Is more protection needed for sub-contractors against main contractors?

Subcontractors continue to find themselves in precarious positions, especially when negotiating contracts with main contractors. A "take it or leave it" attitude, coupled with difficult contractual clauses, can make the lives of subcontractors unnecessarily challenging. It therefore raises the question - should subcontractors be given more protection? All the evidence suggests that the answer is yes, in spite of massive strides being made by main contractors to improve the situation, writes John Ridgeway.

Subcontractors encounter numerous difficulties when working under main contractors. These challenges arise due to a power imbalance in the relationship, often leaving subcontractors with little room to negotiate terms. One of the most common grievances is the delay in payments. Main contractors often tie subcontractors' payments to their own receipt of funds from the client, a practice known as "pay-when-paid." This means subcontractors may wait months before receiving payment for completed work, leaving them to manage cash flow challenges and operational expenses.

Retention clauses are another sticking point. Main contractors frequently withhold a percentage of the payment as a safeguard for defective work. While this is standard practice, the withheld amount is often disproportionately large or held for unreasonably long periods, causing financial strain for subcontractors. Indemnity clauses that transfer risk from main contractors to subcontractors are another significant issue. These clauses often make subcontractors liable for risks or damages beyond their control, exposing them to financial and legal consequences.

In addition, ambiguous contractual terms regarding the scope of work can lead to disputes between subcontractors and main contractors. Subcontractors may find themselves forced to undertake additional tasks without adequate compensation, as main contractors interpret vague language to their advantage.

Even worse, termination-for-convenience clauses allow main contractors to end a subcontract at any time without justification. This creates uncertainty for subcontractors, as they risk losing their jobs and investments with little or no compensation.

Pay-when-paid clauses

As already mentioned, these clauses state that subcontractors will only be paid after the main contractor receives payment from the client. This effectively shifts the financial burden of non-payment from the main contractor to the subcontractor, who has no control over the client’s actions.

Then there are the no-damages-for-delay clauses which prevent subcontractors from claiming damages for project delays caused by the main contractor or other factors. Subcontractors are often forced to absorb the costs of labour and equipment idling during delays.

In addition, we frequently see indemnity clauses requiring subcontractors to assume liability for actions not within their control - such as accidents caused by other subcontractors or delays due to client design changes – which are common in these contracts.

Possibly the most onerous of all, are unrealistic penalty clauses. Subcontractors may face harsh penalties for delays, even when those delays are caused by factors beyond their control, such as supply chain disruptions or poor site management by the main contractor.

What needs to be done?

While considerable progress has been made with many main contractors willing to work more closely with sub-contractors, the construction industry must continue to address these challenges to create a more equitable relationship.

Governments and industry bodies should also be considering more legal reforms to protect subcontractors, such as banning pay-when-paid clauses. Some jurisdictions, like the United Kingdom, have already outlawed this to ensure subcontractors are paid on time. Laws mandating fixed payment timelines can also help reduce cash flow issues for subcontractors. For example, Australia’s Security of Payment laws require payments to be made within a specified period after an invoice is submitted.

Furthermore, industry-wide standards can create more balanced contracts. Standardised contracts, like those offered by the American Institute of Architects (AIA) or the Joint Contracts Tribunal (JCT) in the UK, are designed to be fair to all parties. There are also organisations like the Confederation of Construction Specialists which fight for fair contracts for their members

All this is needed because subcontractors often lack the bargaining power to negotiate fair terms. Trade associations and unions can advocate on their behalf, lobbying for better laws and providing resources to help subcontractors understand their rights.

Setting up escrow accounts can also ensure subcontractors are paid regardless of whether the main contractor receives payment from the client. This mechanism provides financial security and reduces dependence on the main contractor. In addition, quick and accessible dispute resolution mechanisms, such as adjudication or mediation, can help subcontractors address grievances without the need for prolonged litigation.

Different countries have already adopted various approaches to tackle these issues. The UK’s Construction Act (1996) offers some protections for subcontractors, ensuring they are entitled to payment regardless of whether the main contractor is paid. Subcontractors can also resolve disputes through adjudication, a faster and less expensive alternative to litigation.

Australia’s Security of Payment (SoP) legislation is one of the most comprehensive frameworks globally. It includes statutory payment timelines and adjudication so that disputes can be resolved more quickly.

In the U.S., subcontractor protections vary by state. Some states have enacted laws to restrict pay-when-paid clauses, which mandate prompt payment and establish lien rights, allowing subcontractors to claim unpaid dues by placing a lien on the property they worked on.

Canada’s provinces have also begun to introduce prompt payment laws. For example, Ontario’s Construction Act mandates payment within 28 days of an invoice. The EU’s Late Payment Directive (2011) also aims to protect all suppliers, including subcontractors, from late payments by imposing penalties on delinquent payers.

However, while we can see that some countries have introduced measures to protect subcontractors, much more needs to be done to ensure fairness. Legal reforms, standardised contracts and better dispute resolution mechanisms are essential to levelling the playing field. As the industry evolves, stakeholders must prioritise subcontractor protection to ensure the long-term sustainability and fairness of construction projects worldwide – a situation that is long overdue.