Price the terms you cannot change
Every clause that stays in the subcontract has a cost, paid in cash flow, in risk or in margin, so it belongs in your price. Put a figure on each one you could not get changed.
Updated: . By Jack Butler-Kettle, Construction Claims Consultant.
Why it matters
Terms are often treated as the lawyer's part of a subcontract and the price as the estimator's, and the two never meet. Yet a 60 day payment period ties up working capital every month. Retention held until the whole project completes costs a year or more of financing. Uncapped damages carry a risk your margin was never built to absorb. When the terms cannot be changed, the price is the only place left to deal with them.
How to do it
- Take the clauses you asked to change and could not, and the ones you chose not to raise.
- Put a financing cost on each payment and retention term: the sum held, for how long, at your cost of borrowing.
- Put a risk allowance on each liability term, from a realistic worst case on this programme and how likely it is.
- Keep the total as a line of its own in your price build-up, so it is not discounted away in negotiation.
Example
Illustrative example. The scenario and figures are invented.
The facts
A flooring subcontractor is about to sign a £270,000 subcontract. The main contractor will not shorten its 60 day payment period or release retention before the whole project completes. Nor will it lengthen a 5 day notice period for variations.
What happens
- The subcontractor works out the financing. Payment 30 days later than its quote assumed holds back about one month's value, £30,000, across the 9 month programme. At 9 per cent a year, that costs about £2,000.
- Retention of 3 per cent, £8,100, held for about 14 months after the flooring is finished, costs about £850.
- It sets a risk allowance of £2,500 for variations lost to the 5 day notice period.
- The £5,350 goes into the price build-up as a line of its own.
The cost of the terms
| Item | Amount |
|---|---|
| Later payment, financing | £2,000 |
| Retention held to project completion, financing | £850 |
| Risk allowance, variation notice period | £2,500 |
| Added to the price | £5,350 |
The outcome
The terms the main contractor would not change are paid for in the price. Otherwise they would have come out of a 6 per cent margin of £16,200, cutting it by about a third.
To have this set up for you, see our Pre-Signing Contract Review service.