Mitigating the Risks Inherent in Subcontracting

Reprinted from 2017 Western Journal (published by Mechanical Contractors Associations of British Columbia, Alberta, Saskatchewan & Manitoba)

By Stephen Murdoch

It has long been the case in the construction industry that onerous contract clauses have been the norm. All too often, terms are slipped into contracts without involved parties fully understanding the risks involved. This can result in sub trades, like mechanical contractors, being burdened with unknown costs and all kinds of legal liability.

In 2011, a subcontract program was started by the Electrical Contractors Association of BC (ECABC) as an initiative to help educate electrical contractors when entering into subcontracts with general contractors.

The ECABC-Mechanical Contractors Association of BC (MCABC) Subcontract Committee’s mandate has been to collaboratively combine forces to create a useful tool for their members. This includes easy access to legal contract information and an easy understanding of onerous clauses. Members have had access to the program free of charge as part of their membership fees. The subcontract program benefits ECABC and MCABC members by helping mitigate the risks inherent in  subcontracting, saving time and unnecessary legal costs.

“Our Subcontract Program has identified risks that are faced by all trade contractors,” said Deborah Cahill, ECABC President. “Unless you are a lawyer, you will need help to identify those clauses that shift risk from the general contractor to you. These risks could weigh on the profitability of your projects and could ultimately put you out of business.”

In May 2016, the Mechanical Contractors Association of BC signed a Memorandum of Understanding to evaluate the merits of pursuing a relationship for equal partnership with ECABC on the Subcontract Program.

“The program was originally created to answer the concerns of electrical contractors; however, as we worked through onerous clauses with our lawyer, we realized our efforts would benefit all trades. We presented our work and goals to MCABC and they joined us to help develop the program to benefit their members as well” Cahill said. “The subcontract program will save contractors hundreds of hours in litigation and thousands of dollars in legal bills. It is an exclusive benefit to our members, and now MCABC can offer the same to their members.”

Vice President of Davidson Bros Mechanical Contractors Wayne Davidson believes it’s important that mechanical contractors protect themselves.

“As a collective group, we need to make a concerted effort to read all clauses line by line and ensure there is nothing onerous in the contract,” he said. “The contract is something you want to deal with up front and not wait until the job has begun. It’s in everyone’s best interest to draft a contract that is fair to all involved parties.”

The 33-year industry veteran feels that onerous clauses are impacting mechanical contractors in several ways. “It can range from not being paid in a timely manner to being subjected to unfair insurance clauses,” Davidson said. “Although these onerous clauses can appear unfair, it is up to the marketplace to dictate the distribution of risk. The best way to combat all of the negative outcomes is to get things in writing. If changes need to be made that are outside of the original scope, discussions need to be had,” Davidson said.

Davidson credits the MCABC for their efforts in helping mechanical contractors. “It all comes down to education,” he said. “It is the one real tool that can impact change. The subcontract program launched by the association is helping identify and explain onerous clauses. Mechanical contractors need the resources to ensure they are dealt with in a fair and equitable manner. I encourage MCABC members to reach out to the association to learn more about contracts and language revisions.”

The trend of general contractors downloading excessive risk to mechanical contractors appears to be ongoing. “Personally, I fully expect to see mechanical contractors face onerous clauses for many years to come,” Davidson said. “I encourage mechanical contractors to take every effort to protect themselves from potential risk. Speak with lawyers, talk to your insurance provider and fulfill your health and safety obligations. The steps you take today to protect you and your company will ensure your longevity.”

Like Davidson, Robert R. Lashin, P.Eng, President of Houle Electric, feels mechanical contractors are being treated unfairly.

“You can add mechanical contractors to the growing list of trade contractors that are being impacted financially,” he said. Major purchasers of construction are demanding cost certainty on their projects. Risks are being downloaded that cannot be managed by the prime contractor. Prime contractors, in turn, are mitigating these risks by passing these unreasonable contract conditions to their trade contractors. It has always been a fundamental principle of sound business practice to accept only those risks which you can reasonably manage. Accepting risks you cannot manage will eventually lead to financial losses that can be catastrophic.”

The industry veteran of 44 years credits industry associations for educating their membership base. “MCABC has partnered with ECABC to help their members to understand, mitigate and eliminate onerous clauses from contracts,” Lashin said. “Working together, we need to create strong communication channels to convey the importance of understanding onerous contractors. Industry-specific seminars are one tool that can help mechanical contractors so that they can negotiate fair contracts.

If mechanical contractors are to combat the trend of onerous clauses being downloaded to them, the industry needs to work together. “I don’t believe things are going to change for the better,” Lashin said. “If anything, I predict they will worsen. I encourage mechanical contractors to support the efforts of their industry associations. Only collectively can we reverse the trend of downloading unfair, onerous contract conditions from general contractors.” ■

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