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January 21, 2020

How to ensure that bid-winning supply chains actually get used

How to ensure that bid-winning supply chains actually get used

Key Points

  • Winning bidders do not always use the subcontractors proposed in their tenders
  • Clients can ensure this by getting subcontractors named in the supplier’s part of the scope
  • Alternatively they can add a simple clause for key subcontractors, similar to key people

As construction projects get more complex, specialist subcontractors are increasingly critical to successful outcomes. As such clients often consider the proposed supply chain when evaluating tenders, but how do they make sure those subcontractors will actually be used by the winning bidder?

In the NEC4 Engineering and Construction Contract (ECC) and NEC4 Professional Service Contract (PSC), the contractor’s or consultant’s fundamental obligation in clause 20.1 is to provide the works or service ‘in accordance with the Scope’ (or works information in NEC3 ECC).

If the client wishes to impose constraints, such as minimum levels of experience, on subcontractors (or subconsultants in NEC3 PSC) to be used, those constraints need to be included in the scope. In NEC4 ECC there is an optional second part of the scope called the ‘Scope provided by the Contractor for its design’. This can be requested by the client at tender stage and can be incorporated in the contract by a one line reference in contract data part two. There is a similar option in NEC4 PSC called ‘Scope provided by the Consultant’ (similarly in NEC3 ECC but not in NEC3 PSC).

In each contract, the winning supplier (contractor or consultant) must comply with the requirements and constraints in both scope documents. In both cases however, the scope from the client takes precedence over the scope provided by the supplier. This is due to the second bullet of clause 60.1(1), which says it will not be a compensation event if the project or service manager changes the supplier’s scope ‘to comply with the Scope provided by the Client.’

So how does a client make sure the supplier actually uses the subcontractors they have offered at tender stage? We set out two options: using the scope provided by the supplier, or using a simple option Z clause.

Using supplier part of scope

One option for making the winning bidder use its proposed supply chain is to include this requirement in the scope. However, it would not be appropriate in the client’s scope as this could be seen as forcing the supplier to use specific subcontractors – effectively nominating them, with the client taking the risk of having done so. Rather, clients can require suppliers to name their supply chain in their own part of the scope.

For NEC4 ECC, it is suggested clients use a Z clause to change the title of the supplier’s scope, deleting the words, ‘for its design’. The phrase is superfluous and unnecessarily limiting, although it does hint at its normal purpose. For a design and build contract, the client may require some outline design from the contractor, but there is no reason to limit the contractor’s scope to design − it could include any other promise.

Once the subcontractors are named in the supplier’s scope, the winning supplier will be required to use them during the contract. There is no specific clause in either NEC4 ECC or NEC4 PSC for the supplier to request a change to their part of the scope. However, the option to do so is implicit in the second bullet point in clause 60.1(1), which also states it will not be a compensation event if the project or service manager changes the supplier’s scope at the supplier’s request.

So, the supplier could request − verbally or in a general communication as there is no clause − the project or service manager to change its subcontractors. But the project or service manager is in control here and would not have to agree to a change. However, if using the named subcontractor became impossible, for example due to bankruptcy, then the supplier could notify this in clause 17.2 (clause 18.1 in NEC3 ECC and PSC), discuss an alternative and persuade the project or service manager to change the supplier’s scope to suit. This would not be a compensation event.

Using a ‘key subcontractor’ Z clause

An alternative approach is to use a simple Z clause for key subcontractors, based on the language used in clause 24.1 for key people named in contract data part two. For NEC4 ECC, the wording of this additional clause could be along the following lines.

‘The Contractor either uses each key Subcontractor named to do the work stated in the Contract Data or provides a replacement Subcontractor that has been accepted by the Project Manager.

The Contractor submits the name, relevant qualifications and experience of a proposed replacement Subcontractor to the Project Manager for acceptance. Reasons for not accepting the Subcontractor are that its relevant qualifications and experience are not as good as those of the Subcontractor that is to be replaced, or the proposed Subcontractor will not allow the Contractor to Provide the Works.’

Note that the last part of this suggested Z clause aligns with clause 26.2 on subcontracting. Adding such a clause would require a space in the contract data where the supplier would identify its proposed ‘key subcontractors’ for types of work entered by either the client or the supplier. Also, instructions to bidders should explain this and, normally, give the opportunity for the suppliers to state that some work would be performed directly rather than by a subcontractor.

While Z clauses should be avoided as far as possible, it is suggested that the proposed additional clause here is neater and clearer that the option of having subcontractors named in the supplier’s scope.

Written by Richard Patterson, Mott MacDonald and Barry Trebes, Trebes Consulting


POSTED BY NEC Contracts
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