How the contracting hierarchy in construction is designed to keep subcontractors under control

If construction contracts were designed with the sole focus on building better buildings, they’d look very different. 

Instead, most commercial construction contracts are designed to push liability to downstream parties - to keep them under control. Living in constant fear of non-payment, or business killing consequences, subcontractors have no choice but to tow the line so that they can earn their crust of bread after a hard day at the work face. 

In a big way, this practice came about because of the way insurance policies work, and how personal injury and other employee related claims are handled. Add to that the cost of idle labour on the payroll and you can see why builders subcontract instead of employing tradespeople these days. 

But give a builder an inch and they’ll take your retention, the bulk of your final claim and tattoo their name across your logo for your trouble.  

Such is the arrogance of the Big Shiny Builder, that over the generations the smell of blood in the water has led to builders sending subcontractors broke strategically – so that they can take their gear, never pay their retention and hire the subbie’s employees in the aftermath.  

Don’t believe me? Ask around and find out how many commercial builders have started their own subcontracting companies for various trades in the last five years.  

Now I’m not saying they’re all predatory, but in some instances, the aggressive tactics I've seen builders use to leverage eye watering discounts to final claims or cash in bank guarantees for a quick money grab makes you wonder why those builders don’t employ the same commercial creativity and assertiveness when they’re negotiating the head contract. 

Funnily enough - word on the street is, they don’t even try to negotiate better terms in the head contract. 

Why would they, when they can ‘back to back’ the business breaking terms and sacrifice the subbies if things go pear shaped? 

In fact, I would go so far as to say that the status quo in construction contracts today have all the hallmarks of coercive control we see defined in family law and domestic violence contexts.  

Tell me if you see the common themes I see: 

Previously, when I’ve voiced my opinion on this topic, the analogies I've pointed out about coercive control have been met with outrage and feigned insult that any parallel should be drawn between Family Law and construction contracts. 

But that “what-about-ery" narrative is intended to detract from the point without ventilating the actual issues at hand. And that’s what I intend to do. Ventilate the issues... 

Those precious offended are forgetting that when you helicopter view the flow of money in the contracting heirarchy, the subcontractors are the family businesses at the bottom of the food chain. They are the father and son, husband and wife small business operators leaned on by the industry to risk their lives to deliver the dirtiest of work.  

The vulnerable dependents who are relying on the income generating activities for the construction work they’ve carried out.  

The only difference in this commercial context is that the perpetrator isn’t one human being – it's another corporation, choking the revenue of the small family business – to keep them compliant and under control. 

Instead of showering support and resources on those who are actually capable of completing the building work, the contracting regime piles on the liability and passes it off as “subcontractor’s risk”. 

In 2023 the Australian Government increased protections for small businesses under Australian Consumer Law, by broadening Unfair Contract Terms provisions.  

The Unfair Contract Terms laws carry fines of $50M for companies and $2M for individuals who aid and abet unfair contract terms.  

But there is one critical flaw in the Unfair Contract Terms regime – it requires the aggrieved party to pay to play in the Courts to seek relief. My observation is that even if subcontractors could afford to use the Courts, they are so heavily dependent on upstream parties for future work, that it would be small business suicide to do. 

And so, the Mexican wave of pain crashes on the subcontractors’ beach.  

The subbies carry the labour on the payroll, pay the payroll tax, sign contracts with builders that automatically entitle the builder to an unlimited credit limit – with no right to decline more work, or end the contract for any commercial reason of their own. 

This regime has been refined and honed by lawyers for upstream parties and banks financing construction projects to use subcontractors like a pair of disposable gloves.  

Lawyers for Principals and Builders (including tripartite agreements the financier requires) anchor the starting point for the contract terms that will govern the project. This means that by the time the subcontractor enters the crib hut, the gauntlet has been laid down. 

This power imbalance has been left unbridled because the contracting hierarchy pushes a wedge between the two parties to a construction project that have the most in common: the builder and subcontractor. 

If our industry focused on alignment instead of compliance, common ground and mutually beneficial relationships would see quality, safety and culture (diversity and psychological safety) re-grow in our industry. 

It is not lost on me that the above brain dump is one hell of a soap box to kick off on. But someone needs to start this dialogue, and it might as well be me. 

This conversation needs to play out under a spotlight, because subcontractors can't win playing the compliant, cap in hand, blindly sign the builder’s contract blind man’s bluff on the freeway game. 

To win, subcontractors need commercial street smarts and a crystal-clear view of how much contextual leverage they hold within their transaction. 

Couple that with a systematic approach to managing your builder’s contract, and an accounts receivable escalation procedure and subcontracting goes from death diving to a predictable, swallowable amount of liability and risk.  

We are living in an era so politically correct that school teachers can identify as a feline – and yet the construction industry is still indulging the same subbie bashing culture that predates workplace health and safety laws. 

It is my goal to be the Subcontractor’s Advocate in these discussions, to give voice to those subcontractors too afraid to speak up – for fear of losing the next job. 

 
Listen to The Subbies’ Toolbox Podcast Ep#1 – Why the contracting hierarchy is designed to keep Subcontractors under control – not build better buildings to understand how this system actually operates and where small changes can give you back control. 

If you want to understand how this system actually works, and what subcontractors can put in place to protect their position, you’ll find more resources at www.subbiestoolbox.com.au.