When a Subcontractor Should Walk Away

Originally posted 2009-08-07 10:32:00.

Image of Andrea Goldman from Twitter

Image of Andrea Goldman

For this week’s Guest Post Friday, Musings welcomes a good friend, Andrea Goldman of the Home Contractor v. Homeowner and Massachusetts Builders Blogs. Andrea is the principal of a Newton, Massachusetts law practice specializing in construction, business, and real estate disputes. Goldman also prepares construction contracts and acts as a legal advisor for construction companies. She is a litigator, mediator, and arbitrator and is fluent in Spanish and French and has served international clients in their native language. For more information about Andrea Goldman, visit her firm website or call 617/467-3072.

Today I was thinking about a client who was a subcontractor who had worked on three large public construction contracts. These multi-million dollar contracts seemed like a great opportunity. The client was able to keep his employees busy, and plan on a healthy profit over the life of the projects.

However, things went terribly wrong. On one project a sub of the sub made a claim for payment and threatened to file a claim against the General Contractor’s surety bond. In response, the GC put some money in escrow to protect against a potential claim, and the subcontractor’s cash flow was seriously affected.

On another, Requests for Payment (RFPs) were not paid in full, which also affected cash flow. The sub ended up pulling his workers from the job, and the GC went to court and froze the sub’s bank accounts, effectively putting him out of business.

The purpose of this post is not to talk about the merits of this case (nor could I). It’s to point out contract terms that left the subcontractor completely exposed, and at a huge disadvantage. Given the one-sided nature of this contract, I may have advised the client to forego the job altogether. A very difficult choice, but perhaps a wise one in the long run.

The following contract clauses should raise red flags:

The “pay when paid” clause

In this contract, the subcontractor agreed to be paid “in the same percentage paid by the Owner to the Contractor for that work.” Subcontractor acknowledges that his requisitions to the GC might differ from the requisitions by GC to the Owner.

In effect, the subcontractor could put in the RFP, and the amount of that RFP to be paid was completely at the discretion of the GC. As a result, the subcontractor suffered serious damage to his cash flow

No delay damages

The subcontractor has no right to claim damages for delay, hinderance or inefficiency in the work. The only remedy is an extension to complete the work. Again, the sub is giving all the power over the job to the GC and there is no recourse if the work is impeded in any way.

Default

If the GC finds the sub in default, then it may provide any labor and/or material and charge it back to the subcontractor, may terminate the contract and enter the project and take possession of all equipment and materials on or off-site. The GC also reserves the right to pursue any other claims against the subcontractor. The sub would not be entitled to any further payments until the project is completed and would be forced to pay any money owed to the contractor promptly.

Termination

The GC can terminate the sub at any time, and as long as the sub is not in default, then the sub is only entitled to the value of its work completed to date, and cannot claim anticipated profits.

Final Payment

Final payment will only be made once the work is done to the satisfaction of the Owner and Architect (including all punch list items) and the GC has been paid.

Surety Bond

No claim shall be made against the surety bond until an arbitrator or court has issued an award or judgment in favor of the subcontractor.

What should a subcontractor do when presented with these clauses in a contract? One option is to try to level the playing field and negotiate more even-handed clauses, but this would have been impossible in this situation.

Another would be to have enough other consistent business so the sub did not have to rely on these jobs to pay its workers, taxes and suppliers.

Finally, the subcontractor should, at minimum, have had an attorney review the contract and make sure he understood what he was getting himself into. At that point, he could have made the wise decision to walk away and pursue work that was not fraught with the potential for so many problems.

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5 Responses to When a Subcontractor Should Walk Away
  1. Christopher G. Hill
    August 7, 2009 | 10:35 AM

    Thanks for the great Guest Post Andrea!

  2. Christopher G. Hill
    Twitter:
    September 22, 2009 | 12:16 PM

    The economics of the times make this guest post from Andrea Goldman (@andreagoldman) a great read.

  3. mynurealtor (RRG)
    December 31, 2009 | 8:06 AM

    Twitter Comment


    RT @constructionlaw: *an 09 guest post from @andreagoldman When a Subcontractor Should Walk Away | Construction Law [link to post]

    Posted using Chat Catcher

  4. JeshuaTLauka (Jeshua Lauka)
    December 31, 2009 | 8:34 AM

    Twitter Comment


    Informative RT @constructionlaw: *an 09 guest post from @andreagoldman When a Subcontractor Should Walk Away [link to post]

    Posted using Chat Catcher

  5. Jeremy Olm
    August 30, 2013 | 3:25 AM

    The morale of this story is that a subcontractor should make sure they have the best law practise available to represent them and check through important documents. A reputable law firm would have spotted these contract terms straight away and realised what they could mean to their client. They then could have dealt with them either by renegotiation or advising the subcontractor to stay well away from this job. The facts are of course that we need to work and earn money, and I suspect it was those dollar signs flashing in front of the subcontractors eyes that made him sign this contract. Get yourself an agent!

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About Musings

I am a construction lawyer in Richmond, Virginia, a LEED AP, and have been nominated by my peers to Virginia's Legal Elite in Construction Law on multiple occasions. I provide advice and assistance with mechanic's liens, contract review and consulting, occupational safety issues (VOSH and OSHA), and risk management for construction professionals.

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