Subcontractor contractors: Which pitfalls lurk in complex IT projects?
In complex IT projects, there are usually several participants involved. One company supplies the software solution, another is used for parameterization and customizing. Other service providers provide infrastructure, infrastructure services and operating services. Finally, other specialists provide project management and project control services. With such complexity, it is understandable that the customer often wants to have only one contractual partner, who then in turn has contractual relationships with the providers of the various service areas. In such cases, a prime contractor takes over the coordination and provides part of the services. It subcontracts another part. Such constellations harbor risks for all sides. Well-drafted contracts can help avoid pitfalls and minimize risks. In my November 2020 article, I looked at the role of the prime contractor. This article deals with the challenges from the subcontractor's perspective and the options for drafting contracts.
Options for structuring the subcontractor contract
In practice, contracts for IT projects are usually structured as contracts for work and services. Typically, the project involves the implementation of a software solution in a corporate environment or the transition to the software solution of an outsourcing provider. To ensure the success of a project, the prime contractor has the task of coordinating and controlling all parties and holding the subcontractor(s) accountable. Especially when it comes to effort and charges, it is in his interest to involve the subcontractor correspondingly with respect to services and performance as well as claims arising out of mal-performance or breach of contract.
This responsibility for a successful completion of a project cannot always be assigned to subcontractors. The following options are conceivable, but depend on the specific task of the subcontractor:
• The subcontractor assumes a Back2Back responsibility for the parts of the project assigned to the subcontractor or for specific, definable and success-oriented performance areas.
• The subcontractor assumes responsibility for success only for certain services to be provided by the subcontractor.
• The subcontractor does not assume any control responsibility and thus no responsibility for success but is only responsible for proper performance of the service.
A Back2Back responsibility seems to be of great advantage for the prime contractor but can only be considered if the project can be set up in such a way that the subcontractor can control subareas or subprojects independently and assume responsibility. Difficulties already arise when the prime contractor and subcontractor work together in subareas or subprojects, especially when they jointly staff project teams.
Furthermore, the Back2Back responsibility may be affected by the fact that the prime contractor may also have a monitoring and supervising function as part of its overall responsibility. Even if the subcontractor performs poorly, the prime contractor then bears the main burden for the failure of the project. The assumption of normal responsibility for a successful completion also presupposes that the subcontractor can de facto assume responsibility for control. For this, however, at least the success of a project and the services to be provided to achieve this goal must be described in detail. Often, the contract between the prime contractor and the customer lacks a sufficient service description. In relation to the subcontractor, the detailed description of the services to be provided and clear allocation of responsibilities seems to be an even greater challenge. Finally, the subcontractor can be engaged as a service provider, whereby a careful and detailed description of services should also be part of the contract.
The risks in the contracts between the customer and the prime contractor and between the prime contractor and the subcontractor may differ. Individual risks may prove to be neutral in one contractual relationship but cause significant problems in another. Generally recognized is the interest of the prime contractor to stipulate the contractual relationship with its subcontractors in accordance with the contractual relationship with its customer. On the other hand, the prime contractor cannot pass on the provisions of its main contract to the subcontractor without adaptations. The main contract typically contains different services that are not equally provided by the subcontractors used. For example, the prime contractor often provides the software to be implemented as part of the project and carries out the necessary adaptations and further developments. In the case of the subcontractors, the services are in the areas of customizing and implementation. This results in different risks that must be taken into account when drafting the contract.
The prime contractor cannot assign the contractual terms from its main contract in a blanket manner. The prime contractor agreement and subcontractor agreements are legally independent. The prime contractor must negotiate individual terms and conditions from the main contract with its subcontractors. Standardized provisions may be used more than once within the subcontracts. However, such clauses may then be unenforceable within the framework of the respective subcontractor agreements from the point of view of §§ 305 ff. BGB (German Civil Code).
The use of general terms and conditions is certainly unavoidable, as the prime contractor cannot negotiate every clause individually with all subcontractors. In addition, the requirements for individually negotiated clauses tend to become higher according to recent case law and it is also a prerequisite for negotiation that the contents of the clauses to be negotiated are seriously put up for disposition.
Set common targets
Legal doctrine assumes that the main contract and the contract with the subcontractor constitute two contracts to be considered independently. Accordingly, disruptions, changes or other events affecting one contract are of no legal significance for the other contract unless this is expressly stipulated. This simplistic view ignores the fact that a large number of contractors are regularly involved in IT projects.
All these contractual relationships, which are independent of each other under the law, have one thing in common: they are part of a network of contractual relationships, all of which are aimed at the proper fulfillment of the contractual work with the prime contractor. All contractual works serve the purpose of successfully completing the IT project taken over by the prime contractor. This common objective, which is also expressed in the individual contracts, generally leads to the awareness among the parties involved that they must work together to realize the main contract. Therefore, it may also be their will in individual cases that events in the main contract may have an impact on the subcontract, which leads to a corresponding dependency. It is important that all parties have the common understanding of being in the same boat, even in project crises and termination scenarios. The prime contractor has an interest in ensuring that key subcontractors are also still on board in the event of the (involuntary) termination of a main contract.
Purpose of the contract and intention of the parties
Subcontracts, together with the main contract, form a network of contracts aimed at the realization of the overall work. In the course of the project, numerous events may occur in the main contract that actually affect the subcontractor's performance. The strict separation will not be appropriate in every case and often does not correspond to the intention of the intention parties. However, it is precisely this intention that should be expressed in the contracts concluded. If standardized sample contracts are used, these should be supplemented by individual explanations of the background, the distribution of roles and the objectives of the overall project.
In addition, the actual role of the subcontractor services in the overall structure must be taken into account. The coordination of main contract and subcontracts is not mandatory. If, for example, a prime contractor has a subcontractor perform services without the subcontractor having significant information about the use of these services in the overall project, the general principle remains that the contracts are to be considered separately from a legal point of view. Events in the main contract are then irrelevant to the subcontract and the prime contractor bears the risk of use in full. This principle would apply, for example, if the prime contractor has add-ons or apps created by a specialized developer as part of a software rollout, but the developer is not involved in the rollout. Even if the implementation as a whole fails, it would probably not be in line with the parties' intention for the developer of an app to end up without remuneration.
In general, it will always be possible to assume the independence of the contractual relationships if the subcontractor does not know and also did not have to know to what extent and to what extent it will be used as a subcontractor within the scope of a specific overall project. However, even if a subcontractor knows that its share of the work is required for an overall project, this does not mean that the main contract and the subcontract are more or less interlocked. Due to customs in certain industries, the market position of specialized companies or for other reasons, certain subcontractors are only willing to enter into contracts if the legal fate of their contracts is in all respects completely independent of events in the main contract.
Knowing and using design leeway
However, the situation will often be different if the main contract is a complex long-term contract of larger volume and if the subcontractor, which in turn has to provide more extensive services, is recognizably involved in the overall project. This may be the case if the subcontractor occupies a role in the steering committee with the customer.
All in all, the following results: Even if a subcontract de facto serves the fulfillment of a main contract and is thus to be seen in the context of an overall project, this does not yet have any significance for the synchronization of the contracts or for the dependence of individual provisions of the subcontract on the provisions of the main contract. However, if the parties have expressly or impliedly agreed on such in the subcontract agreement, such coordination exists between the contracts.
There are different constellations in the contracts that determine whether and in what form the subcontractor is held accountable. Subcontractors and prime contractors should therefore clarify before the start of the project which constellation best takes account of the task in the specific IT project and in which areas the subcontractor can actually assume responsibility for success.
We advise subcontractors and prime contractors and on contract drafting and help them identify and contractually regulate the relevant issues.
Michaela Witzel, LL.M. (Fordham University School of Law), Certified Expert for IT Law