Assigned subcontracts can be double-edged swords. While it may be nice to have the owner preselect specialty subcontractors, the assigned subcontract comes with many potential risks. Firms can minimize these risks by paying close attention to the following issues before submitting a bid.
Understand the general contractor’s scope of work relative to the subcontractor’s scope of work. If the assigned subcontractor is supplying equipment to be installed by the general contractor, the subcontractor must state exactly what it is supplying and in what manner so the general contractor understands the type and amount of labor that will be required. The general contractor should consider contacting the subcontractor before bidding to answer questions such as: Is the equipment self-contained so it can be installed fairly simply, such as a skid-mounted assembly that only needs to be set and connected? Or does the equipment require some assembly?
Verify there is no gap between the subcontractor’s and the general contractor’s scope of work. Compare the scope of work between the general contract and the assigned subcontract before bidding to make sure the subcontract does not omit something in the general contract. If the plans call for five water chillers, but the subcontract requires delivery of only four, the general contractor could be in a bind, especially if the owner and subcontractor are unwilling to be reasonable.
Consider the risk of a non-performing subcontractor. It is not uncommon for an owner to require an assigned subcontractor’s equipment to pass detailed performance criteria in order to reach substantial completion. Once that contract is assigned to the general contractor, most owners will look to the general contractor for a remedy if the subcontractor cannot pass the performance test. A similar issue arises when the subcontractor fails to perform. Before bidding, the general contractor needs to carefully consider how to manage this potential risk, especially if the supplier cannot realistically be terminated or replaced.
Look for contingent payment language in the subcontract. Savvy general contractors often include contingent payment provisions in their standard subcontracts. The assigned subcontract, however, is not on the general contractor’s standard form, and in many cases will not have a contingent payment clause. If not, the general contractor must consider how it will handle cash flow in the event the subcontractor demands payment before the owner pays. This issue can be compounded if contractual language suggests the general contractor holds payment in trust for the benefit of the subcontractor.
Is there a right of offset? Like the contingent payment issue, many assigned subcontracts are either silent or vague about any offset rights a general contractor may have against a subcontractor for claimed back charges to which the subcontractor has not agreed.
Ensure performance deadlines are appropriate. If the general contract contains a deadline and liquidated damages, the general contractor needs to ensure the subcontract also contains a deadline. The subcontractor’s deadline should be sufficiently in advance of the general contractor’s deadline so the general contractor can complete its work within the allotted time for performance. The general contractor also should review the standard terms carefully to determine whether the owner will grant an extension of time based on slow or poor performance by the assigned subcontractor. Typical owner contracts exclude extensions for delays caused by the general contractor or its subcontractors.
Check the warranty. Owners generally will demand extended warranty provisions on expensive and highly technical equipment—some for longer than 10 years. Unless the contract language provides otherwise, there will be two warranties: The general contractor warrants the equipment to the owner and the subcontractor warrants the equipment to the general contractor. This can expose the general contractor for a lengthy period of time. At best, the general contractor may incur administrative overhead to ensure the subcontractor honors any warranty claims. At worst, the general contractor may be stuck with the entire warranty cost if the subcontractor is not responsive or goes out of business.
Analyze the insurance and bond provisions. Because the assigned subcontract initially is negotiated and executed between the owner and the subcontractor, the insurance provisions may not explicitly require the subcontractor to include the general contractor as an additional named insured on the subcontractor’s policies. Similarly, the subcontractor’s performance bond may be written to benefit only the owner, and not the general contractor. In either case, the general contractor should factor these risks into its bid.
While a general contractor cannot truly eliminate risk when contracting on jobs with assigned subcontracts, it can identify and attempt to quantify those risks before submitting a bid.