The new year seems to have taken off at a reasonable pace in the construction and engineering sectors, despite a definite shrinking of project availability.
In a shrinking market, margins become tighter simply because there are more companies (and people) who are looking for projects than those currently in projects, and therefore companies and people will be prepared to do a lot more for a lot less and take on more risk just to keep their head above water.
With that in mind, at what point does a company (SME) or independent contractor (IC) draw the line on accepting further risk?
Realistically, SMEs are going to be able to absorb more risk than ICs, presumably due to the dynamic size of the differing operations. However, by absorbing more risk, this means the SMEs will be exposed to more risk, and there is no guarantee that they are any better prepared to manage and mitigate the risk than an IC.
The vast majority of engineering and construction contracts are some rendition of Australian Standard form contract. I say some rendition of, because from the cut and paste plagiarised examples that come across my desk on a daily basis, it would seem that the only section of such contracts that remain unchanged and unviolated is the Standards Australian logo!
Let’s be clear about one simple but unbelievably important fact – an Australian Standard standard form contract is not a legal document, nor does it have any recognition in Australian legislation. It only becomes a legal document when executed by both parties. All it is really is a document that has been developed by a committee and is used by industry as a standard form contract.
This does not mean that the clauses in the standard form contract are balanced or fair. In fact, very few of the clauses in an AS standard form contract are balanced or fair. Furthermore, most AS standard form contracts are severely outdated and not aligned with current federal and state laws, as Standards Australia and SAI Global (distributor of AS) are quick to point out in their disclaimers.
So think for a moment about considering submitting to a contract that is quite possibly unfair, unjust and above all does not reflect current legislation. Ask yourself in whose interest does the strength of this contract best serve? I can assure you, it is not yours.
The Superior Courts in Australia are loath to interfere with the wording of contracts between parties, unless one such party alleges oppressive or unconscionable conduct relating to one or more clauses – and then the Court will only deem that particular clause unenforceable, not the whole contract. If you go ahead and blindly sign a standard form contract without negotiating a more balanced sharing of risk and responsibility, you may very well end up with no valid defence under law.
Contract risk is the single most vitiating factor for the high number of insolvencies in the construction and engineering industries in Australia, and of all the contract risks the risk of blindly accepting the contract remains the highest of them all.
As a contractor (IC or SME) your business is a commercial entity, and with any commercial enterprise there will be inherent risk. The difference between success and failure of your enterprise will be wholly and solely dependent on how you manage and mitigate your risk. Manage and mitigate, do not ignore and rely on luck.
Take a look at your operation, and specifically what work you will do under the project. If your work has no design element, do not sign a Design and Construct contract. If your work takes one week to complete then why accept a contract that requires a security payment from you which the main contractor will keep for a period of a minimum 12 months? If your work carries no defects warranty (and you would be quite surprised as to just how many processes fall into this category) then why accept a contract that requires you to warranty your service for 12 months?
Equally, do you have the capacity and capability to administer your contract once you’ve negotiated it? Do you have the knowledge and personnel to query each site instruction, apply for variations, and answer Non Compliance Reports and dispute back charges?
It all comes back to management and mitigation of risk.
As always, risk smartly, risk safely.