PART ONE

In this three part article, Tony Farrow looks at some of the difficulties of being a sub-Contractor. Part One considers matters during the tender period. Part Two will review the post-tender / precontract period and Part Three the time on-site.

INTRODUCTION
In the 1980s, I worked for a leading mechanical and electrical engineering contractor, who undertook projects in the Building Services sector. I held two positions during that time. The first was primarily advisory:-
• pre-contract, it was vetting tender documents, negotiating contract terms, approving bonds and warranties;
• during project execution, I would assist when main contractors were being difficult, when payment was in issue or when we were alleged to be in delay;
• in the post completion stage, when there was a need to pursue a claim, or to defend allegations of bad workmanship.
• Later, when claims had become disputes, it was time to appoint solicitors and take more formal steps.

My other role was a line manager; I was in charge of tendering, supervising the company accounts and banking, office administration, purchasing and the quantity surveyors. Along with the local Director, I was responsible for ensuring we made a profit.

My point in highlighting the positions I held is that, so far as commercial and contractual problems are concerned, there are tremendous differences between an advisory role and a line role.

As an adviser, you tend to work on the basis of providing the best possible advice, perhaps like answering an exam question. I would write reams of comments on proposed contract documents and send them to the profit centre bidding the project. I would reformulate onerous terms, remove severe 'notice' clauses and blank out 'paid when paid' clauses. It was relatively straight forward.

However, in the line role, the task was to make profit and in order to make profit, we had to secure work. To secure work, you had to submit tenders, which meant competitive tenders. The consequence was that heavily qualified tenders, no matter how reasonable and sensible the qualification, could significantly influence your chances of your bid being taken seriously.

Hence, there was always a conflict between what the adviser recommended and what had to be done by line management in order to secure workload. This irreconcilable situation repeats itself throughout the project's life cycle, ie, what is contractually recommended in any circumstance is different from what is commercially achievable.

Legal Advice
Lawyers advising the company fell into two categories; those who provided 'text book' legal advice and those that offered legal advice but with an 'accent' on the 'real world'. Where there was an issue on a current project, say concerning the unreasonable actions by a main contractor, line managers were often let down by advice which, if followed, would result in a further deterioration in the developing situation. The advice was always legally correct, of course, but was practically inappropriate for the circumstances.

The best advice in these 'live' situations covered legal, commercial and project management aspects, ie it was good business advice. Hence, the lawyers we employed had to know our business. If they did, long term relationships developed.

Commercial and Contractual Problems
Turning to the problems regularly encountered by mechanical and electrical sub-contractors, I have identified these at the various stages of the project's life cycle:
• during the tender process
• contract negotiations
• prior to start-on-site
• whilst carrying out the works
• post completion

PROBLEMS DURING THE TENDER PROCESS
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The first problem is that there is never enough time to bid a project.
Even if there is enough time, the second problem in tendering is that you only win one in eight jobs. Consequently, you always have several bids going through the estimating department at one time and a degree of repetition develops. Drawings are measured, quantities are obtained and entered into a computer, which generates the estimate. It is all rather routine and relatively little attention is given to the particulars of any given project. I perhaps exaggerate a bit but this is an important point when claims develop in the future.

A great deal of the retrospective analysis can be carried out by lawyers, surveyors and consultants into the background of the contract and the underlying tender. Tender allowances are questioned, tender programmes asserted as identifying how long the project would take to complete the works and method statements identifying how the project was to be built deemed as something certain and absolute.

However, what the estimator is really saying to himself at the time of submitting his bid is that he believes the overall tender price to be sufficient to complete the works in the broadly indicated timescale. He would not be surprised if the actual boiler price was 10% over the tender allowance or pipework 5% under the allowance.

In fact, later on in the process, when the tender becomes a secured job and a project engineer is appointed by the sub-contractor, the very first thing the engineer does is revisit the estimate. He obtains re-quotes from suppliers and sub-contractors, and produces two lists:-
• estimate shortfalls
• buying savings

The estimate shortfalls are notified to management, because the engineer is saying "this job cannot be built for this price". The buying savings he keeps up his sleeve for a rainy day!

The point is that the engineer produces what he believes to be a more realistic estimate of what it will cost to carry out the secured contract.

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When tender documents are received, an estimator will be appointed to oversee the bid. His first task is to arrange volumes of photocopying of the tender documents. I would estimate that in the order of 100 supplier and subcontract quotes may be obtained for a £5million project. This is where repetition produces a lot of problems. Ductwork subcontractors, for example, may be given the mechanical drawings to take-off, or the ductwork bill of quantities, together with the ductwork specification. However, they may not receive the preliminaries section, the preambles to the BQ, the commissioning specification or the general requirements section of the specification. All these documents could have a bearing on cost and price, yet the sub-sub-contractor or supplier will not know of them.

This is usually sorted out by the project engineer later on, when on awarding the ductwork sub-subcontract, but items may be missed. Hence, in subsequent litigation between sub-contractor and sub-sub-contractor, it is important to compare each parties documents to establish any liability 'gaps'.

For a lawyer conducting discovery, a worthwhile enquiry is the existence of all the unsuccessful supplier and sub-contractor quotes, particularly if he is trying to establish tender insufficiency. The band of prices can be substantial, and the mean price can be 25% higher than the accepted lowest!

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The tender documents themselves will contain errors, inconsistencies and anomalies - some glaring howlers at times! However, the work of the estimator is to prepare a tender within the short timescale, knowing he only has a limited chance of success. Hence, he does not always read the large print, let alone the small print! So, when you are looking at the contract documents 3 years down the road and thinking, "why on earth didn't the estimator clarify this tender rubbish" - you are giving him too much credit - he is unlikely to have read it! I exaggerate, of course, but these circumstances do prevail and are perhaps one of the main causes of the contractual disputes arising in the months and years ahead.

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In my experience, the single greatest cause of mechanical and electrical disputes arises from the poor management of M&E design and design coordination. In M&E work, it is usual for the M&E subcontractor to carry out a varying amount of design work. This ranges from a substantial requirement based on a consultant's performance specification, to straight forward shop drawings, where the consultant has located all plant, pipes and ductwork, and the subcontractor is only required to carry out minor working details and bracketry.

The problems are twofold:-
• The role between consultant and sub-contractor is frequently ill-defined. Employers squeeze the consultants' fees and consultants perhaps try and get more design work carried out by the sub-contractor. The consequence is that when the sub-contractor starts his detailed design work, he believes he is completing a well developed design and assumes too much. For example, he may produce layout drawings following the routes indicated on the consultant's drawing, but these have yet to be coordinated with the architectural layouts or structure. Hence, when the 3 sets of drawings are compared, clashes appear.
Major claims develop from these circumstances.
• A related problem occurs because there is 'break' in the M&E design process (see chart), whereas there is no break in the developing architectural process. By this, I mean that the architectural and structural scheme develops from Outline Proposals to Scheme Design to Detailed Design. However, the services consultant completes the Scheme Design and then awaits the appointment of a M&E sub-contractor, perhaps 6 months later. In the meantime, the architectural and structural designs have been advancing and when the sub-contractor completes the M&E design, the final routing solutions may affect building work already completed.

The foregoing problems usually manifest themselves when the subcontractor tries to complete the detailed design, or, more worrying, when he tries to install ductwork and pipework on site.
 
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Another problem at tender stage, is that sub-contractors are reluctant to draw too many points of clarification to the attention of main contractors or consultants, for fear of appearing overly commercial or difficult. One approach is to insert a sentence such as "should our tender be of interest, we have a number of points we would like to discuss with you". Then depending upon the keenness of the price and the main contractor's willingness to negotiate, a list of questions or points can be drawn up, on such issues as interpretation of the documents, programme requirements, terms and conditions etc. However, I have to say that if the line managers need the work, they will accept that there are problems with the documents and not raise too many questions and take the risk of there being no financial problems in the future.

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A rather unique feature about M&E work concerns the selection of equipment and its implications on design. Take an air conditioning system where air is sucked into a building and passed through Air Handling Units which can clean the air, dampen or dry it and then pass it over coils of pipework through which is flowing chilled water to cool the air. Every manufacturer of Air Handling Units will adopt different technology and designs; hence, their physical sizes will differ, as will pipework and ductwork configuration connecting into the units. What happens, therefore, is that the consultant produces his design based on the characteristics of a particular manufacturer. He will then specify performance criteria and ask tenders to make their own selection of equipment. Realistically, however, there is only one manufacturers equipment that exactly fits the bill (and that manufacturer will quote relatively high prices).

However, the tendering subcontractor will obtain the cheapest prices from alternative manufactures and the trick, or the risk, is to say your bid is compliant with the tender requirements but using alternative equipment. You then hope that you can convince the consultant that your proposed equipment is technically sound and will not involve him in further design work, because the original design does not quite suit the alternative equipment.

All sorts of problems arise from the selection of plant and the manner in which the construction industry organises itself.

In 1990,1 was involved in a project that required the refurbishment of a high quality office building. A new plant room was created on the roof of this tower block. Two large fans were installed and these, when operating, would supply conditioned air to the floors below via external ducting. The employer's consultant engineer had carried out his design selection based upon a certain fan manufacturer's catalogue and so he specified performance criteria based on those particular fans. He then nominated three manufacturers of large fans that he considered capable of manufacturing such fans, although the reality was that only one manufacturer produced a fan that exactly complied with the specification. The appointed main contractor sub-contracted the M&E works to an M&E sub-contractor, who placed an order with the fan manufacturer whose catalogues had been used by the employer's engineer.

The fans were installed in December 1990, and were put into operation but failed to deliver the expected volume and pressure of conditioned air. However, the employer needed the space and so the building was put into occupation. Unfortunately, the engineer refused to issue a taking-over certificate, giving the reason as the defective fans, ie engineer blames main contractor; the main contractor then blamed the M&E sub-contractor; the M&E subcontractor initially blamed the fan manufacturer, but the fan manufacturer blamed the design configuration of the plant room and said the fans would deliver the right pressure and volume of air if tested under British Standard 'Test Bed' conditions (ie the duties stated in the fan manufacturers catalogue were based on a BS 'Test Bed' situation). So the M&E subcontractor later blamed the engineer for making the dimensions of the plant room too small, but jhe engineer blamed the M&E subcontractor because it was he who had ultimately selected the location of the plant in the said plant room. The main contractor was then dragged in by the engineer's site agent discovering that the external ducts had been poorly installed by him and this had contributed to the reduction in performance of the fans ie, engineer blames the main contractor.

The employer reluctantly sat back and listened to the various organisations blaming each other. Perhaps the employer should have been advised to pay the fan manufacturer to put right the installation irrespective of responsibility. Notwithstanding that it may not have provided the right legal or contractual solution, it was a very pragmatic and practical method of dealing with the situation. I would say that where there is a complex organisational and contractual relationship between parties involved in a problem, steps such as dealing outside the contractual chain could well be the most sensible route to get things corrected.

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One final point on the tender process. It is likely that the subcontractor will have an internal adjudication policy ie, tenders over £1 million to be signed-off by a branch manager, tenders over £5 million to be approved by the managing director. Some potentially interesting information is prepared for these adjudications:-
• strategic appraisal programmes
• risk assessment report
• Bid document check lists
• Alternative bids

It is at this time in the adjudication meeting that the final commercial decisions are being taken by management and the bid marked up (unlikely!) or down (likely!!).