Nominating the best project subcontractors

by Mukund Karnick

In his second article, Mukund Karnick, senior contracts advisor at Nakheel’s Palm Jebel Ali, broaches the topic of Nominated Subcontractors (NSC). The benefits of introducing Nominated Subcontractors (NSC) in tenders By introducing NSC in tenders, the client:

(a) can select the firm for nominating;

(b) is free to choose which company he wishes to use (and that decision does not have to be based on price);

(d) can make the NSC part of the contracting team by making it fully involved; and

(g) can avoid delay with proactive action in deciding price, design and selection of material.

According to FIDIC conditions, which are used widely in the UAE, the contractor shall not be under obligation to employ the NSC if he has reasonable objection against the company. The following, among others, are considered as reasonable causes for objecting.

Firstly, if the NSC, in the opinion of the contractor:

(a) does not seem to have sufficient competence, resources or financial strength;

(b) does not indemnify the contractor against negligence or misuse of goods by the NSC; or

(c) insists on signing the subcontract which does not specify that:

(i) the NSC undertakes to the contractor, such obligations as will enable it to discharge its obligations and liabilities under the main contract; or

(ii) the NSC indemnifies the contractor against and from all obligations or liabilities arising under or in connection with the main contract and from the consequences of any failure by the nominated subcontractor to perform these obligations or to fulfil these liabilities.

The possibility of the contractor not accepting the NSC because his previous experience with the company was not good can also not be ruled out.

The second scenario is where the NSC is not willing to accept the nomination and insists on signing a direct contract with the client, either for doubtful credibility of the contractor as paymaster, or the contractor imposing more onerous terms upon the NSC.

But the buck doesn’t stop there.

The following difficulties are likely to be faced, with the contractor:

(a) refusing to pay advance payment to the NSC even though he had received it from the client;

(b) refusing to release payment for the NSC on the grounds that the client has not paid him;

(c) refusing to carry out the builder’s works; and

(d) refusing to provide access, scaffolding, temporary works, etc., to facilitate the NSC work.

In all of these scenarios, it is the client who suffers because the project will be delayed and will cause a loss of income that was expected to be generated after the project was completed.

On the other hand, if there is a delay in the original nomination or in the nomination of a new subcontractor if the first one for some reason withdraws, the contractor may claim extra time and cost.

Moreover, temptation on the part of the client to select his ‘favoured’ subcontractors is also likely to play a part in compromising the quality of work.

Measures to mitigate the problems have to be considered even before contemplating making the particular item a subject of a nominated subcontract (NS). Some such measures are:

(1) Restrict NS works to only those likely to be procured at a substantially cheaper price than what the contractors can quote for.

(2) Specify in the BOQ of the PS items such as a reasonable percentage of mark-up for the builder’s work, attendance, coordination and profit over the PS.

The amount of such a mark-up should be extended to the total of the bill. Some clients let the tenderer suggest his own figure of the percentage mark-up in the ‘Appendix to Tender’ or the BOQ without extending the amount in the total.

This leads to erroneous evaluation of the tenders. The tenders where a high percentage mark-up is quoted can be seen as the lowest priced tender against the one with the lower percentage, only because the amounts have not been extended to the total);

3) Select a NSC who will cooperate with the contractor in executing and completing the project and not act as the high and mighty ‘chosen one’ answerable only to the client;

4) Refrain from resorting to favouritism or ‘other’ considerations in selecting the NSC;

5) Make it imperative for the NSC to sign its subcontract on the same conditions (except the price part) as are applicable to the main contract;

6) Make it imperative that the contractor gives advance payment to the NSC if the advance he has received from the client covers that particular PS item;

7) Emphasise that payments to the NSC shall be made by the contractor and not by the client unless it is established with substantiation that the contractor has failed to do so;

8) A further palliative for the client may be of obtaining a carefully drafted collateral warranty from the NSC.

CW