Subbies' Toolbox

A few years ago, we got a call from a labour only concreter that was terminated for convenience by his builder as soon as he topped out of the main structure.

That meant he did almost his entire contract works except the external pavements and some front stairs to the building.

The builder waited until they were holding the full 5% of retention and could use someone else for the piecework, then pulled the plug on his contract "for convenience".

It worked out very conveniently for the builder, who was able to keep his 5% of retention (about $150k on that job).

Termination for convenience clauses don't just sting when you have no certainty of work moving forward, they can ricochet in ways that can sink your business.

This particular fight was the straw that broke the camel's back, and the subbie's business went into liquidation a few months later.

All those "good bloke" CAs and PMs that played the relationship card to keep this subbie under control for 15 + years locked up his gear on their sites within 30 minutes of him telling them the liquidators were coming in.

Don't believe me?

Head to where you listen to podcasts and tune into Episode 8 of the Tricks of Your Trade Podcast. You can hear the full story in the subbie's own words.

When subcontractors sign a contract with a builder they're giving the builder an unlimited credit limit - and they don't even realise it. This is because builders' contracts don't give the subbie a right to decline a variation.

Yet 99.99% of those same contracts have termination for convenience clauses that mean the builder is never giving the subcontractor any contractual certainty at all. (I've only seen 2 subcontracts ever with no TFC clause)

To add insult to this, almost all of the contracts we read require the subbie to give back profit and overheads where the builder deletes work from the subbie's scope (negative variations).

So, the subbie prices the job competitively to "win the job" in the first place. This requires them to go in lean on margin, lean on overheads recovery.

Then when the builder deletes a chunk of work, not only can the subbie not recover overhead costs apportioned on a pro-rata basis over the remaining contract sum - they have to give back profit while they are sidelined and now need to go find other work to fill the gap.

The way current subcontracts are designed, it requires the subbie to be on commercial standby so the builder can turn on and off the tap, with zero consequence to the builder for offering the subbie no contractual certainty whatsoever.

Builders reading this will be thinking - yes but we have to sign up to this too.

Why, builders? Why do you sign up to these terms?

Builders and subcontractors have more in common with each other than they don't have in common. The commercial risk profile of a building company is more closely aligned than that between Builder and a Principal.

All around the world there are special laws ONLY applicable to construction contracts, to help the parties that do the work on site get paid for it.

No other industry has laws like these.

Doesn't that say something?

I’m not proud of this, but 3 times I sent subcontractors broke when I was a builder’s CA. Two because of underpricing. I knew they were below cost, but I signed them up and when they went broke, we kept their retentions.

The third really sad.

We were building townhouses in a regional town, and I really liked our concreter. We had used them on many projects, they were a husband-and-wife business, and my favourite to use.

Payments wise I gave them two claims per month, paid within 14 days.

Every fortnight, the wife would come in, I would witness her stat dec (I was a Justice of the Peace) and fax their claim to head office so they made the pay run.

I was doing everything I could to get them paid. Except one thing.

I was not properly assessing the progress of the work against the contract sum each fortnight.

They had finished all the townhouse slabs but still had all the driveways to complete. As soon as I realised, I said to the wife:

“I can’t pay any more until you finish the project. We’ve already paid 95% of the contract sum, and you haven't started driveways.”

She was shocked — and I was confused. How could she not know they were almost at the full contract sum?

The next day we sat down with the husband and he asked her, “How were you calculating the claims?”

She said, “I was adding up the wages for the fortnight, then putting a bit in for us.”

He looked at us and said, “I'm so sorry, we can't finish. We don’t have the cash flow to pay our guys.”

He was devastated. We were devastated.

Three people learned brutal lessons that day:

1. The subbie learned that no matter how good the relationship or payment terms are, you can still go broke if you are not tracking job costings. If he had tracked the costs as he went, he would have known he was in the red.

2. My commercial manager learned that cost reports may show movements up and down, but you still need scrutiny of payments against the contract sum and work completed. Asleep at the wheel.

3. Me — the people pleaser, the subbie hugger, the snotty-nosed green CA. I learned that relationships do not replace systems, and nobody thanked me for being the best-paying CA.

Not only did the subbie go broke — he got divorced. 🥹