Back-to-Back and Lump Sum Construction Contracts

Mohammad T. Alsayyed, PhD, PE, Geotechnical Engineer

International Center for Geotechnical & Engineering Studies, Bethlehem, Palestine

ABSTRACT
In big construction projects, the project is implemented by hiring a main contractor to carry out
the project in full and to be responsible towards the owner for the execution of the overall
project. Back-to-back contracts are thought of as risk-free but they are not. Historically, it has
been difficult for organizations to manage this type of contracting, especially when it involves
multi-layer agreements. The main contractor transfers the execution of all the different
components to one or more subcontractors and/or suppliers. The main contractor in this case
tries to be with the minimum or no responsibility or obligations.
This paper addresses the areas that may be of particular concern in back-to-back contracts such
as: extension of time and additional payments, changes or variation procedures, claim
procedures, completion requirements and deadlines, limitations or liability, suspension and
termination, dispute resolution and cooperation and coordination between the parties.
The paper will address as well the Lump Sum type of construction contracts. This is another
type of contracts that is commonly used. The difference between lump sum and measurement
contracts, advantages and disadvantages, firm price contract, fixed price contract, variations in
contract items and dispute will be presented.

Introduction
It’s common in the construction industry for a head contractor to engage the services of a
subcontractor to complete all or part of a particular project for a client. The client usually
requires that the head contractor is liable for the full extent of the work for the project. To protect
their liability, the head contractor will often seek to have the subcontractor legally responsible
for as much of the project as possible. Essentially, this is a back-to-back contract, and it is
becoming increasingly standard where a project requires the collaboration of several different
entities to complete the full scope of work. There have been a number of developments at FIDIC
since 2010. These include the introduction of a new subcontract for use with the Red Book – the
FIDIC Construction Contract, 1st Edition 1999 - and also some changes to the Pink Book, the
version of the Red Book used by the Multilateral Development Banks. In the following
paragraphs, different issues are discussed in order to reduce the disputes in the back to back
contracts.
Risk Pass Down: The Subcontract works on the basis that the risks assumed by the Contractor
under the Main Contract are passed down to the Subcontractor and the Subcontractor is deemed
to have "full knowledge of the relevant provisions of the Main Contract".
The Subcontract is therefore drafted on a "back to back" basis with the Main Contract, with the
Subcontractor obliged to perform "all the obligations and liabilities of the Contractor under the
Main Contract" insofar as relevant to the Subcontract works - albeit with some
modifications. For example, in relation to the time limits for giving notice in Clause 20.1, the
Subcontractor has a shorter time limit than the corresponding time limit in the Main
Contract. This is in order to ensure that the Contractor has sufficient time to receive and process
the information from the Subcontractor and still meet the deadline for giving notice to the
Employer.
There are also stated exceptions to the risk pass down approach. These are listed at Clause 2.2 of
the Subcontract and include the Contractor's obligations in relation to setting out and obtaining
permits, licences and approvals. Clause 2.2 of the Subcontract also allows the parties to add
other additional specific exclusions in Annex A.
Payment: The Subcontractor must submit his draft final statement 28 days after the end of the
Subcontractor Defects Notification Period (which is tied into the Defects Notification Period
under the Main Contract). The Contractor may require additional information if he is unable to
verify any part of the final statement. The Contractor must pay the balance of the Subcontract
Price within 56 days after the end of the Subcontractor Defects Notification Period.
The Contractor can defer payments to the Subcontractor if the amount has not been certified by
the Engineer or the amount has been certified by the Engineer but not paid by the Employer. He
may not do so if the non-certification or non-payment is due to Contractor default or Employer
insolvency. FIDIC recognises that this pay when paid approach may not be consistent with the
local law (e.g. the UK HGCRA regime) and so includes alternative provisions in the Guidance
Notes to the Subcontract.
Co-operation with other subcontractors: The Contractor is responsible for the overall co-
ordination and project management of the Works and for the co-ordination of the Subcontract
Works with the Main Contract Works and the works of any other subcontractors.
However, these obligations of the Contractor are subject to Clause 6.1 which requires the
Subcontractor to co-operate with any other subcontractors. Clause 6.1 also provides that if the
Subcontractor is delayed or impeded by another subcontractor he must give notice of this to the
Contractor. In these circumstances the Subcontractor may be entitled to an extension of time and
payment of any costs incurred.
Performance Certificate: The Performance Certificate applicable to the Subcontract Works is
deemed to be the Certificate that is issued by the Engineer under the Main Contract. In other
words, the Subcontractor's performance is not certified until performance of all the Works have
been carried out and certified under the Main Contract. The Guidance Notes contain an
alternative clause that can be used if the Subcontract Works are completed in the early stages of
the overall project.
Notices: As is the case with Contractor claims under Clause 20.1 of the Main Contract,
compliance with the obligations relating to notices in Clause 20.1 of the Subcontract is a
condition precedent to any Subcontractor claim. Failure to comply with the notice provisions
will disbar any claim.
Loss or damage to Subcontract Works: The Subcontractor is by default obliged to rectify all
loss or damage to the Subcontract Works during the period when he is responsible for their
care. Clause 17 sets out the circumstances for which the Subcontractor is responsible for the cost
of that rectification and contains a mechanism whereby the Subcontractor can recover its costs
for rectification of loss or damage caused by something for which he is not responsible.
Termination: Clause 15.1 entitles the Contractor to terminate the Subcontract if the Main
Contract is terminated. Other rights of the Contractor to terminate the Subcontract are set out in
Clause 15.6 and arise if any one or more of the events or circumstances set out in Clause 15.2(a)-
(f) of the Main Contract are applicable to the Subcontractor's performance under the Subcontract.
Differences between the Test and First editions
Risk pass down: The exception to the Subcontractor's general duty to perform and
assume all the obligations and liabilities of the Contractor in relation to the Subcontract
Works which is contained in the words "other than where the provisions of the
Subcontract otherwise require" in Clause 2.2 is a new and important provision. It allows
the parties to ensure that express provisions of the Subcontract take precedence over the
Main Contract and to list other clauses that are exceptions to the general duty in
addition to the finite list of clauses contained in Clause 2.2. That list of clauses itself has
also been expanded to include the obligations in Clause 2.2 of the Main Contract
(provisions dealing with permits, licences

and approvals).
There is also a significant change in relation to the rights that are passed down to the
Subcontractor. The First Edition Clause 2.4 states that the Subcontractor "shall have"
the like rights entitlements and remedies that the Contractor has under the Main
Contract. The Test Edition simply required the Contractor to exercise "reasonable steps
to secure from the Employer like rights entitlements and remedies" he enjoyed under
the Main Contract.
Payment: The payment provisions have been streamlined and shortened in the First
Edition. The interim "draft" stages have been removed and the timeframe for payment
of the Final Subcontract Payment has been reduced from 84 days after the expiry of the
Subcontract Defects Notification Period to 56 days after this date.
The Contractor has a new obligation to give full particulars and provide substantiating
documentation of amounts that have not been certified by the Engineer or for which the
Employer has failed to make payment under the Main Contract.
In relation to measurement and evaluation, the First Edition contains a slight change to
what happens if the parties cannot agree on the measurement. The Contractor is now
expressly required to make "a fair decision...having due regard to the Subcontractor's
views and all relevant circumstances." The Test Edition simply provided for the
Contractor to use "the appropriate and applicable measurement" if the parties could not
agree.
Under the Test Edition the Contractor was not obliged to make an advance payment to
the Subcontractor until the Subcontractor had submitted its advance payment
guarantee. This provision does not appear in the First Edition.
Progress of the Works: The Subcontractor is no longer expressly required to comply
with the Subcontract Programme. This is a significant change but not altogether
surprising. The program is a live document and subject to change and the
Subcontractor already has a strict obligation to comply with completion dates and
ensure that the Contractor does not breach completion dates in the Main Contract.
Extensions of Time: Clause 8.4(d) of the Test Edition contained a general "catch-all"
provision entitling the Subcontractor to an extension of time for "a cause of delay which
would give the Contractor an entitlement to extension of time under the Main
Contract". The catch-all has been slightly changed in the First Edition Clause 8.4(d) so
that it now refers to "any one of the causes set out in the Main Contract Clause
8.4". This is a potentially narrower catch-all than the one which related to any cause
under the whole Main Contract.
Loss or damage to Subcontract Works: In the Test Edition the Subcontractor was
only obliged to rectify loss and damage occurring as a result of "any cause which was the
responsibility of the Subcontractor". In practice it can be difficult for a Contractor to
prove that any damage to the Subcontract Works has been caused by something for
which the Subcontractor is responsible. The change is therefore a practical one and
ensures that rectification works can be carried out before any argument about
responsibility arises. It does not significantly change the underlying risk allocation.
Points to be aware of when using the Subcontract
Numbering: The "back to back" drafting approach assumes that the numbering of the Main
Contract and the Subcontract are identical. Care is needed to check that the numbering of the
 two contracts corresponds exactly, particularly if substantial amendments have been made to the
Main Contract.
Deemed knowledge of Main Contract: The Subcontractor is deemed to have full knowledge of
all the relevant provisions of the Main Contract – whether or not this is in fact the case.
Overriding the general risk pass down approach: If the Contractor and Subcontractor have
agreed any specific exceptions to the general risk pass down approach in addition to the ones set
out in Clause 2.2, these should be expressly identified in Annex A.

How Does A Back-To-Back Contract Work?

Clients of construction work understand that there may be multiple entities needed to complete
their project. However, clients usually engage with only one entity: the party responsible for the
delivery of the project, referred to as the head contractor. The client is protected this way because
there is a single entity who is fully liable for the whole project. It is much easier to deal with a
single party with issues of liability and disputes.
However, a head contractor usually cannot complete the work singlehandedly – they may engage
several subcontractors to assist. In this case, they want to make sure that they are not directly
liable to the client for work a subcontractor completed. As such, they will ensure that their
contract with the subcontractor mirrors their contract with the client. The key terms affected are
usually the head contractor’s obligations including:

 liabilities;
 the rights of the subcontractor; and
 dispute resolution clauses.

Obligations of the head contractor passed down to the subcontractor may include:

 responsibility of maintaining the design for the project;

 specified date for completion of that part of the project; and
 quality and standard of work.

For a subcontractor, there are also rights that should be passed down from the head contractor,
including:

 entitlements for extension of time to complete the work;

 where some variation of the work is needed; and
 right for additional compensation against the head contractor if the head contractor breaches a
term of the subcontract.

Key Issues
It can be difficult to ensure that the head contract and the subcontract set out all of the
obligations and entitlements required to fully protect the relevant parties. Issues arise where the
 subcontract does not effectively complement the head contract. Simply citing the same
contractual terms between the client and the head contractor may not make sense for some
provisions or leaving out other important issues that apply solely to the relationship between the
head contractor and the subcontractor.
Matters that arise in a subcontract, but not the head contract, could include the:

 head contractor’s obligation to pay the subcontractor even if the client has not paid the head
contractor; or
 subcontractor’s liability to the head contractor for their delay of work, which also delays the
obligations outlined in the head contract.

Ensure that the subcontract includes all the relevant clauses the head contract requires but also
those that apply solely to the relationship between the head contractor and subcontractor.

In the Event of a Dispute

In the case of dispute resolution clauses, not properly drafting the subcontract can have a
significant impact on the outcome of a dispute between the parties.
For example, should the subcontractor be obligated to participate in any dispute resolution
process between the head contractor and client?
If the subcontractor has a dispute against the client, make clear the extent to which the head
contractor must pursue a claim. Finally, if the dispute resolution process involves mediation or
arbitration, the decision will need to bind all parties. This must be in a particular way that is
present and consistent across both contracts.

Key Takeaways
To make back-to-back contracts work effectively, both head contractors and subcontractors need
to be acutely aware of:

 their obligations; and

 the extent of their liability.

Draft the contract to include all relevant considerations; don’t just refer to the terms of the head
contract.
Head contractors should seek the client’s approval to engage subcontractors before seeking to
draft back-to-back contracts. Within the contract itself, head contractors should pass down
liability to the contractor for their portion of the work.
Subcontractors must understand the obligations passed down to them. Subcontractors should also
limit their liability to their part of the project.
Back to Back Contract: Everything You
Need to Know
A back to back contract can refer to many different things, but it's most commonly used in
construction, in which case it means the main project contractor requires their
subcontractors to adhere to the original contract terms. In this usage, the terms of a back-
to-back contract may also be known as terms which are “incorporated by reference” (as
opposed to newly drafted terms).
In general usage, “back-to-back” means that any document contains all the same terms and
characteristics as the following contract. You might open a back-to-back letter of credit,
which contains all the same elements as the previous one. In housing development, the
term might refer to houses built adjacent to one another.

Why Use a Back-to-Back Contract?

Back-to-back construction contracts are quite common, especially in large projects.
Substantial international projects typically require many participants' collaboration. Each of
these participants has a different capability when it comes to contributing to different
aspects of the project.
The principal contractor does not want to be solely responsible for all elements of the
project. Thus, they will attempt to pass their obligations and liabilities to the project owner
through their subcontractors. In doing so, the main contractor can limit their exposure to
potentially risky obligations. They do this by using back-to-back contracts with their
subcontractors.

Drafting and Reviewing Back-to-Back Contracts

To incorporate the primary contract terms into back-to-back (subcontractor) contracts, copy
the applicable terms into the new contracts. Be sure to exclude any terms that do not apply,
such as the total contract cost or other clauses only relevant to the principal contractor. This
method of drafting back-to-back contracts may seem simple and efficient, but it can
sometimes be more difficult than writing a stand-alone contract.
Stand-alone contracts include all the terms of the original contract which are relevant to the
subcontract. Such a contract may eliminate time-consuming cross-references, inaccuracies,
and inconsistencies. However, drafting a stand-alone contract may actually prove to be
even more time-consuming than drafting a back-to-back contract, as each party must
examine the agreements and decide which terms will be included in the subcontract, and
which terms will need to be modified.
You may also use a standard form subcontract, a contract form that contains relevant
clauses from the original contract. For example, you may wish to use the FIDIC Subcontract
for Construction for Building and Engineering Works Designed by the Employer, which is an
internationally used standard form subcontract meant to be used with the FIDIC Pink Book
and the FIDIC Red Book, 1999 edition. However, the usefulness of this type of contract
varies, since parties usually edit standard form contracts to meet their own preferences,
which may generate inconsistencies among the original contract and the subcontract.
As you draft or review back-to-back contracts, make sure to thoroughly examine each
contract clause. Elements that might be particularly important include:

 Term extensions and additional payments

 Changes in procedure
 Completion deadlines and requirements
 Liability limitations
 Indemnification
 Damages
 Suspension and termination
 Coordination and cooperation of each party
 Dispute resolution
 Notice requirements
 Important deadlines
 Mutual assent

Depending on whether the party is the principal contractor or the subcontractor, the manner
of handling these concerns may vary.
It is absolutely imperative that each party carefully and thoroughly reviews the principal
contract's terms to ensure that every desired clause is included within the subcontract and
that terms are consistent throughout all. Although the process may be tedious and very
time-consuming, it is recommended that each party takes a sequential approach to
examining the contractual terms and determining whether incorporating the term into the
new contract will be effective and consistent (in a legal and commercial manner) and will
certainly have the intended effect. This comprehensive walkthrough approach is best,
regardless of whether the subcontract incorporated the principal contract by reference or
written as a stand-alone contract.

Back-to-Back Contracts Under English Law

Under English law, a back-to-back contract that incorporates terms by references may not
incorporate particular kinds of clauses from the principal contract to the subcontract. For
these clauses, you might need to draft language into the subcontract that expresses the
desired terms from the principal contract, as opposed to relying on a default
blanket incorporation by referenceclause. Other local and international laws may also
prohibit the incorporation of particular provisions.
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Back-to-back contracts
Herbert Smith Freehills LLP
United Kingdom April 15 2011
Back-to-back agreements, by which a main contractor seeks to pass its obligations and
liabilities towards the employer through to its subcontractor(s), are becoming an
increasingly common feature of construction projects. While they can be a convenient
means of transferring risks and obligations down the chain of responsibility, inadequate
drafting can give rise to disputes which are particularly complex and difficult to resolve.
In this newsletter we discuss the key reasons why back-to-back contracts can be
particularly contentious and the main drafting issues that need to be considered and
addressed in order to minimize the risk of disputes.
The back-to-back scheme
Large international construction projects often require the collaboration of several
participants with different capabilities. However, the owner (employer) of the project, often
will require the project to be structured such that it has only a single contractual relationship
(the main contract) with one of the participants (the main contractor) and not with all of them
individually. From the employer's perspective, there is much attraction in structuring the
project such that the main contractor acts as the single point of responsibility.
The main contractor, having assumed responsibility for all aspects of the project vis-à-vis
the employer, will aim in turn to pass on its obligations and liabilities to its subcontractors so
that it is left with only minimal, or no, obligations or liabilities to meet on its own.
There are therefore obvious benefits for contractors in implementing back-to-back
arrangements. However, in practice drafting back-to-back agreements can be a difficult
task.
Drafting back-to-back contracts
There are, in broad terms, two ways of structuring back-to-back subcontracts:

1. by incorporating by reference all the terms of the main contract save for certain parts
of the main contract which are expressly excluded or varied (often these are limited
to clauses which are obviously not applicable to the subcontract, for example
clauses relating to price); and
2. by drafting a stand-alone set of terms and conditions specific to the particular
subcontract.
The first approach is often seen by contractors as being the easiest and therefore most
cost-efficient means of passing down liabilities. However, without careful attention such an
approach can often result in difficulties. Particular care needs to be taken when drafting the
back-to-back provisions. For example, a general provision stating that all references in the
main contract to the "Employer" and "Main Contractor" are to be read in the subcontract as
being references to the "Main Contractor" and "Subcontractor" respectively, may not be
appropriate for every obligation and could result in rendering what should be an essential
term of the contract either ineffective or subject to an interpretation that was never intended.
Further, where there are long and detailed main contract specifications (often in the form of
employer's requirements) it can be a very complex, and indeed contentious, task to
separate out the obligations that are relevant to each individual subcontract; the
subcontractors' greatest concern being that they will inadvertently be taking the risk for
matters that are inappropriate given the size and scope of their particular subcontract.
These issues should be capable of being overcome by proper drafting of a standalone
subcontract. A further obvious advantage of standalone contracts is that in executing the
subcontract the parties only have to refer to the one subcontract, rather than having to also
cross-refer to the main contract which itself can cause confusion. However, drafting
standalone contracts should by no means be considered to be an easier task; again
considerable care needs to be taken.
Common drafting issues
Irrespective of which drafting approach is taken, there are a number of issues that require
particular attention:
Conditional payment clauses
A common feature found in back-to-back contracts is a provision that payment to the
subcontractor will be conditional upon the main contractor receiving payment under the
main contract. However, such "pay-when-paid" clauses are not enforceable in construction
contracts under the laws of certain jurisdictions, including England and Wales and
Singapore. Sometimes a "pay-when-certified" clause will be seen as an appropriate
compromise if not also outlawed in the relevant jurisdictions, as it will shortly be in England
and Wales. Even if such clauses are not prohibited under the applicable law, they are often
resisted by subcontractors who expect to be paid once they have rendered due
performance of their obligations under the subcontract irrespective of the position further up
the chain.
General or liquidated damages?
Will the main contractor be seeking to pass on liquidated damages levied by the employer
under the main contract to the subcontractor as general damages? If so, it will be desirable
from a main contractor's point of view to specify in the subcontract that, without prejudice to
its right to recover general damages, any claim by it for general damages may include some
or all of the liquidated damages levied by the employer under the main contract. This is
because it might otherwise be questionable whether the liquidated damages levied against
the contractor by the employer constitute direct or indirect/consequential loss as against the
subcontractor and therefore irrecoverable under the relevant exclusion clauses in the
subcontract. It will, of course be necessary to apportion the full amount of liquidated
damages applicable so as to provide for recovery of only those in respect of which the
contractor can legitimately claim against the subcontractor.
The subcontractor may, of course, resist inclusion of this item aslikely to tempt the
contractor to seek to levy the full amount of liquidated damages against an individual
subcontractor. Instead, the subcontractor may prefer to negotiate a rate of liquidated
damages that covers all of the subcontractor's liability for the relevant breach (e.g. delay)
under the subcontract. While liquidated damages carry certain advantages for the main
contractor, particularly in terms of certainty of recoverable damages and not having to prove
actual loss, the main disadvantage lies in the risk that the rate of subcontract liquidated
damages will not ultimately cover the actual loss and/or damage sustained by the
subcontractor's breach.
Contractual deadlines
It is imperative that deadlines in the subcontracts are aligned to those in the main contract,
for example in terms of document approvals, delivery/completion dates and claims
notification periods. Some form of early warning procedure may be desirable.
Gaps in the claims procedures across the two contracts are of particular risk to main
contractors. This is because in many contracts the main contractor's right to claim in full
against the employer will be contingent on complying with the main contract notice
requirements. Those notice requirements therefore need to be adequately reflected in the
subcontract. In particular, the main contractor will need to ensure that it is not prevented
from claiming in full against the employer by reason of not receiving the necessary claim
details from the subcontractor in time, while remaining liable to the subcontractor for the
same claim.
To avoid such a predicament, main contractors will need to ensure that the subcontract
contains notification periods that are shorter than those provided for in the main contract, so
as to ensure that the main contractor has sufficient time to pass on a subcontractor's notice
of claim to the employer. In addition, the subcontract should require the subcontractor to
provide exactly the same information about the claim as the main contractor is required to
provide under the main contract.
Dispute resolution
In a back-to-back scheme, a dispute between the main contractor and the employer is likely
to have significant implications for the relationship between the main contractor and the
subcontractor, and vice versa.
Depending on the nature of the subcontract, claims that are commonly passed up and down
the chain include those relating to defects, performance failures and delays, and variations
(both in terms of scope and valuation). In all cases, the main contractor will want to ensure
that it is not shouldered with a liability in respect of matters outside its control that it cannot
pass on to its respective counterparts. The main contractor's greatest concern will be to
ensure that it is not exposed to differing decisions by the courts or tribunals appointed under
the two contracts.
The following are some of the main issues that will need to be considered:

 To what extent should the findings of a dispute adjudication board or arbitral tribunal
in a dispute between the employer and the main contractor be binding between the
main contractor and the subcontractor and vice versa? This is something that is
likely to be strongly resisted by subcontractors and employers respectively.
 Clauses providing that a party is to be bound by the outcome of proceedings under a
contract to which it is not party could be acceptable if that party is given a contractual
right to participate in the main contract proceedings. In this regard, consider whether
the third party should be given the right to participate directly (preferable for the main
 contractor and subcontractor) or indirectly (preferable for the employer) in those
proceedings.
 Under what circumstances will the main contractor be obliged to pursue the
subcontractor's claim against the employer and what is the sanction for a failure to
pursue such a claim? This is a common concern of subcontractors as the main
contractor may often be less interested in pursuing claims in which it has little or no
interest, particularly if it has a commercial interest in maintaining good relations with
the employer in order to secure future projects.
The FIDIC Subcontract
In response to industry demand, FIDIC is in the process of preparing a Subcontract for
Construction for Building and Engineering Works Designed by the Employer to be used for
subcontracts intended to be back-to-back with the FIDIC 1999 Red1 and Pink2 books. In
November 2009 FIDIC released a test edition of the Subcontract for comment. The test
edition is largely well-drafted however certain of the pass-down provisions could do with
some revision in the final version that is due to be published for use this year. The dispute
resolution clauses in the test edition attempt to address the three issues referred to above
however, regrettably, they are somewhat lacking and contain substantial risks for both the
main contractor and the subcontractor. Again, it is hoped that these issues will be resolved
in the final version. For a more detailed commentary on the FIDIC test Subcontract please
click here.
A rigorous drafting process across all subcontracts
There is no one-stop solution to the various possible pitfalls associated with back-to-back
contracts. Whichever approach to drafting back-to-back contracts is chosen, the decision
should never be based with the intention of short-cutting what should necessarily be a
rigorous drafting process. Both main contractors and subcontractors will have a vested
interest in ensuring that the subcontract is properly drafted. In addition, where there are a
number of subcontracts the main contractor will need to ensure that its main contract
obligations are properly allocated between the various subcontractors and none unwittingly
omitted.