What your average Contract Sum tells you about your risk profile

Uncategorized Jun 07, 2023

If you've ever wondered how the contract sum impacts your risk profile in the Australian construction industry, you're in the right place. As a construction adjudicator with real-world site experience and a background in building and law, I'm here to spill the beans on everything you need to know.

In this blog, we'll explore the fascinating world of subcontracting and how understanding your contract sum can help you navigate the choppy waters of the construction industry.

So grab a cup of coffee, sit back, and let's dive in!

  1. $5k to $30k: Fast in, fast out! When you're working on projects in this range, you need to be on your toes. The margin for error is minimal, and jobs often start later than expected. However, there's good news – you should be able to avoid retentions, which means you can get your hard-earned cash without unnecessary delays. Remember, in this game, speed and precision are your best friends.

  2. $30k to $75k: Now we're moving up a notch, my fellow subcontractors. In this range, the contract sum itself becomes the main risk factor. While retentions might not be a money grab concern, you need to consider the cost-effectiveness of pursuing payment if you're not paid promptly. It's all about finding that delicate balance between protecting your interests and maintaining a good relationship with the builder. Remember, your time is valuable, so choose your battles wisely.

  3. $75k to $150k and $150k to $500k: Buckle up, folks, because we're entering the danger zone. When your contract sums fall within these ranges, you'll likely start nesting small value retentions. Builders in this segment may try to pull a sneaky move known as cross contract set off. Translation: they'll deduct money from one project to cover their debts on another. It's essential to be aware of this tactic and understand the viability of debt recovery in such scenarios. While individual projects may not sink your business, you don't want to work for free either. Stay alert and protect your bottom line.

  4. $500k to $1M: Welcome to the big leagues! As your contract sums soar, so do the stakes. In this range, you'll be dealing with 2.5% retentions, which can amount to a substantial $12,500. It's time to level up your game and develop strategies to navigate these high-value projects. Remember, in this realm, reputations are at stake, and your ability to deliver on time and within budget is crucial. Embrace the challenge, and don't let those retentions weigh you down.

Now, let's explore some additional insights to help you better understand the subcontracting landscape.

  1. The Power of Commercial Leverage: As a subcontractor, understanding your contract sum gives you the upper hand in negotiations. Armed with this knowledge, you can protect your business and negotiate from a position of strength. Don't be afraid to assert your worth and use commercial leverage to secure favorable terms in subcontracts. Remember, knowledge is power.

  2. Be Wary of Scary Clauses: When you're operating in the $1m to $10M range, builders often expect you to accept all the scary clauses in their contracts. They assume you're a grown-up and can handle the consequences if things go south. However, don't be a pushover. Seek legal advice if necessary and ensure you fully understand the implications of these clauses. It's your business on the line, and you deserve to protect it.

  3. Unions and Big Ship Problems: Subcontractors working on projects exceeding $10M will likely encounter unions and face bigger challenges. While operating in a larger ship may make you feel secure, the peaks and lows of this level of business are magnified. Cross contract set off clauses can be particularly hazardous, potentially sinking your entire operation. Stay vigilant, anticipate issues, and navigate the complexities with caution.

Ultimately, subcontracting in the Australian construction industry is no walk in the park. But by understanding your contract sum and the associated risks, you can navigate the subcontracting bloodbath with confidence. Remember, knowledge is your best defence. Whether you're working on fast-paced projects or diving into multi-million dollar endeavours, the insights shared here will help you protect your business and negotiate from a position of strength.

It's time to take control of your future. No more blindly signing subcontracts. No more accepting unfavourable terms. Armed with the knowledge of your risk profile, leverage your commercial power and ensure you get paid for your hard work.

The construction industry may be challenging, but you're ready to conquer it, one project at a time.


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