et al (1996) recommended that
when the contractor is rating subcontractors, account should be made for the ability of the
subcontractor to meet the following criteria:
 Produce project schedule
 Produce quality work
 Employ skilled trade people
 Cultivate goodwill between parties
 Ability to allocate resource, and
 Safety and environmental management
QUALIFICATION SUBMISSION SHEET
FORM OF BID
APPENDIX TO BID

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The New FIDIC International Civil Engineering Subcontract

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Subcontracting [guidance note]

What is a Subcontractor and what is Subcontracting?
Subcontracting of contractual obligations is permitted under law. The exception is that
subcontracting is not generally permitted if the obligations that are subcontracted can only be
carried out by the person who is obliged to perform the obligations in the first place. It is also
generally the case that the main contractor will remain responsible to the employer for the
completion of the subcontract works. The general rule may not apply if the employer selects the
subcontractor and requires the main contractor to employ them; such a situation can alter the
contractual responsibility of the main contractor for any failure to perform on the part of the
subcontractor selected by the employer.
This chapter covers the following information concerning subcontracting:
 historical background
 key subcontractor bodies in the UK construction industry
 pros and cons of subcontracting
 types of subcontractors
 procurement and tendering overview
 post-tender changes
 key features of a subcontract
 providers of standard forms of subcontract
 amending standard forms of subcontract, and
 bespoke/in-house forms of subcontract.
Pros
The key reasons for subcontracting fall into project-related and business-related categories. Project
related reasons include:
 The main contractor does not have the necessary skills to carry out the works to be
subcontracted, such as specialist design and/or construction works.
 The main contractor requires additional resources for a particular project. Business-related
reasons include:
 The main contractor is able to respond to increases and decreases in workload without
substantially increasing or decreasing its own resources, such as labour and plant; this
provides them with additional flexibility.
 The main contractor might wish to transfer contractual risks and/or liabilities to
subcontractors, for example in relation to failure to complete work on time or defective work.
 The main contractor is better able to forecast and manage its cash flow, as money generally
flows down a contractual chain: the employer pays the main contractor and the main
contractor then pays the subcontractor.
 The main contractor can reduce the cost of training, research and development.
 Governments often seek to encourage enterprise and initiative, including by way of tax
incentives, so that there is a larger pool of self-employed potential subcontractors available.
Cons

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Although subcontracting is commonplace, it is not without potential drawbacks. This guidance note
does not describe such drawbacks in detail, but some examples are set out below:
 Subcontracting might restrain the development of skills and innovation. Where an industry
subcontracts a lot of work, a potential consequence is that specialists become the focal point
for training, research and development. However, where specialists in a particular trade sit at
a lower tier of the supply chain, they might lack the resources to provide the training,
research and development required to improve skill levels and innovation. Main contractors
might also decide that it is no longer business critical for them to develop skills and
innovation in certain specialist trades, to the disadvantage of the main contractors, the
specialists and the construction industry as a whole.
 Main contractors lose a degree of management and control over specialist work, which,
coupled with the potential reduction in skill level of the main contractor’s staff, may lead to a
reduction in quality.
 Main contractors might form the view that subcontracting is a key part of their risk
management strategy on the premise that if risks are passed down a contractual chain to
subcontractors, the risks have been adequately managed. However, a better view is that
passing risks to subcontractors is not a complete approach to risk management. At best,
subcontracting might reduce – but will not eliminate – the impact of a risk on the main
contractor if it occurs.
 Where risk is passed down the supply chain, it may go too far and become inappropriate
‘risk dumping’, for example where the risk is passed to a subcontractor who has no hope of
managing the risk. The potential for the risk to be improperly managed increases, and this
can give rise to collateral problems and costly disputes.
 Subcontracting can lead to the industry operating by way of one-off (or project-specific)
teams, which are disbanded at the end of the project with a consequent loss of learning,
experience and know-how.
Some of these potential drawbacks can be overcome or mitigated through vertical integration, which
involves a business operating at various stages of the project. In a construction setting, this can
involve the main contractor using its own resources to carry out several elements of construction
work, for example the substructure, superstructure frame, cladding and mechanical and electrical
services. Other work elements can be carried out by subcontractors the main contractor employs
regularly and with whom it has strong business relationships.
Types of Subcontractors
There are seven categories in the construction industry that are usually considered subcontractors
or akin to subcontractors:
 nominated subcontractor: is selected by the employer to carry out part of the main contract
works. Subject to certain conditions, the main contractor is required to enter into a
subcontract with the nominated subcontractor.
 named subcontractor: is named by the employer in the main contract, and is employed by
the main contractor to carry out part of the main contract works. Naming subcontractors
enables the employer to steer the main contractor’s choice of a subcontractor for particular
works. The way in which naming is dealt with in modern contracts varies;
Perhaps the most common instance where naming is used is where the main contract is JCT
IC 2016. In that case, the ‘Named Sub-Contractor’ may be named in one of two ways:
‘Procedure One’ and ‘Procedure Two’.
Key features of Procedure One include:
o The subcontractor is named at the tender stage, in the tender documents, and the
tenderer prices the subcontract works to be carried out by the named subcontractor.

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o The subcontractor is also named in the main contract.

o If the main contractor is unable to enter into a subcontract with the named
subcontractor, in accordance with the main contract and the particulars given in the
contract documents, it must inform the CA, specifying which of the particulars prevent
the execution of the subcontract. If the CA accepts the main contractor’s position, it
must issue an instruction that changes the particulars to remove the impediment to
execution, omit the work, or omit the work and substitute a provisional sum; such an
instruction is treated as a variation.
Key features of Procedure Two include:
o The subcontractor is named in an instruction concerning the expenditure of a
provisional sum for work identified in the main contract.
o The main contractor has 14 days in which to make a reasonable objection to the
named
o subcontractor identified in the instruction.
o If the main contractor is unable to enter into a subcontract with the named
subcontractor, the CA may issue another instruction concerning the expenditure of
the provisional sum.
If the named subcontractor’s employment is terminated as a result of their default,
insolvency or corrupt act, the CA may, by way of instructions, name another subcontractor,
require the main contractor to carry out the work or omit the work. The main contractor may
be entitled to an extension of time in such circumstances, but not loss and/or expense.
One of the purposes of the ‘Named Sub-Contractor’ provisions in JCT IC 2016 is to enable
the employer to procure a specialist’s design input. However, the main contractor is not
responsible for defects in the named subcontractor’s design (although the main contractor is
responsible for the named subcontractor’s quality in terms of materials and workmanship).
So that the employer has adequate contractual recourse against the named subcontractor
for defects in the named subcontractor’s design, the employer should obtain a warranty from
the named subcontractor. The JCT Intermediate Named Sub-Contractor/Employer
Agreement (ICSub/NAM/E) can be used for this purpose.
 domestic subcontractor: is selected and employed by the main contractor. Generally
speaking, a domestic subcontractor is any subcontractor other than a nominated
subcontractor. The employer will have an interest in the domestic subcontractors the main
contractor wishes to appoint. Therefore, the main contractor must usually obtain the
employer’s consent to subcontract part of the main contract works. The main contractor is
generally responsible for the proper performance of the domestic subcontractor.
 works contractor: is a contractor employed by a management contractor to carry out part of
the main contract works that is the subject of the management contract trade contractor: A
works contractor is not a subcontractor in the normal sense of the word. The management
contractor is contracted by the employer to manage the main contract works but does not
itself carry out construction work. The management contractor is responsible for the
administration of its contract with the works contractor, but the management contractor is
usually not liable for the consequences of any default by the works contractor. Therefore, the
employer will usually require adequate contractual recourse against the works contractor;
this is normally achieved by way of a collateral warranty provided by the works contractor in
favour of the employer.
The selection of works contractors is usually required to be agreed between the employer
and the management contractor, and confirmed in an instruction given under the
management contract.

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 trade contractor: is not a subcontractor in the normal sense of the word, but is contracted by
the employer to carry out part of the main contract works that is the subject of a construction
management contract.
The construction manager is contracted by the employer to manage the procurement of the
main contract works but does not itself carry out construction work. The essential function of
the construction manager is to provide a consultancy and management service without the
direct contractor role that a management contractor would have. The construction manager
is also responsible for the overall management of the site. The construction work is carried
out by trade contractors employed by the employer. The construction manager is not a party
to a trade contract. However, the construction manager will assist the employer with the
selection of trade contractors and the negotiation of trade contracts. The employer is obliged
to appoint trade contractors to carry out the main contract works, after giving due
consideration to any recommendations made by the construction manager. The construction
manager acts as the employer’s agent and as a certifier in administrating the trade contract
 labour-only subcontractor: A labour-only subcontractor carries out subcontract works, but
does not supply materials. The main contractor might decide that subcontracting on a
labour-only basis has commercial advantages. The extent and type of labour-only
subcontracting varies. However, it is not uncommon for the main contractor to subcontract
trades such as groundworks, brickwork and carpentry on a labour-only basis.
 design consultants as subcontractor: Where the main contractor is responsible for the design
of some or all of the main contract works, it may decide to subcontract design work to design
consultants (such as architects and engineers). The industry often refers to such consultants
as sub-consultants.
The main contractor might employ its design consultants through appointments entered into
directly between the main contractor and the consultant. However, in some cases the
employer will have appointed design consultants prior to appointing the main contractor and,
as part of the contractual matrix for the main contract, the employer might require that its
consultants’ appointments are novated to the main contractor. Once the consultant’s
appointment is novated from the employer to the main contractor, the consultant becomes in
effect a subcontractor to the main contractor.

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Comments
These comments are based on:
 FIDIC Subcontracts [1994, 2011]
 FIDIC Contracts [Red Book 1987-1992 Ed., 1999, 2017]
 PPPAA Directives
 JCB Contracts [ ]
 ERA Subcontracting Framework Management [2019]
 Subcontract agreements made between indigenous and foreign Contractors in the road
sector.
Basic Comment lists:
 Appendix to Bid
 General Conditions and Guidelines to provide project specific risk related Particular/Special
Conditions of Contract

Issues:
Employer’s insolvency [or any other reasons of the Employer] and Contractor obligations and rights
under the Law with respect to the Sub-contractor. Does the Contractor obliged to take the
Employer’s risk of insolvency?
What does it mean back-to-back relation of the main contract and the subcontract with regards to
payments, period of completion, defect liability period, taking over, …?

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