Originally posted 2017-01-26 10:29:28.
After the last two weeks’ analyses of a couple of big construction decisions that came out recently, I thought I’d keep this week’s post practical and short for those that are not construction lawyers. So without further ado, here is a short checklist of the top things (aside from calling their local experienced construction attorney) a construction subcontractor should do or look for when reviewing a construction contract from a general contractor (and for a couple of these that a general contractor can look for in its prime contract).
- ALWAYS get a copy of the Prime Contract between the Owner and the General Contractor. This contract will contain terms that will “flow down” to you through the incorporation clause that almost every subcontract contains. You can’t do much to change these terms, but you will need to know them as the job progresses.
- READ every provision of the subcontract. I know this sounds simple, but not all subcontracts hide the red flags in the same places. Remember the details of a subcontract can sink you later if you aren’t prepared.
- COMPARE the insurance and indemnity provisions of your subcontract. Be sure that you are insured for those things that you are indemnifying for or you could be left bare in the unlikely event of a problem. Also, be sure that you aren’t indemnifying the General Contractor for its negligence or for the actions of others. It also would not hurt to run these provisions by your insurance carrier to be sure that the carrier is on board.
- STRIKE or at the very least soften any “pay if paid” contract language. If a General Contractor won’t agree to strike the provision, at least put it in line with the law and try and add language that any non-payment has to be your fault before you are subject to such a clause.
- BALANCE the attorney fees provisions. Many subcontracts have one way provisions that allow the general contractor to collect its fees but barring your collection of the same even if you win. At the very least try and edit these types of provisions to allow the winner (“prevailing party”) to collect its fees.
This is far from an exhaustive list and should not be taken as a one size fits all approach to negotiating your subcontracts. As I stated above, you should always consult a construction attorney that you trust and do so early in the process to be sure that all of the nuances of your particular subcontract are covered.
As always, I welcome your comments below. Please subscribe to keep up with this and other Construction Law Musings.
Hi, Chris, it’s been some time since I’ve posted, but I had a few thoughts that might be helpful (as supplemental to your own both above and in other blog posts). These don’t stray from your notes, but offer some additional details to think about. In no particular order of importance, but following your list:
Conditions of the prime contract:
If there is already a Prime contract, but you have not already bid on your scope, this is the perfect time to request a copy of the Prime. If there is not a Prime in place, get the current version that is being negotiated. If there are provisions in the Prime that are fundamentally unacceptable this will allow you to deal with them before wasting your time on the bid process. Alternatively you will be able to assess the risks involved and negotiate terms that will mitigate them (or increase your bid price to account for your increased risk). This might be the only time you can cost-effectively deal with terms that are objectionable. Once you have taken the time to scope/detail and bid out the work, submit your bid and be conditionally accepted (all of which can eat up time/money), you may feel boxed in – and at a minimum will have lost some leverage (the GC knows you need to ‘protect’ your up-front investment). If you don’t get the Prime until you have signed up, you have missed the boat.
Make sure that when you are accepting the flow-through Prime contract you have reviewed the final/executed document, and that the agreed-to version is attached to your subcontract. Your subcontract should also be explicit in disclaiming any liability that could flow from any later changes made to the Prime without your consent. Although the legal risk of not explicitly stating this might be small, this could be helpful protection if the Owner and GC revise Prime scopes or performance criteria via Owner or A/E supplemental instructions, ASI’s, CO’s, etc. Those changes might not even be in your trade, but could still impact you. When there is a change to the Work, the GC will probably just issue instructions and process your Change Order (if any)… but if you then move forward and you haven’t evaluated the potential risks, you have again missed the boat. If a Change Order is issued to another sub, but it could possibly impact your work, you may not even know it has happened, despite that it could affect you and embroil you in a dispute down the line. You might be found ‘not at fault’ but the cost and time dealing with the dispute might still be out of your pocket.
Don’t just ‘get’ the Prime. Read it. Thoroughly. Line-by-line. You do not know where a trap might be hiding unless you do this. As oft-stated by Chris, early involvement of a talented construction-savvy attorney is a prudent (nay, necessary) business expense – dispense with this at your own peril.
After you are awarded a project, make sure all of your people understand everything you (as the contracting party) must do to comply with the Prime. Of course you will give your staff the drawings/details/specs/schedules and such that apply to your scope. However, if they do not also know and understand every technical and performance requirement that is embedded in your subcontract plus the Prime, this can be a recipe for disaster. Disputes can (and do) result when subs do not follow requirements to the letter. Failure to comply with what might seem to be the most minor (even silly) contractual terms can doom the outcome. I cannot count the number of times I have found that subcontractor crews, supers and managers do not have a clue about anything beyond the hands-on work they have to perform. Yes, it takes time for your staff to understand the ‘stuff’ that they think doesn’t directly affect their work, but it’s time well invested.
Insurance:
I would be a bit stronger on this advice. Subcontracts and Prime contracts in their proposed final form should be reviewed by the insurer before you execute. You should request written confirmation from the insurer that your intended contractual scope is covered.
Pay if paid:
This is a topic that has been resolved in some jurisdictions, and for certain types of work, in that it is no longer allowed. Such clauses most often place an unfair burden on the smallest players in a project who face a real risk of going bottom up when funds are withheld. Clauses that clarify a right to withhold only when the sub is “…at fault…” don’t really do the job, since it might take months (even years) for the GC and sub to agree on who is the party at fault (if ever). In the interim, the funds are in limbo. Your attorney in your jurisdiction is the one that should guide you in crafting tight language that ensures you are not held hostage, and potentially put out of business because your cash flow has been impacted.
My usual disclaimer: I am not an attorney and am not offering legal advice. The above reflects my thoughts based on experience. For legal advice, consult an attorney… like, um, Chris.