Legal and Regulatory

Subcontracts Are Broken

Subcontracts have high inherent risk and are extremely complicated. They should be written so everyone can understand.
By Karalynn Cromeens
February 16, 2022
Topics
Legal and Regulatory

A subcontract is supposed to be a clear set of instructions that explain the relationship between the prime contractor and the subcontractor throughout the construction project, as well as the details of the service or project that is agreed on. The way subcontracts are written currently, though, fail miserably at accomplishing this. They might as well be instructions written in a foreign language because they are impossible to understand. The status quo is outdated, and it shouldn't be this way. Change starts with speaking out and starting a necessary conversation.

Broken Contracts

Rather than ignoring the 10,000-pound gorilla in the room, it's important to talk about how subcontracts are broken. First, even if contractors are prudent and read every contract before signing it, there is danger in the fact that they still might have no idea what they agree to do or what they are liable for because contracts are so hard to understand. There is no reason subcontracts have to be written in a language that is difficult to comprehend.

The second thing that can be cut out of subcontracts is repetition. If it is written correctly, the author should only have to mention things one time for them to be effective. So, why do we have pages and pages that say the same thing just phrased differently? There is really no reason that a subcontract needs to be longer than ten pages.

The Danger Zone

Another issue with how subcontracts are written is that they place 100% of the risk and liability on the subcontractor. Subcontractors need to be wary of dangerous provisions currently in subcontracts. One of the top dangerous provisions is the pay-when-paid clause. But what exactly does this clause do? This clause puts 100% of non-payment from the owner on the subcontractor, meaning the prime contractor has no obligation to pay the subcontractor until the owner pays them.

If subcontractors have a pay when paid clause in their contract, they can no longer just do a good job and turn in all the correct paperwork to get paid. Instead, they have to wait for the owner to pay the prime contractor before they get paid, which is something the subcontractor has no control over.

For example, let's say you are the painter, and the owner gets upset with an issue with the plumbing and decides not to pay the prime contractor anything until the plumbing issue is resolved? In this situation, the money that the painter needs to make payroll is contingent on the plumbing being repaired. It's pertinent that subcontractors understand that when they sign a subcontract with a pay-when-paid clause, the only way to be sure that they can survive the project is to have enough cash on hand to pay for all of the work called for in the subcontract before they ever get a payment. What it boils down to is that subcontractors need to be able to finance their portion of the project.

Risky Business

An equally dangerous part about how subcontracts are currently written is that they do not allow subcontractors to add the additional cost of materials if the cost is increased since they bid the job or signed the subcontract. This means that the risk of increased material costs is on the subcontractor. It’s not uncommon for the cost of material to increase or even double between the time the contract was signed and when it was time for them to do the actual work. Even when they submitted a request for a change order for the increased cost, it was just ignored. At that point, subcontractors must cover the increased cost or be in default of the subcontract and potentially be terminated.

As an industry, we can do better and we need to do better for the future of the skilled construction trades. No one wants to go to work when there are these types of risks involved. These risks are incredibly dangerous, and have the potential to put construction companies out of business. The future of the construction business is at our fingertips, and we can make a change. That change starts with developing a fair, subcontract written in plain English that everyone can understand.

by Karalynn Cromeens
Published author, award-winning lawyer, host of The Quit Getting Screwed Construction Podcast, and Owner and seasoned Managing Partner of The Cromeens Law Firm, Karalynn Cromeens is a true jack of all trades. Karalynn has been practicing construction law for more than 17 years and is on a mission to educate contractors on their legal rights. The Cromeens Law Firm partnered with construction management software, JobTread, in 2022 to offer superior legal protection for construction businesses through a fully integrated all-in-one software.

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