When I managed construction contracting for fast track programs and we would make advance purchase of long lead-time items prior to the prime contract being bid or negotiated. In those agreements we would include two requirements. One would be that the supplier would agreed in advance that the contract could be assigned to the prime contractor that we selected and second that we would be a third party beneficiary to that contract once it was assigned. Then in our bid documents and contract we would identify the specific contracts that would be assigned and include the requirement that the prime contractor would assume those assigned contracts. Whether we sought a novation of those agreement would normally be dependent upon the value of those advance purchases and whether the supplier had concerns over payment by the prime contractor.
This approach allowed us to shorten the schedule for competing the work as the activity could be done in parallel rather than serially waiting for the design to be completed and bid. It also eliminated the potential of there being a problem where those advance suppliers and the prime contractor were pointing fingers at each other with our company being in the middle of the dispute. Once the contract was assign, the total responsibility for performance rested solely with the prime contractor. If there was a problem it needed to be worked out between the prime contractor and those suppliers. This also places the responsibility for coordinating all of the work on the prime contractor and it eliminates the potential for claims from either party that would occur if they remained our contractors. So while the prime contractor may charge additional cost to assume that responsibility, you avoid those claims.
The reason why we wanted to be a third party beneficiary to those advance contracts was because some of those advance contracts had obligations that extended beyond the period of the construction such as warranty obligations and we wanted to be able to directly enforce those directly with the suppliers.
In situations where there was not an assignment and novation, meaning we could still be liable to pay those suppliers if the contractor prime didn’t, we could protect against that risk by payment bonds, requiring a waiver and release of liens from those supplier as a condition for future payments or we could issue dual party payee checks that were written in the Prime Contractor and suppliers name so the supplier couldn’t cash it, they could only endorse it for the supplier to then endorse and deposit. The check couldn’t list both parties or use “or” as the prime contractor could potential deposit those. The “and” requires both signatures for deposit or cashing.
While this approach works well in construction there are clearly a number of other areas where it could be used as a tool to fast track work and not leave yourself with a problems where what you purchased isn’t working and you have both sides pointing fingers at each other as to the reason for it not working with you standing in the middle.
but wouldnt that be unfair for the prime contractor?
ReplyDeletei see that the supplier here has so much ground for arm twisting the prime contractors given that they are now the recommended / ristricted supplier.
The way it works is prior as part of the bid or negotiation you make it clear that there are contracts that will be assigned and you tell them what and with whom. Before the contract is signed a smart contractor will want to review those contracts. If there is something in the contracts that they do like or if the contract would leaver them with costs and risks that are not covered in the supplier contract being assigned the prime contractor has three basic options. They can walk away from the contract.
ReplyDeleteThey can price it accordingly. They can limit their liability for any costs or liability caused by the supplier to only that which they can recover from the supplier.
As to "arm twisting" I have two views. First, I can't think of many contracts where I allowed the supplier to twist my arm, which means the prime contractor is going to get the same rights I had when I assign the contract. Many times it's the prime contractor that does most of the twisting with their subcontractor to lower their risk or improve their profit. To the extent it eliminates that activity some people could consider it unfair. As an owner I like the fact that that doesn't happen in these situations as a feel the supplier has less of a need to cut corners to make up for what the prime took from them. Even when I didn't assign contracts I would always have a list of pre-approved subcontractors so the prime contractor wasn't out shopping the job to the world just to improve their profit.
ReplyDeleteThank you for the info. It sounds pretty user friendly. I guess I’ll pick one up for fun. thank u
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