Oppressive terms and conditions in construction contracts throughout Australia are affecting the ability of subcontractors to operate profitably and maintain healthy levels of cash flow, a leading construction industry advisor says.
In a recent interview, John Lowry, managing director of workflow integration advisory and construction payment management outfit Lowry Consulting, says Australia is seeing a growing trend of risk aversion on the part of a number of parties including head contractors and the passing of undue proportions of project risk through to subcontractors through what are often unfair terms of contract.
“There is a proliferation of very damaging contract clauses in construction contracts,” Lowry told an audience at a recent presentation. “They damage businesses, people, families, the economy. They are unproductive and inhibit teamwork, innovation, technology adoption and employment.”
According to Lowry, such clauses are emerging in a number of areas.
One such area is delay costs, whereby delays within a project further up the chain force the subcontractor to either postpone the commencement of work or alternatively not be able to commence work but still be required to maintain a presence on site up until the job is ready to start. The subcontractor must then subsequently ramp up work in order to complete the job within the existing deadline. Whilst this requires the subcontractor in question to incur additional labour expenses for reasons beyond their control, Lowry says they are increasingly being denied opportunities under the contract to claim back these costs.
In another area, one recent contract required the subcontractor not only to warrant that documents provided to them by others were correct and accurate but also to take the most expensive option required to remedy the situation where there was an error or discrepancy. Furthermore, under the contract in question, the subcontractor was required to indemnify the contractor, the contractor’s employees and any consultants employed by the contractor with regard to the error in question. As a result, the subcontractor was required to verify detailed information which were prepared by another party over whom the subcontractor in question had no influence or control, to choose the most expensive remedial option where these documents were incorrect, and potentially to not be able to claim the cost of this back off another party.
In a final area, Lowry says some contracts enable the head contractor to terminate the agreement without reason but prohibit the subcontractor from suspending work for any reason, even where he or she has not been paid. Speaking in particular about the situation in Queensland, Lowry says some contractors use this situation to terminate the agreement the day the subcontractor finishes work. This phenomenon, he says, creates a situation where subcontractors are unable to use access security of payment processes as judges in Queensland have previously ruled that the termination of the agreement means that no future reference dates will arise in respect of which claims made under SOP processes can be based.
Lowry’s comments come amid growing levels of concern about the impact of unfair contracts within small business around Australia.
Last October, the federal government passed legislation to extend the provision of unfair contract terms to small business as well as consumers.
Lowry says the aforementioned practices are not only unfair but are also creating an adversarial environment and unnecessary barriers to project collaboration.
“The technology which is becoming available is pushing people into collaborative arrangements, so you really can find out precisely what’s going on from top to bottom of a job (at any given time),” he said. “And if you want to manage a job, that is exactly what you want to know.
“But of course because these contracts are risk averse, it’s the last thing they (head contractors) want to know. They don’t want to know what is happening. All they want to know is you are doing it or not doing it. And so they block themselves off and they all do it.
“So you’ve got this chain of contracts, and everyone is working in a little silo.”