FAQ's Nominated Selected Subcontract Agreement

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Clause 14
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Question 1

Could you please elaborate on the reasons for the provision of guarantees rather than retention and how the quantum of the guarantees was determined?

Ref: N14.001

Answer

In addressing your query I would like to stand back and consider the security issue as a whole in relation to the Agreements. Firstly it must be appreciated that it is impractical for the employer to seek "absolute" security from the contractor and he in turn from the n/s subcontractors. This would result in the contractor and each n/s subcontractor providing a 100% guarantee of the contract value on a reducing basis over the period of the contract. This is obviously commercially impractical and unreasonable

The practical and reasonable route is therefore to seek financial cover at a level that will potentially (but not absolutely) “guarantee” the potential risk due to the failure of the defaulting party not meeting its obligations. Experience and financial practicality over many years have shown that security cover not exceeding 10.0% of the n/s contract sum is reasonable and affordable in almost all instances. It should be appreciated that the employer's and in turn the n/s subcontractor’s risk reduces as the project is built and therefore the security can likewise be reduced at definable points. This is addressed in the standard Variable Construction Guarantee

It is important to note that retention has a serious shortcoming in the application thereof as it provides the least cover at the commencement stage and its greatest cover when the work has been completed. Further it withholds much needed cashflow from the n/s subcontractors executing their work which, logically, increases the risk of default by the provider of the retention which seldom if ever covers the true loss suffered by the party holding the retention

 

Question 2

The n/s subcontractor wishes to secure certain materials that are in short supply and are potentially liable to a sharp increase in price. He has offered to provide a “Transfer of Ownership” for such materials off site. I can find no provision for such “transfer” in the Agreement. Can I increase the retention on such materials to say 20%? How would I show this in the payment certificate?

Ref: N14.002

Answer

There is no provision for a Transfer of Ownership form relating to materials off site in JBCC documents as such process is inherently "bad in law" as it gives the employer a false sense of security in regard to ownership. This, more often than not, does not legally pass to the employer no matter what forms are signed as there is no certainty the seller of the materials has "acquired" ownership as they, in turn, have not made payment in full to their supplier

JBCC therefore advocates the use of an Advanced Payment Guarantee [14.5] as retention has a severely negative impact on the contractor's cash flow and inadequately covers the risk being incurred by the employer