Key Tips to Carefully Reviewing Contractor-Subcontractor Agreements

When entering into a contractor-subcontractor agreement, it is important to carefully review the “boilerplate” to ensure that you as a subcontractor are properly protected and are not being subjected to onerous and unfair obligations.  Although as a subcontractor you may have limited bargaining power with respect to negotiating the terms and conditions of the contract, it is important for a subcontractor to try to ensure that its liability is appropriately allocated and that it is aware of its obligations under the contract.  At a minimum, the subcontractor needs to be able to assess how much risk it is assuming.  Below are a few things to consider when reviewing a contractor-subcontractor agreement.¹

Conditional Payment

Conditional payment clauses are a popular tool used by contractors to shift the risk of a property owner’s insolvency or non-payment by the property owner. A “pay when paid” or “pay if paid” clause is common in contractor-subcontractor agreements. As the name states, these clauses provide that a subcontractor receiving payment for work performed is contingent on the owner issuing payment to the general contractor. As a result, if the contractor never receives payment from the owner, the contractor is under no obligation to pay the subcontractor. Although some courts have found these clauses to be unenforceable, they are often upheld by courts and it is important to be aware of the risks posed by such provisions.  The risks posed are particularly pronounced if the general contractor and the project owner have a close relationship whereby the owner may collude with the general contractor regarding payments so as to deny payment to subcontractors.  

Design Performance

In reviewing a construction contract, the contractor or subcontractor should strike any contract language that refers to design intent. Instead, the bid should be based upon plans and specifications. The contract documents should also reflect the same dates as the plans and specifications.

In most instances, a subcontractor will submit shop drawings to the general contractor, and to the architect or engineer of record, to show how a particular portion of work will be performed. This is often true when a subcontractor is working on prefabricated components, as the shop drawings provide the architect or engineer with greater detail regarding the installation of such components. A contractor or subcontractor needs to review the contract to determine whether the contract is shifting design responsibility to it.  In some instances, the language may explicitly state that it is imposing design responsibilities on the contractor or subcontractor. In other instances, it may be more ambiguous and the contract may simply include language such as warranty provisions or code compliance obligations that have the effect of imposing performance standards on the contractor or subcontractor’s work. If the contractor or subcontractor wishes to not have design responsibilities imposed on it, the best option available to it is to include disclaimer language in the contract expressly denying any responsibility for design in the contract. If an owner or contractor refuses to accept such language, the contractor or subcontractor should have its work completed by a qualified individual and reviewed and stamped by a design professional. This is important because if problems arise with the project, the first person the owner and general contractor are likely to point the finger at is the subcontractor, even if the problems are the result of design defects.

Attorney’s Fees Provision

In the event of a legal dispute, attorney’s fees provisions allow a contracting party to collect its costs and attorney’s fees incurred in enforcing the agreement.  Often construction contracts are larded with such provisions, including in indemnification clauses. A subcontractor should carefully review the attorney’s fees provision to determine whether they are reciprocal or one-sided. In the former case, it provides that the prevailing party is entitled to recover its attorneys’ fees in the event of litigation or arbitration. In the latter case it simply states that the general contractor is entitled to recover its attorneys’ fees in enforcing the contract’s provisions. A subcontractor should insist on the prevailing party language because in the event of litigation or  arbitration, the threat of attorney’s fees — which ultimately could be as large or larger than the amount of the underlying dispute — can be used as a cudgel by a general contractor seeking to  impose an unfair settlement on a subcontractor. 

Additional Things to Consider

The project schedule should be agreed upon. Failure to reach an agreement in this regard may result in a contractor or subcontractor being forced to attempt to perform under unrealistic deadlines and may result in damage claims resulting from deadlines that are impossible to meet.   

Once the agreement has been signed, there are some additional things a subcontractor should consider when working onsite. When performing work on a construction site it is not uncommon that either changes or additional work is required to complete the project. The subcontractor should not begin to perform additional work until it submits a change order and the change order has been approved by the contractor.

By way of example, the subcontractor may receive an urgent notice from the contractor that it needs additional work to be completed by next week.  Under these circumstances, although the subcontractor will want to accommodate the request, it needs to calculate the cost of the additional work and determine if overtime is necessary.  If the subcontractor begins work prior to seeking approval, due to the press of time, and overtime is incurred, the general contractor may later deny overtime payment. (Emergency work is often not recognized as having been urgent after the work has been completed.)  As a result, a subcontractor should always submit a change order prior to beginning additional work in order to ensure full payment from the general contractor.

Please contact GKG Law if you have construction related contract issues or litigation (or other contract issues). Brendan Collins may be reached by telephone at (202) 342-6793 or by email at bcollins@gkglaw.com; Kristine Little may be contacted at (202) 342-6751 or by email at klittle@gkglaw.com.