If you are a developer operating as a management contractor whereby you procure packages with works contractors (i.e. groundworks, civils, roofing, cladding, M&E), you will likely be using the skills of an architect and structural engineer to develop your design brief and provide detailed design to these package contractors. This means you are free to detail the products and design that you prefer.
However, if you are a developer and your arrangements are to work with one main contractor on a design and build basis, you’ll need to consider how to specify the exact finishes you want, without retaining design liability. For example, if you provide an output specification, the main contractor is free to approach any suppliers that can meet this specification irrespective of your preferences in regards products or suppliers.
In developing your brief, you may have already spoken to specialist supply chain subcontractors to discuss certain finishes or products you prefer. Architects may also seek to understand specific fixing details when producing fully detailed design. Subcontractors, in response to providing this advice and design input, may request they are named in the ensuing contract documents or they are taken on by the developer directly and then imposed on the eventual contractor through a process called nomination.
In order to make an informed decision that suits your requirements, you need to understand how these specialists are included in the contract documents and the legal connotations of the method you select.
Nominated vs Named – what’s the difference?
Subcontracting enables main contractors to take on increasingly complex projects by procuring individual packages of works. This allows them to manage the risk of delivery by stepping down main contract conditions into their subcontracts, think delay damages or liability caps.
As projects increase in complexity, a contractor is unlikely to keep all of these trades in house. For example, the original Standard Method of Measurement (SMM) issued in 1922 contained just sixteen different trades, but in SMM7, the most recent version, before it was replaced by the RICS NRM, there were over three hundred trades.
When you are looking at supply chain procurement, there are three types of subcontractor:
- Domestic Subcontractors
- Nominated Subcontractors
- Named Subcontractors
A domestic subcontractor is one that is selected, procured, and awarded packages of work solely at the discretion of the contractor.
Nominated subcontractors are pre-selected by the client and then imposed on the contractor once in contract. Such arrangements are usually borne out of working together earlier in a projects development, such as the feasibility stage or outline design stage, where the specialist has provided input which has in turn allowed the client to drive their project forward to the build stage.
Equally, situations arise whereby a client or developer may have a backstop date they need the project to be complete by, and they realise the materials or equipment they need is on a longer lead-time that planned. Working to their current programme, they will not have a contractor procured in time that could place an order for the long lead items, therefore the client has to step in early and place the order themselves. As you are procuring the contractor, you require them to take on this supplier, in which case you state they are nominated in the contract documents.
In terms of pricing the works, the chosen method is typically via a prime cost sum, which allows the contractor to add an uplift for attendance i.e. to manage the nominated subcontractor through the completion of their works.
As a client, the benefits to programme and design are obvious, but there are significant downsides that can surface that could lead to complicated legal ramifications. These include performance issues leading to project delay, plus potential for insolvency of the nominated subcontractor and the consequential effect on the contractor’s programme, all of which could be levied at you as the client.
The contractor may be wary of the performance issues associate with nominated contractors, and fearing they will be held liable for a perceived third party supplier, they may reject their appointment or seek to be indemnified before they agree to take them on. In any case, most court rulings concur that such matters absolve contractors from responsibility in regards issues caused by nominated subcontractors.
It is likely that, for these reasons, since 2005 JCT has removed the option for nominated subcontractors to be included as standard when using their contract conditions. In fact, in the JCT 2005 suite of contracts the use of named subcontractors take the place of nomination, albeit named subcontractors has been in use in JCT contracts in some form since 1984.
However, there is still a desire for nomination in some quarters, therefore JCT brought into use the Named Specialist option into their JCT SBC from 2011. This allows the client to choose the subcontractor and terms, and the contractor has to take that subcontractor on, albeit they can make grounds for reasonable rejection.
The naming of subcontractors allows clients to influence the tender list but does not result in them taking on the liability of the subcontractor’s performance. In effect, the client lists a minimum of three subcontractors they have deemed as acceptable to carry out the works. In many cases, the client may already have a quotation agreed for the works with each subcontractor.
The client can include a provisional sum in the pricing documents against which the contractor adds their uplift for preliminaries, programme costs and other general attendance costs. Later, once the contractor has a firm quotation for the works, the provisional sum is removed and the final agreed quotation value takes its place.
In this type of arrangement, the contractor is deemed as able to choose which party they wish to contract with, and therefore the liability for the performance of that subcontractor now fully resides with the contractor. For all intents and purposes, this subcontractor is treated as a domestic subcontractor. The contractor is free to tender and renegotiate as they see fit, and they can decline to enter into contract with a named subcontractor as long as they reasonable grounds for doing so.
What is the benefit of each to a developer?
By using a nominated subcontractor, the developer will forge ongoing relationships with each supplier as opposed to approaching the supply chain on a project-by-project basis. This allows them to build trust, which reduces the level of risk priced into quotations and these savings are passed over to the client.
Notwithstanding the commercial benefits of ongoing nomination, the suppliers are more likely to prioritise the client in the case of high demand. They’re also more likely to support the client if an issue arises with a planning aspect and the client requires solutions that would allow them to obtain the requisite planning permission to allow a development to proceed.
Assistance in resolving early technical issues and value engineering down the scope to within the developments budget is provided by a nominated subcontractor, and in turn the subcontractor has preferential payment terms. In older versions of the JCT contracts e.g. JCT SBC 98, the client even had the ability to make direct payment to the nominated subcontractor in certain circumstances i.e. where additional payment made sense to accelerate the programme and avoid the ensuing delay costs levied by a main contractor in the event of a nominated subcontractor’s failure.
In terms of named subcontractors, the client is still able to influence the supply chain list, but this is not absolute like nomination. The client can include named subcontractors in an invitation to tender, but the contractor has a right to reject some of the names, although any challenge must be made before contract award.
The contractor can also add names to the tender list as they see fit, but this may be restricted dependent on individual contract conditions. The contractor carries out tendering for subcontract packages as they normally would, but if they intend to award to anyone who is not on the list, they must make a case to the Architect as to why, and such a case is not to be unreasonably withheld.
What is the drawback of each (to the developer)?
In terms of nomination, the risk imparted onto the client is fairly significant as they are liable for the nominated subcontractor’s performance. This is highlighted in JCT 98’s Standard Building Contract, Clause 25.4.7, which provides for an extension of time where the nominated subcontractor causes delays.
Notwithstanding the cost of delays to programme, the nominated subcontract may reject the main contractors working practices on site by being too dictatorial around working conditions, hours, handover between trades and what is required for overall completion. This can have a negative effect on a projects progress i.e. a main contractor needs to have tight control of their supply chain in order to drive programme, but if one supplier effectively works directly for the client it can strain relationships.
Despite existing relationships and input to date between a supplier and client, a contractor can still reject a nominated subcontractor on the basis they have concerns about their liquidity.
Equally, whilst all the input earlier on might be advantageous to a client, it can also be seen as a weakness by a contractor and exploited. For example, if a design is based upon a particular product or interface requirement, a contractor may, pre-award, request the client indemnify them against any design issues. This could be the case whereby a fitness for purpose warranty is required. The client could be faced with this reasonable challenge resulting in the project stalling and therefore might have to give into such demands.
In terms of named subcontractors, whilst contractors are permitted to make allowances for mark-ups, these may be disproportionate to the value of works. Equally, if the named subcontractors have previously provided a quotation, and this is included as a provisional sum, then contractors may list their own conditions, such as longer payment terms, stricter quality controls, more resources required to manage off site management, higher health and safety requirements, all of which are represented back in a higher quotation. Once all added together, plus the additional allowances, this can impact on a developer’s budget. Careful vetting of a named subcontractor’s quotation in the first instance is important, or making your own suitable risk provision in a development budget.
Do contractors have to work with nominated or named subcontractors?
Under older forms of JCT, the contractor has the right to reject the nominated subcontractor as long as the reason for rejection is reasonable. However, this notice must be served within seven days of receiving the documents from the client, with the default position being that if no rejection notice is received they must enter into contract with the nominated subcontractor.
However, this is not all plain sailing for the contractor, as the client can remove the objection and ensure the contractor complies with the nomination or they might remove the nominated subcontractor and replace them with another, starting the cycle again.
Despite the use of nomination being withdrawn from JCT 05 onwards, there is still a demand and the emergence of ‘specialists’ being selected by clients came into play via the JCT SBC from 2011 via an amendment introduced in 2013. This is a mix of both nomination and named contractors whereby named specialists are provided by the client, including what work they are to carry out, what clauses they require, and either directly included in the contract or via provisional sums included in the pricing documents.
The contractor can still make a case for a reasonable objection, which the client can seek to remove, provide an alternative or remove the work altogether i.e. similar to nomination. In making these alterations, the client becomes liable for loss and expense claims and extensions of time claims where applicable.
In terms of what constitutes ‘reasonable’, this must be backed up by a valid reason for doing so. In the case of named or nominated subcontractors, this could be poor safety records, financial issues, the sum provided by the client is not viable to deliver the scope, or the time allowed is not realistic. Any case made against the ground of being reasonable must be clearly evidenced or face the risk of being dismissed by the client.
Image credit: iStock.com/eoneren
About Dean Suttling
A member of the Royal Institution of Chartered Surveyors, Dean has twenty years of experience in commercial management and quantity surveying, undertaking roles for contractors, clients, and consultants.