As our economy strengthens and particularly those businesses in the trade sectors or servicing the mining sector are becoming increasingly busy, we are regularly having conversations with our commercial clients about their difficulty in obtaining good staff. One of the answers may be to look to fill staffing gaps by sub-contracting certain services. In this article, we explore some of the benefits and risks and ways to limit those risks associated with engaging sub-contractors to assist you to perform your services and win projects.
When to sub-contract?
Businesses often engage contractors to either supplement limited staffing capacity for large projects or when they are unable to engage permanent staff to complete large workloads or to fulfil specialist skill sectors that will allow for them to win larger projects and with their existing full-time staff, perform the majority of the work but use specialists to supplement and allow them to win significant project work.
How to go about it?
When engaging sub-contractors, the first rule is to ensure that you enter into a formal contract with them as to how their services will be engaged. It is important that if your subcontractor’s services are being provided to allow your company to provide services to a larger organisation, that their sub-contract agreement with you reflects the relevant rights and responsibilities that you undertake under the contract you have entered into with the head contractor.
Sub-contractors agreement clauses
A sub-contractors agreement should address the larger picture and objectives detailed above but should also have specific clauses that address, amongst other things, who will be held responsible for defects in the sub-contractors performance or other violations of your contractor’s agreement. The agreement should set out what occurs in those events and, if possible, provide indemnification and ways for you to ensure that you are not exposed for liability in that regard more than you have to. One of the significant risks you take on with a sub-contractor is that you will still be responsible to the party that your company is providing the services to but if your contract with your sub-contractor is drafted correctly, you will have recourse against them. As always, this recourse is only as good as your ability to enforce it and you should ensure that you, therefore, have personal guarantees from the directors if your sub-contractor is a company. You should ensure also the creditworthiness and asset and income position of your sub-contractor to ensure if they do default, you will be able to have recourse against them that is of value.
One of the other significant risks you take on by sub-contracting is that as your sub-contractor is not an employee, you cannot direct them in the same way as you can direct an employee. Sometimes, therefore, the manner, timing and method of the performance of their services may not be the same as you would expect of your staff. It is important that in your sub-contractors agreement, you clearly stipulate obligations in this regard that allow for you to manage the relationship.
Other matters that you should ensure are in the agreement, the requirement to complete part of the project by a specific date, the quality and standard of the work and maintaining the project design. You should also pass down certain rights to sub-contractors including being bound with some variations of the work that is needed.
You should also clearly stipulate whether your sub-contractor can sub-contract the work that they have been engaged for. In most circumstances, you would be reluctant to allow for this if the work that they are sub-contracting is of a relatively small scale. The larger the obligation and the larger the scope of work you are requiring, the more likely it would be that you should allow for them to sub-contract those services. You should appreciate, however, that that creates greater risk if they sub-contract those services further.
You should ensure that you do not treat them like employees because even though you have a sub-contractors agreement and you call them a sub-contractor, that is not definitive of the relationship. If you exercise control over such things as who else they can work for, what they wear to work, what hours they work, and how they perform the services to mention a few of the relevant factors, this could be indicative of more control and the more control, the more likely it is to be an employment relationship than a sub-contractor relationship. Generally, a sub-contractors arrangement should be for a specific project over a specific time to be delivered in a specific manner and you could then control those types of things. If it is a larger, ongoing relationship, this could also tend to reflect an employment relationship rather than a sub-contracting relationship.
You should also clearly stipulate in your sub-contractors agreement the licencing and insurance obligations of your sub-contractor. You should ensure that you see that they have the appropriate licence and insurance policies, you may even want to have your company mentioned as an interested party on the insurance policy.
You should also look at incorporating into your agreement restraint clauses that prevent them from directly contracting with your clients and/or poaching your staff for their business.
You should also ensure that there is appropriate provision for dealing with intellectual property and confidentiality concerns addressed by ensuring you own the materials and processes which are either created during the course of the job or information provided to them for them to provide their services.
It will also, in many contractor arrangements, be necessary to set out and provide, details of who is required to provide and maintain equipment for the works to be performed and the insuring of that equipment.
The types of reasons why a dispute may arise in a sub-contractors arrangement that are most prevalent are:
- There is a defect in the work;
- There is a delay in the performance of the work; and
- We often see disputes arising over whose terms and conditions apply.
We often find sub-contractors trying to provide to head contractors with their terms and conditions of engagement and the head contractor providing theirs to the sub-contractor and it not being clear when the project was entered into and which terms and conditions operate. To avoid this, you should ensure that if you are a head contractor, that your sub-contractor signs your terms and conditions of the sub-contractor arrangement or if you are a sub-contractor and you require specific terms, that they are either incorporated into the head contractor’s terms and conditions or your head contractor signs your sub-contractor agreement.
You may want to incorporate into your agreement a dispute resolution clause. This is a clause which can help resolve disputes in a more efficient and cost-effective manner than the parties going to court. It may either involve arbitration or experts or other methods to try and resolve the dispute without the necessity of drawn out and expensive court proceedings.
As businesses in Western Australia continue to find demand for their services and find difficulties in employing enough staff to complete those services, the engagement of appropriately skilled sub-contractors is often an effective way to resolve the issue. Also, sub-contractors can be very effectively used for specific skill sets that are required on one-off projects and are not always required by your company’s staff. In these circumstances, the use of sub-contractors can be highly effective.
To ensure that sub-contracting engagement works effectively for both the sub-contractor and the business, it is imperative that a clear and well-drafted contract be entered into by the parties before the arrangement commences. That will avoid complications and/or disputes arising during the performance of the contract.
If you require assistance to deal with interpretation of sub-contractor arrangements, drafting sub-contractor arrangements or dealing with a dispute arising out of contractual arrangements, please contact the commercial team at Lynn and Brown Lawyers.
This article has been authored by Steven Brown. Steven is a Perth lawyer and director, and has over 20 years’ experience in legal practice and practices in commercial law, dispute resolution and estate planning.