Legal and Regulatory

Key Provisions Every Subcontractor Should Consider Before Entering an Agreement

Nine stipulations to keep in mind when you're signing a contract.
By Trent Cotney
April 24, 2023
Legal and Regulatory

When prime contractors and subcontractors do business together, success is reliant upon clear, effective communication. And that communication starts with the contract. Both parties must be aware of their responsibilities and liabilities, and those details lie in the contract provisions. What follow are important stipulations to consider.

  • Scope of Work: When beginning a project, prime contractors must outline the scope of work for the subcontractors. In most cases, prime contractors tend to make the scope broader, while the subcontractors prefer it to be more specific. It is essential that the scope matches the work described in the bid proposal. If there are any exclusions, they must be noted. Without a well-defined scope, prime contractors may find that the work falls short of their expectations. Unfortunately, most disputes on construction projects arise out of a poorly defined scope of work.
  • Flow-Through: The flow-through clause allows the prime contractor to pass along their responsibilities from the owners to the subcontractors. It is important subcontractors receive a copy of the contract between owners and prime contractors to ensure everyone is in agreement regarding the work to be done.
  • Indemnification: An indemnification clause requires one party to compensate another party for damage or loss. The party taking responsibility (the indemnitor) holds the other party (the indemnitee) harmless in the contract. It is also essential that any party agreeing to indemnity is insured at a level high enough to cover any resulting loss or damage. In most cases, prime contractors should not assume responsibility beyond their own and their subcontractors’ negligence. And subcontractors should seek to avoid assuming broad form indemnity with prime contractors. These clauses are often subject to local and state laws, so contractors working in or across multiple city or state limits will want to review each document carefully.
  • Liquidated Damages: Most contracts provide for liquidated damages when there are delays on a project. This requires a prime contractor to pay specific amounts based on each day of the delay. With a flow-through clause, a subcontractor can also be held responsible for liquidating damages. The flow-through clause can even protect the prime contractor from unexpected expenses when faced with liquidated damages.
  • No Damages for Delay: In most cases, if an owner causes a delay on a construction project, the prime contractor and subcontractor can recover damages. However, when a no-damages-for-delay clause is included in the contract, the prime contractor cannot recover damages and, per a flow-through clause, neither can the subcontractor. Instead, they are usually given more time to complete the project. Both prime contractors and subcontractors may object to the no-damages-for-delay clause since any scheduling issues may take time away from other projects.
  • Termination for Convenience: This clause allows an owner or prime contractor to cancel a contract or subcontract without cause and for any reason. Such a termination can have a substantial financial impact on both contractors and subcontractors. Therefore, the contract should include language that guarantees contractors will be paid for work completed prior to the termination. Subcontractors may also request that a contractor is allowed to terminate for convenience only if the owner has done so.
  • Termination for Default: This type of termination usually occurs when an owner or prime contractor cancels a contract due to breach. Causes include a failure to perform, follow laws and ordinances and fix subpar work. Both contractors and subcontractors should ensure that the contract allows for sufficient notice before such termination. Otherwise, they could face serious financial implications. They could also be held responsible for consequential damages, such as lost rent, lost profits, loss of property use and damage to reputation.
  • Dispute Resolution: Quite often, if one party files a claim against another, the matter ends up in court. However, many contracts include an arbitration provision, which requires that all parties agree to participate in arbitration to resolve the dispute. While the arbitration process is much faster than litigation, it can also be more expensive. In addition, all parties must understand that the arbiter’s decision is final, and appeal of that decision is difficult. Therefore, it is critical that both prime contractors and subcontractors thoroughly review any language regarding disputes and arbitration. The contract should expressly state which parties are responsible for covering which expenses.
  • Final Thoughts: When owners, prime contractors and subcontractors enter an agreement, it is essential that they understand one another’s expectations and outline those details in the contract.

If you are entering such an agreement and are unsure what provisions to include in your contract, do not hesitate to consult legal counsel. An experienced construction attorney can review your contract and advise you about protecting the contractor-subcontractor working relationship.

The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.

by Trent Cotney

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