Michelle Cirson (00:01.39)
Hello, welcome to the Subbies Toolbox podcast. I'm your host, Michelle Cirson construction adjudicator, lawyer, and the founder of the Subbies Toolbox. Today on my podcast, I want to talk to you about schedule of rates contracts. Schedule of rates contracts are being weaponized by builders and very big tier one contractors doing big civil projects. And I want to really
contextualize and bring back to common sense the way that these contracts should work hopefully in a bid to create awareness into the industry and so that subcontractors know what to push back on when you're negotiating these contracts. So a normal subcontract would have a set scope of work for a fixed price and you would effectively have priced in anything ancillary not
typically shown on the drawings but required for you to get a job done. So there's a set scope of work, there's drawings, you have a clear-cut idea of how much work is involved so that when you know from start to finish you have a good gauge on how long the job should take you, how much work is involved, what the quantities of materials are and all of those types of things. When you sign a typical subcontract as a lump sum there are clauses that the builder should be
potentially entitled to having in their head contracts that say the deadlines for you to be getting things done or the minimum quantities or hold you to a particular standard. When you sign a schedule of rates contract, all that's out the window because a schedule of rates contract effectively allows a contractor to engage a subcontractor for a period of time or duration or on a particular project for
a list of tasks or deliverables that have set rates based on quantities. So the unit of measurement with the quantities could be square meters, could be cubic meters, could be hourly rates. We recently negotiated a contract where there was a weekly rate, but the schedule of rates is there because nobody knows from the outset of the contract precisely how much work is going to be done or exactly what quantities.
Michelle Cirson (02:19.694)
work will be achieved. So the work could be labour on an hourly basis and or it could be labour with a component of something that you're supplying which is fine. So for example if you were engaging a labour-only tiler they might have square meters of particular tiles that they'd be laying but they also would be supplying potentially some consumables like glues, grout, silicon things like that and
Builders typically want to engage somebody on their schedule of rates so that they only pay for precisely the amount of work that somebody does because a lump sum contract can be great if you are effectively throwing in the kitchen sink to the scope of work and making the subcontractor carry any gaps, basically bankroll any gaps. But if you think that you can pick up money by engaging a subcontractor on a schedule of rates contract, a builder will do that.
so that they can do a precise measurement at the end of the job. And a really good example of this, the last projects that I worked on when I was builder side in Brisbane in 2015, we engaged a block layer to build an apartment building with us. So we did the masonry component of the project. And when we did the takeoff for the block work that was required, we were about 400 grand different to what the subcontractor did with their takeoff.
And there were a whole lot of windows and sliding doors in this apartment building. was a really, the design called for a lot of glazing and it turns out in retrospect that the subcontractor when it apparently it's industry standard when you're measuring block work to not remove windows and doors. We didn't know that we would build aside. weren't industry standard block layers. so what we did was the quantity surveyor takeoff, which is to remove the windows and doors. And we effectively measured.
the block work that would be installed at the project. Now we couldn't come to an agreement on a lump sum price. I wasn't prepared to accept the blocklayer's quote for a lump sum because he was 400 grand higher than my budget. And I was looking at his quantity saying, Hey, this is not marrying up. Now that particular blocklayer was supplying the blocks. So they had factored in wastage as well. So there could have been a bit of muddy waters about what the right quantities were, but
Michelle Cirson (04:44.447)
I thought the best way for us to be able to effectively deal with it would be for him to give me a square metre rate for the block work and we would use a schedule of rates contract. Now that went fine until we got to the end of the job and of course the blocklayer standing by his original quote started putting in claims for a whole lot more block work than actually existed on site. And a dispute unfolded because
The builder had a quantity surveyor that was able to we used the surveyor to actually measure the block work that was done. And that report came back and it was a whole lot less than the block layer was claiming. So the block layer never ended up getting paid for all the blocks that they said they laid. And the way that it came to light, the way that they were calculating it was that they were looking at the number of pallets that were delivered by their supplier and working out how many square meters.
of blocks to a pallet and then working it out based off that. At the end of the day, the schedule of rates contract benefited the builder because the builder was able to measure the finished product and say, I only have to pay you for the square meters of finished block work. But there were a whole lot of other things that the builder was able to effectively hold over the subcontractor. And one of the things that
I think is really important for you to realize when you're about to enter into a schedule of rates contract is that if there's no clear cut start and finish. So for example, you don't know whether you could be engaged to do 10 square meters of block work or 10,000 square meters of block work. Then you really need to understand that you could be stuck under contract for a very long time, because if the schedule of rates contract relates to the project,
you could be stuck under contract until the project is finished on those rates. Now I had another client, actually one of our Subbies Toolbox members who jumped into our Q &A last year. Now they had signed a schedule of rates contract for the Sydney Metro Tunnel to do some carpentry work. And last year, the main contractor directed them to go back and keep doing more work on those schedule of rates in that contract.
Michelle Cirson (07:06.765)
that dated back to 2019. 2019, they sign up to rates as at 2019 prices and five years down the track, they were asked to go back and keep doing work. Now, of course, COVID came along, timber prices ran, everything was completely different. You can't even engage a laborer to be able to go to a project like that these days.
for the rates that they had in their schedule of rates contract, but they were stuck on a contract to provide those services under that contract for those rates for that project. So having a clear cut start and finish in terms of the goalposts for that contract is quite important. And you need to understand when you're entering into a schedule of rates contract, how long you could be called back to keep doing work for those same rates. So that's the first thing to bring to your attention. The second thing is when it comes to schedule of rates contracts,
It's like how long is a piece of string when it comes to your practical completion date, because you don't know how long you're going to be called back to do work until the builder decides that the project is finished. Yet practical completion is always tied to that age old chestnut of liquidated damages. So if you've got a schedule of rates contract where they say, if you don't finish by the 20th of March, 2027,
We're going to charge you liquidated damages for every day you're late. How is that making any sense whatsoever when you don't know whether you've got to do 10 square meters of block work or 10,000 square meters of block work? So the PC date can only really be worked out based on the genuine construction program. If you have certainty around the volume of work that you're going to be doing. So if the builder on a schedule of rates contract directs you to do an additional
10,000 square meters of block work and you're doing 20,000 square meters of block work, then you need to consider, well, hang on a second, did I ever have a genuine practical completion date? I never had a clear cut scope of work where I was guaranteed I would be engaged to deliver that work within those timeframes. So schedule of rates contracts, I don't believe should have liquidated damages tied to the date for practical completion. I think the...
Michelle Cirson (09:26.827)
better approach to making sure that the subcontractor is not delaying the project is to ensure that the subcontractor is carrying out the work diligently. And the way to do that is if you're deployed or called back to the site to be doing a particular next trench of work, if you don't turn up at that point, that's where those damages should be applicable rather than a pie in the sky throw spaghetti at the ceiling, practical completion date that nobody knows whether is valid or not.
So if you are negotiating a schedule of rates contract, consider whether the practical completion date is related to anything at all. I'll give you a perfect example. Last month, we assisted a client in negotiating a schedule of rates contract for a very big contractor who wanted them to be engaged for five years. So it's anticipated the project would go for five years and that subcontractor
was going to be providing a piece of machinery with an operator and an off-sider and they were paid on the basis of a weekly rate. Now that contract when we initially read it had liquidated damages in it. How is the main contractor to work out whether a subcontractor is delaying the project if all they're required to do is show up every day and they're paid on a weekly rate? There was no
clear direction on the work or the area of work or precisely the scope that that machine would be doing on those days. It was effectively a higher agreement. providing that machine showed up, the operator and the off-sider, the subcontractor was not delaying the job. They were performing their part of the bargain. But the construction industry is so set in their ways of having liquidated damages in contracts, it was really difficult to get that negotiated out.
And was only when we said, you guys could at any point in time stop directing us to do work under the schedule of rates. And at that point, we would be at practical completion. So you can't really anchor liquidated damages to practical completion in this instance. Now, the other thing that is really difficult with that type of a contract is variations because unless
Michelle Cirson (11:50.466)
there is something that is not contemplated by the schedule of rates. Is it really a variation if you're asked to do more or less of it? And that by nature of a schedule of rates contract is how it works. You end up being paid for the quantity of work you end up doing. If you had to stop and give a notice of variation every time you were directed to go to site to do more in accordance with the schedule of rates, it just would be completely uncommercial.
And one of the principles of contract law is that there should be business efficacy at the heart of each contract. And so it should be able to be transacted from a business commercial common sense. So the parties can actually have a workable contract. So if you've got a schedule of rates, it's not really a variation for you to just be given more of the same work on the schedule of rates because the contract contemplated you performing work for that amount.
for that task to that project. So consider that when you're looking at your schedule of rates contracts. Does it make sense that you be held to a practical completion date? Perhaps it might make sense if there are clear cut drawings and the builder is effectively engaging you to provide. Say for example, there might be a preliminary design and the actual design is not yet.
complete. So if I'm a piling subcontractor and I have a piling design, it might be the case that we don't know until we get to site precisely how deep the piles are going to be because it could depend on how deep the rock is once we start drilling. So that could make sense from a commercial standpoint that I could be held to a deadline to complete a scope of work because I know that I'm going to have to do 400 piles. I don't know precisely how deep they're going to be and so therefore
the schedule of rates component of the contract is the concrete supply for the piles, which we won't know until we know the depth. But in all honesty, that's probably a lump sum contract that has an element of a provisional sum or an element of something that should be a schedule of rates component that makes up the lump sum to the contract. So I just want to make subcontractors aware that when you're signing up to schedule of rates contracts, there are hidden dangers that you might not be aware of. And
Michelle Cirson (14:14.015)
If you think of it as a normal contract, and if you think of a schedule of rates contract, like a lump sum where you enter into it, believing that you're being given the whole project, you might just be given 10 square meters and there's nothing stopping the builder from just engaging you for the first 10 square meters and then engaging someone else for the rest. So pricing those rates accordingly is incredibly important and understanding too that
your rates need to build in infinite mobilizations because if you're giving them a schedule of rates based on doing 10,000 square meters of block work and you only end up doing 10 this week, 10 in a month's time, 10 in two months time, and you have to demobe and then remobe again, then that's where your schedule of rates really needs to consider and cater for those mobilization costs that you might incur in dealing with a schedule of rates contract. Now,
If you're listening to this podcast, probably wondering why we're talking about all these interesting contracting topics for subcontractors. Our sub used toolbox members come to Q &A two days a week, Tuesdays and Fridays at 12 noon. And we have some really curly questions that our subcontractors ask during those Q &A questions. It's effectively a community of like minded values aligned subcontractors who are dealing with the same commercial problems on a daily basis. So if you're looking for a community like that,
where you don't need to feel alone in the difficulties you have with your builders and you need a safe space to be able to share those stories. Subbies Toolbox membership might be something worth looking into.
