The dangers of the preliminary subcontract • Legal Desk, October 2019
By Dan Leduc
Dan Leduc warns subcontractors to be wary of what they're signing up for.
By Dan Leduc
As part of the work I do for my clients, I get the opportunity to review a variety of contracts, along with other contractual documents. As a result, I believe I am aware of certain trends taking place.
One of these current trends is to arrange a design-build joint venture contract with a subcontractor (specifically, in my experience, a mechanical or electrical subcontractor) to undertake some ‘design assist’ efforts and, further, estimate the work to be performed.
Such a contract is often referred to as or titled a ‘preliminary subcontract.’ It will generally include many of the following clauses:
- The subcontractor will assist in the overall proposal/competition with the design-build joint venture.
- That assistance will include ‘design assist,’ a full-blown estimate and an execution plan for the work.
- The subcontractor agrees to work exclusively with the design-build joint venture.
- The design-build joint venture agrees to carry the subcontractor’s price as part of its overall proposal for the project competition.
- Should the design-build joint venture be awarded the project, the subcontractor shall negotiate a subcontract—failing which, the preliminary subcontract will come to an end.
- The ownership of any work product provided by the subcontractor, however, falls under the property of the design-build joint venture.
The danger of the subcontract thus manifests itself in the following sequence, for the subcontractor to (a) provide a competitive bid, (b) incur the cost of the estimate, which can be extensive, (c) assist with the design and then, upon the awarding of the contract to the design-build joint venture, (c) see that joint venture negotiate a price for the subcontract that squeezes the subcontractor to a point where it is no longer economically viable to accept the subcontract.
The preliminary subcontract then comes to an end.
The subcontractor has no leverage to negotiate, in that he/she has assigned ownership of his/her work product to the design-build joint venture. Effectively, the subcontractor has agreed to permit the joint venture to ‘shop’ the price (and work execution plan and design assist information), with no recourse allowed.
In other words, the subcontractor has waived the right to what would be proprietary intellectual property (IP) in preparing the bid and work execution plan, along with the other rights he/she would have in terms of tender and procurement law. And ultimately, the subcontractor can find out he/she has expended $50,000 to $120,000 on an estimate for an opportunity that eludes him/her—and for which he/she has no legal recourse.
There is nothing illegal about the preliminary subcontract. If you want to sign up for it, you are free to do so.
In the economic Darwinism that can be apparent in the construction industry, however, with such indicators as the inappropriate allocation risks in subcontracts, you should certainly be wary of what you are signing up for.