Oz PCH – Bad Press.
The following link is a report from the Australian Financial Review News Paper regarding JHG’s treatment of sub-contractors.
In summary, a sub-contractor (Yuanda) has issued a claim demanding payment of AUD$8.6 million as part of a progress payment with two other subbies following suit.
The payment is being withheld due to defective/damaged work and the report says that Yuanda’s claim states that JHG is not entitled to offset payment for defects under their subcontract.
Below is an extract from my AER 1 regarding payments:
…In terms of the sub-contracts JHG will, subject to any rights to set-off, pay the subcontractor through either Percentage Progress (% against pricing schedule) or Quantities (re-measurable basis) payment methods. Once a payment claim is made by the subcontractor JHG have to produce a payment schedule and, by the scheduled timeframe, make payment on account until approved security of the amount has been acquired and the final payment can be made. JHG can deduct from payment monies otherwise due to the subcontractor under the rights of set-off (JHG (B) 2014).
The right of set-off from the standard subcontract itself states:
12.18 Right of Set-Off
John Holland may deduct from moneys otherwise due to the Subcontractor under or associated with the Subcontract:
(a) any debt or other moneys due from the Subcontractor to John Holland; or
(b) any claim to money which John Holland may have against the Subcontractor whether for damages (including liquidated damages) or otherwise.
Technically Yuanda are right. The off-set explained above at (b) is JHG’s right to off-set payment in the case if JHG get hit with liquidated damages from the Client for late delivery caused by defective/damaged works by the sub-contractor.
JHG automatically hold a percentage back, usually 5% for a one year Defects Liability Period (DLP) but this project has a two year DLP so it may be slightly higher. Either way it is this sum that JHG are contractually obliged to withhold payment on should the work be defective and not the reported progress payment.
I haven’t actually seen the specific Yuanda sub-contract so there may have been another clause put in but either way it’s not good press.
So what?
This kind of bad press could cause many things to happen, the most significant of which would be that JHG lose potential tenders. Additionally, for tenders that JHG have won, when it comes to tendering for sub-contractors these sub-contractors may either look elsewhere or see an opportunity and to protect themselves from potentially getting shafted, factor in a higher contingency risk fee. This results in JHG either being left with a substandard sub-contractor as a result of not assigning a ‘preferred sub-contractor’, which they may have spent time and money on sweetening-up from a previous project, or worse still getting the ‘preferred sub-contractor’ on-board but paying out more for the privilege.
Holdfast Training Services Trial Blog 
Nice Blog. Alternately JHG might be seen to be protecting the clients interests in refusing to allow a subcontractor to throw in poor qulity materials using substandard labour/quality and then claim full payment. This might encourage clients concerned to see teir best interests reperesented by their MC. Subcontractors that have had no issues with JHG (been sweetened up) might similarly see that their high quality is valued and that JHG are capable of recognising vlaue when hey see it ansd so might want the reputation of being a JHG contractor that always gets paid? It’s weasle words and emotion that win the day not facts and technicalities (Although the technical clause 12.18(b) “…or otherwise” is a pretty broad licence to retain against potential claims arising from refusal to accept the end product due to poor quality or damages.!
Sound like a proper Contactor/Sub-contractor squabble. Impressive figures though. I am surprised the subby has allowed this to slip out into the public domain, as defective workmanship claims will not reflect well on their organisation whatever the contractual circumstances. Regards Greg
It gets even worse. Another sub- contractor (Acrow Ceilings) were eventually ordered off site early last week over a payment dispute and by Friday the director of Acrow had committed suicide – apparently there were other problems but this was the catalyst. This hit the headlines at the wk end off the back of the Yuanda report.