Monday, September 12, 2011

What’s the most important part of subcontracts?

Like all of these very open questions, the view will always depend upon where you sit, what you do, and who you deal with.

If you are a prime contractor that assumes risks, costs and potential liabilities from their contract with the customer, the sum of their work and that of their subcontractors must be equal the commitment to the customer. If there are shortcomings in terms of the subcontractor’s scope versus the commitment to the customer, the prime needs to cover the cost of that additional work. If there are differences between what the prime has contractually committed to the customer versus what they contractually get from their subcontractors, the prime needs to cover the cost or liability. If Prime fails to meet their obligations to the customer and is subject to damages, the prime needs to recover any damages that were attributable to the subcontractors or pay those damages themselves. For a prime contractor the most important aspect of subcontracting is making sure that all those risks are managed. Scope of each of the subcontractor’s agreements is important but it only manages one of those risks. What's important in subcontracting is making sure that you flow down the necessary requirements and liabilities that make sense for the subcontractor to provide. Understand the areas where you don't have 100% coverage. Make sure the team negotiating the prime contract is aware of the uncovered risks and uses that in negotiating both the terms and price. Then have plans is place to manage against the potential uncovered risks. Companies get in trouble when they commit to more than what they can delivery and what their subcontracts can and will reasonably assume. To a prime contractor its also important that they be assured that all needs and expectation have been flowed down to all tiers and that they can have close relationships with their subcontractors and tiers. The simple fact is that the customer isn’t going to accept failure on the part of the supply chain as an excuse. Their contract with the prime and that’s who they look to for managing it to perform. Even if there is no fault at the prime, most prime contractors will do what it takes to solve the problem from a customer satisfaction perspective. They want repeat business from the customer and they want a strong reputation in the community.

A subcontractors view will be a combination view. As it ties to their subcontractors and lower tiers they will have the same view of what’s important as the prime. Their view with respect to their agreement with the prime contractor will be different. With the prime their most important part will be that the scope of their work is extremely clear and is something they can perform. They will look at obligations and terms that the prime is trying to flow down to them to make sure that:
1) They are applicable for the work they will perform.
2) They are reasonable for the scope they will perform and represent an appropriate risk for the benefits they will receive, and
3) They are risks that they know they can manage.
If the scope isn’t clear, its something that they question whether they can perform and the obligations and terms don’t work for any of the three items, then it best for them to let the prime know so the can manage the risk of not getting those flowed down.

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