Selecting your project partners: Keeping the chain strong

In large-scale projects, very different players come together on the various levels of the delivery chain, each with their own expectations and preconceptions. The contractors’ degree of professionality may vary as well as their financial soundness. Probably the most effective tool of risk management is the careful selection of business partners.

When you are selecting a subcontractor for a crucial portion of your delivery scope, you may want that subcontractor to be liable for mistakes, and you also want them to be financially capable to actually pay the bill if something goes wrong.

Workability over liability

But what you want most, of course, is that nothing goes wrong in the first place. After all, in the delivery chain, you yourself are liable towards your own client for that same delivery. It is highly likely that your maximum liability will be higher than the liability cap of your subcontractor.

Many contracts directly state a limitation of liability that is calculated as a certain portion of the value of the delivery – and your delivery is bigger than the chunk that you contracted out to the subcontractor. If you were to impose on the subcontractor liability that is measured against your own delivery scope rather than theirs, there is a good chance that a Finnish court, with their substantial power to adjust contracts that they consider unjust, would cut the subcontractor’s liability, with results that are impossible to foresee.

Hence, rather than relying on liability clauses, making the project work is priority. It is obvious that you will want to check your contractor’s background – reference projects, financial data, and the like. When the subcontract is important for you, you may also want to check the actual acting persons. Carefully drafted contractual procedures will ensure that the contractor sends project managers that have the experience they need, and that you have a say in the case of necessary changes in key personnel.

No weak links in the chain

Your subcontractor may again bring subcontractors, and that is fine and normal. However, you must be aware that your risk increases with the size of the deliveries that your subcontractor contracts out. Your subcontractor should be obliged to provide the core of the relevant services themselves.

When looking at the value added on each level of the delivery chain, a healthy chain is thickest at the top and only becomes thinner towards the bottom. If you have a subcontractor who does not add relevant value themselves but contract most works out to another player, then the chain becomes too thin at that point. It will probably break.

Why? Much of a project’s success depends on successful communication. Communication of relevant specifications, communication of changed circumstances and their impacts, communication between various contractors working on interdependent parts of the project. The weak link in the delivery chain will probably remain passive in communications, or at least you will not know what the subcontractor and the sub-subcontractor have discussed internally. With the sub-subcontractor, you do not have contractual mechanisms to ensure that they get the right messages and will be held liable. But in order to make things work, you will anyway have to talk directly to them. When something goes wrong, it will be hard to know who said what and what that means for liability.