Wednesday, January 11, 2012

Owner Specified Suppliers or Subcontractors

The first time I ran into the term “nominated subcontractors” was in managing a construction contract in England. Under the UK system if there was a supplier or subcontractor that the owner required be used in the performance of the work, those suppliers were treated differently under the contract between the contractor and the owner. The contractor would be excused of certain liabilities or responsibilities if there were problems caused by the nominated subcontractor.
The rationale for contractually treating nominated subcontractors differently was easy. First the subcontractor was not selected by the contractors on their own. Second because the nominated supplier or subcontractor was favored by the owner, the contractor may not have been able to negotiate the applicable terms they would need to transfer risks and costs to the nominated sub-contractor that the contractor had to assume in their agreement with the owner..

In a number of other types of contracting that occurs today there are similar situations to nominated subcontractors that exist.A customer may demand a specific software supplier as part of a solution that the prime contractor has been hired to provide. In those situations the subcontracts manager for the prime contractor needs to manage those in the same manner.They need to flow down all of the applicable terms of the prime agreement to those specified suppliers or subcontractors. They need to advise the deal team with any provisions that they are not able to flow down so exclusions in the prime contract can be included if the cause of a problem was the specified supplier or subcontractor. For any damages they could be liable for in the event of a performance problem or breach, they need to be assured that they could collect those from the preferred supplier and the preferred supplier has the assets and resources to stand behind to commitments. Otherwise they need to carve financial liability arising out of performance caused by the preferred supplier out of their potential responsibility..

The key is making sure that one of three things happens:
1. They have made the preferred supplier fully responsible of any problems they cause, or
2. They have carved responsibility for what they can’t get from the preferred supplier out of their responsibility to the customer, or
3. They have included a significant enough of a contingency in the price with the customer to assume the risks.

If the contractor can’t get any of those, they need to convince the customer to allow different suppliers or subcontractors for the work to proceed. If the customer in not willing to agree to that, they need to walk away from the deal. The easiest way to lose money is to be assuming risks and costs you can’t manage and not have appropriate contingencies built into the contract.

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