3 – Subcontractors in construction industry

Subcontractors
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The maximum portion of tasks in a construction project is carried out by subcontractors. Most of the leading contractors in the modern construction industry are keen to use subcontractors than direct labours for their works. It allows them to minimise indirect overheads costs such as rental for labour camps, transports, insurance charges etc.

Managing a small labour force will enable them to perform at any market condition without substantial loss. Apart from that, Main contractors do have a few more advantages of using subcontractors for project execution.

Some works may require specialised workmanship and experience. And main contractors will only use a specialised subcontractor when necessary. Usage of the specialised subcontractor will assure the quality of the work. 

Another key advantage is that the main contractor can reduce their risk by transforming some percentage of risks to subcontractors. But ethically Main contractor should not transfer the most significant risks to the subcontractor. Transferring significant risks can destroy subcontracting organisations. 

Subcontractors
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There are 3 kinds of subcontractors in the construction industry

Below are the 3 kinds of subcontractors in the construction industry

  • Nominated subcontractors
  • Domestic subcontractors
  • Named subcontractors

Domestic subcontractors

Subcontractors who directly appointed by main contractors are called as domestic subcontractors. An agreement will be formed between the main contractor and subcontractor at the appointing process. The domestic subcontractor will not have any contract or communications with the client. But all appointed domestic subcontractors have the responsibility to execute the works according to the client’s requirements and expected quality.

Most of the selected domestic subcontractors will be paid measure and pay basis. But on rare occasions, some specialised subcontractors will be paid lump sum basis. All payment terms will negotiate between the main contractor and domestic subcontractor, and the subcontractor gives any discount will be held by the main contractor (the main contractor is not liable to reduce discount provided by the subcontractor from the main contract)

Nominated subcontractor

Nominated subcontractors are appointed when the client wants to maintain the cost and quality of the works. Apart from that nominated subcontractors are used when full details are not designed and state at the tender stage. It allows the client to start the project with immediate effect until the design team finalises full details. So clients will be used provisional sum or prime cost sum at the tender stage (for works which are not available at the tendering stage).

Some clients desire to appoint nominated subcontractors based on the previous relationship between each other. 

Examples, 

  • Specialized, Costly items which have long lead time to procure and deliver such as Lifts, Escalators, Plants etc. 
  • When clients want to involve specialised subcontractor to design and deliver particular specialised works.
  • Based on the client’s preference for products. (for generators, AC systems etc.). 

Nomination process

The client or client’s representative will appoint nominated subcontractor after negotiation. The main contractor will not part at the pre-contract stage of selecting the nominated subcontractor. Client’s representative will send all details and tender documents to identified subcontractors who selected as the nominated subcontractor. After choosing a suitable subcontractor client’s representatives will ask the main contractor to sign a contract with the selected subcontractor.

Mostly payment will be made through the main contractor, but in most of the cases contract will allow the client to pay direct payments to the nominated subcontractor if the main contractor was failed to pay any due amount. Relationship with each other (client, main contractor and nominated subcontractor) can depend on the contract agreements formed between each other. But most of the time in the nomination process, the nominated subcontractor will have direct communication between the client and his representatives. And nominated subcontractor will provide direct warranty to the client for works carried out. Therefore contracts using to appoint nominated subcontractor can be varied and complicated.

Named subcontractors

Some forms of contracts are not allowing clients to appoint nominated subcontractors. In these kinds of situations, client’s are naming a suitable subcontractor to specialised works. The client will handle the selecting process of the named subcontractor, but the contract will be formed between the main contractor and selected subcontractor. Otherwise, the client can state a few suitable contractors (for carrying out specialised works) in the tender document. So the main contractor can negotiate and finalise without involving the client. 

This article is written based on the Quantity Surveyor’s Pocket Book.

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