Tier 1 Works Contracts – the Good, the Bad and the Ugly

1. The Tier 1 contractors in Australia win all the mega projects from the governments. And that is to be expected because they are the only entities with the experience and balance sheet capable of undertaking such massive projects.
2. The problem is, the subcontractors then need to be engaged by the Tier 1s and the subbies are usually “term takers”. And the risk profile assumed by the Tier 1 upstream to the government is usually more advantageous than what the subbies assume to the Tier 1. That is, the Tier 1 will rarely accept any “risk gap”, because the Tier 1’s position downstream is covered by its position upstream. Of course, this usually won’t apply to metrics such as liquidated damages, where the Tier 1 is unlikely to have complete downstream coverage.
3. Enter the classic Tier 1 “works contract”. There is very little of the “Good” to report. More often it is the Bad and the Ugly, at least from a subcontractor’s perspective.
4. Most Tier 1 contractors will have a form of a works contract. Think CPB, John Holland, Downer, Bouygues, Lendlease etc. And often these contracts are pitched to the market as “take it or leave it”. And these contracts are bespoke to each organisation, so subcontractors either need to be familiar with each Tier 1’s standard form, or upskill on each occasion to understand the risk profile, usually at considerable time and expense. And not to mention that these contracts are often 50+ pages of operative provisions, usually in fine print, then with special conditions appended to the rear.
5. The careful reader will observe that these contracts will contain a host of time bar clauses, where entitlement to claim can (in some instances), be lost if time bars are not adhered to. But notice that there usually aren’t time obligations on the Tier 1. In a recent example we reviewed, there was no requirement for the Tier 1 to issue a payment certificate within the statutory timeframe required by the Building and Construction Industry Security of Payment Act 1999 (NSW). Although it is implied, it still presents difficulties when asserting breach.
6. Here is a sample of observations we have made in respect of Tier 1 contracts that any subcontractor should be aware of when negotiating these deals, in no particular order but all “Bad” and “Ugly”:
   1. Security – cashable at any time on the whim of the Tier 1’s project manager (no notice required);
   2. Design documents – subcontractor waives most rights for variations despite design changes;
   3. Coordination, cooperation and integration – broad requirements for the subcontractors to coordinate works with all and sundry working on a project (forgive us for thinking this is what the Tier 1 gets paid for as principal contractor);
   4. Novation – Principal can be swapped out at any time;
   5. EOTs – time relief events – very limited;
   6. EOTs – cost relief events – very limited or nil;
   7. Valuation mechanisms – favourable to the Tier 1 where the subcontractor causes the Tier 1 to incur a loss but conditional and restrictive where the Tier 1 causes the subcontractor to incur a loss;
   8. Tier 1’s default – very few defaults entitle the subcontractor’s suspension let alone termination;
   9. Tier 1’s termination without cause – very few remedies available to subcontractors;
   10. Claims (other than EOTs, Variations) – unfriendly positions;
   11. Dispute process – often at the election of the Tier 1, where Tier 1 can elect to proceed with expert determination, arbitration or litigation. And in some instances “pass through” provisions will apply, where a dispute under a works contract with a subcontractor becomes a “Linked Dispute” with the Tier 1’s client upstream. So the subcontractor can be embroiled in a much larger dispute process with the Tier 1’s ultimate client. And on a true mega project, where say a PPP arrangement is in place, a subcontractor can be pulled into a dispute with a Tier 1’s client, often the “special purpose vehicle”, and the ultimately client sitting above the SPV.
   12. Assumptions and exclusions – this concept does not exist;
   13. Reliance information – as above;
   14. Good faith obligations – sometimes expressly excluded from the contract entirely.
7. When we’re acting for a subcontractor negotiating with a Tier 1, undoubtedly there’s more work involved simply because of the already wildly onerous positions adopted by the Tier 1 in its standard form contract. If the Tier 1 had simply offered a reasonable market norm agreement, both parties would save a bunch of time and money on negotiating the deal.