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Tuesday November 3, 2009

Sub-contracting jobs

ARTICLES OF LAW By BHAG SINGH


There is nothing wrong with sub-contracting, but it must be for a legitimate purpose.

MUCH has been said in recent days about obtaining lucrative government contracts and passing them down the line. This leads to layers of people – contractors or sub-contractors – passing the job from one to another.

Along the line, each party is entitled to a certain percentage of the contract price, while leaving it to the one at the end of the line to perform the job. In doing so, each party gets to profit with minimum effort. Of course, its starts with the employer, the party awarding the work. This could be the Government or any other entity.

Some may say that this is working smart. However, the existence of many parties undoubtedly increases the costs. This may not happen if those passing on the contract choose not to make any profit, which is extremely unlikely.

But is this really sub-contracting? According to the Oxford Advanced Learner’s Dictionary, to sub-contract means “to pay a person or company to do some of the work that you have been given to do”. Thus basically it would appear that when the entire work is being passed on to another, it is no longer a sub-contract.

Assignment

When all the rights and obligations under a contract are transferred to another, it is intended in law to be an assignment. A person giving away rights in this manner is called an assignor. The recipient is referred to as the assignee.

If properly structured such as being absolute in writing and with the required notices given, all rights and obligations under the contract would be transferred from the assignor to the assignee.

However, this does not happen in many instances. This is because contractually at least, most contracts are likely to have a clause to prohibit an assignment or require consent of the employer to be obtained for it to be operative.

Otherwise the employer will be entitled to hold the party who entered into the contract entirely responsible. Hence such parties involved will have to make arrangements to seek indemnity from each other if things go wrong. Why then is there criticism of sub-contracting?

Recent media exposure has focused on the award of government contracts. However, such activities are not confined to the Government alone. Sub-contracts or assignments also occur in the business world in contracts awarded by companies and such other entities.

Of course, there is nothing wrong about sub-contracting if the objective is legitimate. Thus many contracts have express provisions for a specific part of the work to be sub-contracted. Appointment of such sub-contractors could either be by the employer or require the employer’s approval.

Such sub-contractors are referred to as nominated sub-contractors. Their appointment helps provide a specific expertise or skill to perform a specific part of the work. Whether such nominated sub-contractors are paid directly or by the main contractor would depend on the terms of engagement.

Improper purpose

Concern about sub-contracting arises when the purpose is not to carry out the work more efficiently. It may have the effect of only enabling the in-betweens to profit.

It has been said that in many cases, the intermediaries are well-connected businessmen whose main activities are limited to lobbying for large development projects, expensive maintenance contracts and getting special import permits.

What is relevant is whether the sub-contracted work is substantially over-priced or awarded on the basis of costs of material and labour as well as a reasonable profit margin for the person doing the work. Different implications arise whether it is one or the other.

One scenario is that the contract is substantially overpriced. In such a case, everyone along the line is likely to enjoy his share and the contractor actually doing the work will also make a reasonable profit.

However, if these are government contracts, then the loser is the country and its people. This is because what belongs to the country, whether it be derived from taxes or its resources, is paid out improperly.

Where the employer is a business entity, then the extra cost would have to be borne by somebody. If profits are reduced, then the shareholders are the victims. If, as a result, a higher price has to be paid for the goods or services, then the public pays for it.

Poor work

On the other hand, if the contract is not overpriced to accommodate the intermediaries, different consequences will result. The skimming of profits at earlier levels will result in the actual contractor being left with a small profit or no profit at all.

When this happens, such a contractor is likely to cut corners. This will invariably result in defects or other shortcomings. Take the example of an overhead bridge.

On account of the fact that corners have been cut, it may one day suddenly collapse. Those using it at that point of time may be severely injured or even exposed to death. When this happens, it is such people who end up paying the price.

And this will in turn create the need for repairs or rebuilding work to be done, involving costs which may not have been necessary in the first place. It will again go back to increasing the original cost of the work and a repeat of the earlier cycle.

It may be said that there are consultants who are entrusted with the responsibility of supervising the work. They should make sure that the work is done according to specifications. Why the problem still occurs could be the subject of a separate discussion.

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