Michelle Cirson (00:01)
Welcome to episode two of the Subbies toolbox podcast. Today I am going to run you through a bit of a checklist I've been putting together for commercial subcontractors to triage and rank what risk they have in their business based on different functions that they might be performing. So the reason behind this checklist,
This is an interesting one because my business doesn't actually provide a lot of the services that you need to be able to get up to speed and have a really high functioning commercial subcontracting business. But.
I'm sort of the place that you will come when things go bad. And one of the things that I can tell you from experience is that when things go wrong, it all comes to head in a payment claim. So you will give a payment claim and you won't be paid and insert reason why. And it's always because there has been some kind of hole in the way that we're functioning that's left us exposed to something the builder might do. So for example, we might have ITP.
that we use on site for quality.
but we had a hole in our system or we didn't probably capture the records that we needed to. And now the builder's back charging us. That all ultimately comes to a head in a payment claim. And that's where I find subcontractors come to me. So what I wanted to do with this checklist is reverse engineer the things that go bad that result in you not being paid on site and then help you triage and work out what your biggest area of exposure is in your subcontractors.
Contracting
business now this really goes to the heart of my law journey when I was studying law And I was quite young I was still working on construction sites and I used to get really frustrated when Subcontractors would come to the law firm that I was working at and if they just said one thing in an email or if they just given one notice under the contract we could have avoided a really big court battle and I saw this reoccurring
theme and the lawyers that I was working with at the time said to me that's not legal work Michelle that's that's a service that you might like to provide in a consulting admin business but that's admin grade work that's not what lawyers do.
And I thought to myself at the time, it's actually really short-sighted because we as lawyers on the front line of these big legal disputes, we get a front row seat of the evidence that is scrutinized and the cases, whether won or lost, will turn on these bits of evidence that subcontractors do or don't have. And most lawyers, if you ask them, would be able to tell you what the most important things that a client should do or have in their business to help them avoid disputes.
So that's where the inspiration for this podcast came from. We've been working on a business risk checklist. By the time this podcast airs, you should be able to download a copy of the checklist that we've put together for you to use in your business. And the intention is...
every episode for the next few episodes, I'm going to go through and pick one of the things on the checklist and explain to you why I've made a big deal over that aspect of what you need in your business. Now, risk.
mitigation and risk control in business doesn't sound like a sexy term at all. And in fact, when you think about a systematic approach to managing risk in your business, what happens is subcontractors think automatically, â more paperwork, more paperwork, more admin time. I don't get paid for admin time. The time and cost.
involved in just me tendering work is enough and I've got to then win work and then get out on site to get things done. Well there's nothing more disheartening than you working your bum off to get all the way to the end of the job and not be paid over some technicality in paperwork that could have been avoided. So in this episode what I want to focus on first is purchase order terms and conditions. Now
on the checklist, you'll see there's a whole raft of different contracts that you could have in your business. And to be honest, they're all pretty important. But if you were to have the bare minimum, the bare minimum in terms of people that you engage or buy things from in your business, the purchase order terms and conditions for me would be at the top of the list. That's because with purchase order terms and conditions, you can pretty much set the baseline for giving yourself the right to
security over any deposits that you've paid, being able to make registrations over any specialist equipment you might have purchased, you can have contractual warranties that would be in excess or in addition to the Australian Consumer Law and you lay the foundations for how you will be paying those suppliers. So it might sound counter-intuitive and you'd be thinking I've got all this focus in my business about me getting paid but
the way that this will play out is likely to come to a head in a payment claim because you did not have something in place that went pear shaped in the back end of your business. So I want to give you a couple of practical examples of how this has played out recently. So a couple of years ago, we had an electrician who was doing a very big job for a big tier one contractor and they had ordered these LED signs from a supplier who was then to manufacture the stands for the LED signs to go over the highway.
And in the course of having the stands manufactured or the structural supports to hold these big signs over the highway, the signs had to be sent to a steel fabricator for that to happen. Now it was coming into Christmas at the time, this was a couple of years ago, and suddenly the supplier that the electrician had ordered the LED signs and the frames for the LED signs from was struggling with their cash flow. And they had
the LED sign off to a metalwork fabricator to have the stand manufactured. So suddenly we've got this electrician who's paid lots and lots of money for very expensive specialist LED signs. The supplier who they bought those LED signs from sent them to a third party to have another step in the process manufactured before they could be delivered to site. And that supplier didn't get paid.
So the the metalwork fabricator wasn't being paid and they held the LED signs to ransom. Now the electrician came to us. They didn't have anything in writing in terms of the agreement that they had purchased the supplier, the sign, the LED signs to the supplier from, and their signs are being held to ransom. Now, when I say this all comes to a head and a payment claim for you, what I'm talking about is you are unable to deliver on site.
time the equipment that you've purchased because it's being held to ransom by this third party so someone else has got this very expensive gear that this electrician has purchased they had very limited options in which they could effectively get around the problem now that problem ended up getting solved in a commercial way but
The real issue was they didn't have any purchase order terms and conditions. And because they didn't have purchase order terms and conditions, they hadn't made the appropriate registrations on the PPS register over the LED signs that they purchased. And they didn't have line of sight contractually to where the equipment was going to be sent in transit before it actually arrived at their warehouse. And then they also didn't properly structure the payments to the supplier in a way that protected the
contractor, the electrician, if the gear never arrived. So if you're listening to this I want you to think about how often do you buy things in your business and part with cash with nothing in writing before you actually receive the goods.
Another example of how we've seen this go pear-shaped. I want you to know that you're not alone. If you have nothing in place and you're giving a purchase order, but the purchase order doesn't even have any terms and conditions attached to it. Don't feel bad because most subcontractors don't. It's a very overlooked area of commercial subcontracting because you're so often given a contract by the builder that this is not at the forefront of your mind when you're doing business. You're thinking, oh, I don't have to deal with more contracts. So
Another example, last year we had a subcontractor who purchased some construction equipment through a broker. Now this subcontractor was buying equipment, he was a carpenter, he was buying equipment from another carpentry company, Interstate, and there was a broker who provides transactions and facilitates transactions through companies that would otherwise be in competition with each other.
This particular broker, everybody had traded with him before, but there was something terrible happened and this person ended up in hospital. So he was out of play, nobody could contact him. And the carpenter came to me at the time and said, hey.
I've given this guy a lot of money to deliver some materials to me. I'm buying it off another subcontracting business, Interstate. I don't know who the business is that I'm buying it off, but I've given him more than six figures to go and get this equipment for me. Now that particular broker, we ended up tracking him down and there was nothing unintended or nasty about the way that went down. The poor fellow had just been involved in something unfortunate and had been in hospital for a while.
able to be contacted but it really shone a light on the way that the carpentry business was trading where they were prepared to pay more than six figures to somebody, a human being. He was a broker he had at ABN but you know there was no shop front.
this guy didn't have an office, he just operated off his mobile phone. He had been in the industry for some time and he was trusted, so he's not an unsavory fellow. â
But this happens quite a lot where we wheel and deal in the construction industry and we don't have any terms to fall back on. Now it's all well and good until something goes pear shaped because you put specialist equipment on a truck who's paying for the freight insurance policy. Does the carrier, the truck itself have an insurance policy? So is that one way of it being managed? Now all of these moving parts of these transactions that we do in construction can be captured in general.
purchase order terms and conditions but what I've seen is that there are
mobs out there who will sell you cookie cutter terms and conditions for purchase orders that are designed to be for the finance industry or other industries that are not necessarily specific to construction. And it's a real issue because in construction we have special laws designed to get you paid and those same laws can be used against you if you buy something from someone and they start invoicing you. So you do need to be managing your contract.
terms by way of what you're purchasing and who you're engaging as suppliers and subcontractors. Now you can use purchase order terms and conditions to engage a subcontractor. In some states and territories there are minimum requirements for what needs to be in a contract document. For example in Queensland if you are doing any transaction higher than $10,000 you need to have a proper written contract and there's criteria for what needs to go into that contract.
So if you have purchase order terms and conditions, that's great. But are they construction specific? And do you know how they work? And do you know whether they meet the minimum form requirements for the jurisdiction that you're trading in?
So lots of factors in there to be thinking about and if you think about the nature of your trade specifically For example structural steel subcontractor might do manufacturing of steel in their workshop and then send it away to be powder coated you effectively have a agreement with the powder coat powder Coater â and you will be hoping that your steel comes back to you properly powder coated but how often do you get?
a piece of steel to site and the builder takes issue with the powder coating. Though that's probably one of those areas where not only have they got possession of your gear and could hold your gear to ransom, which would be catastrophic for your ability to deliver under your builder's contract, but also â what are you doing in terms of making sure the warranty for workmanship and â the way that you're managing your payments, whether or not you have the ability to backcharge your powder coat supplier.
Is probably a question you need to answer now giving you specific examples here because I want you to really think about in your trade What do you buy? What do you buy? Who are you engaging? â You know, could it be the case that you are the type of subcontractor who needs to go and get temporary power set up at a location or maybe you're a plumber and you're engaging a pump subcontractor or similar there are lots of different scenarios that could come into play but
But
the purchase order terms and conditions, if I was starting a subcontracting business tomorrow and I did not have any other contracts in place, that would be the first thing that I invested in for my downstream subcontractors and suppliers. So I want to be upfront, it's not going to help you with your builder's contract, the builder's probably going to give you a big scary contract to sign, but
If you're engaging other people to help you deliver the goods and services under your contract with your builder, good chance you need a purchase order and you need purchase order terms and conditions. Now, it's not lost on me that a lot of you will be thinking, â I have to sign a credit application form with all my suppliers and they all have directors guarantees and I rarely get to dictate what the terms and conditions are.
Look, that's a valid point. â If you are buying things from a supplier and you're buying raw materials and you do have to sign a credit application form, there's a process that you really need to be going through to make sure you understand what terms and conditions you're agreeing to with those credit applications, how much security those suppliers have over you, and then also whether or not you're signing up to any personal guarantees. So as the director of a subcontracting company, if I want to go and get a trading
with BlueScope, I'm just picking a random supplier, there's a good chance that I'm going to have to sign up to a director's guarantee with a credit application form for a big manufacturer or supplier. Now you can get away with not signing those. I used to do this when I was a builder CA. We used to apply the scope creep â
strategy when it came to signing directors guarantees we would go and get a trading account a cash trading account for $10,000 and then we would buy $12,000 worth of material then we'd buy $17,000 then we'd buy $25,000 and it's amazing how quickly you can increase your trading capacity with suppliers because they will want your business. You have those sales reps within those supply businesses who will be incentivized to have
sales targets and if you're a customer that typically pays on time and you're flying under the radar there's a good chance they will let you increase your trading capacity without signing a directors guarantee. So bear that in mind but circling back to your purchase order terms and conditions that is something and those two stories hopefully will spur you into action in terms of thinking about the ways in which you are engaging others to help you deliver goods and services under your contract with your builder.
So that's it for today's episode. â And next week we will be tuning in to talk about other things on the business risk checklist â that hopefully if you download and you have done your little checklist, you will have triaged and found on that checklist what you need to action in what order. So jump in for next week's episode for the next thing off the business risk checklist.
