Five Provisions for Construction Subcontractors to Negotiate
or at least flag for follow up and diligence during the project
Our subcontractor clients often do not see a construction project from start to finish as their role is a discrete subset of the work. Subcontractors typically understand their specific job well and accept the rest, but often the subcontract’s most important terms are dictated by the project documents and the relationship (good or bad) between the general contractor and the owner.
From the subcontractor’s perspective, there are several key provisions to the construction subcontract that can, and should, be modified in negotiating a deal. We always recommend our subcontractors address these provisions whenever a new subcontract or service agreement is forwarded for review and execution.
The infamous “pay-when-paid” clause is the bane of the subcontractor’s existence. The subcontractor should avoid a “pay when paid” if they can, and avoiding a “pay-if-paid” should be a priority. The difference between these two types of payment clauses is stark. A “pay-if-paid” clause can limit the subcontractor’s payment to situations only if the owner pays the general contractor. “Pay-when-paid” generally defines the time of payment only. “Pay-if-paid” clauses can be enforceable in Colorado and in many other states particularly where the subcontract that uses the phrase “condition precedent” in its pay-if-paid clause.
Deleting such clauses and making payment mandatory within 30 days of invoice should be the subcontractor’s first goal. If this is unsuccessful, the subcontract should require the general contractor to provide notice of the owner’s non-payment and, if payment is not received within 40 days, allow the subcontractor to evaluate its risk and seek assurances. No subcontractor wants to receive false assurances as to payment and to continue on a project without knowledge or recourse.
Construction contract dispute clauses take several forms. The key features involve (1) whether mediation or arbitration or both are required prior to litigation, (2) the location (venue) of any dispute and the choice of law the dispute will be governed under, (3) whether an award of attorneys’ fees to the prevailing party is mutual or whether only the general contractor gets its fees, and (4) whether there is a duty for the subcontractor to continue working in the event of a dispute during ongoing work.
The use of arbitration, the form of arbitration and its scope should be reviewed on project-by-project basis. Depending on the size of the job, whether payment or performance bonds are in play, and the nature of the subcontractor’s relationship to the general contractor all guide negotiations on this front. Venue for any disputes should avoid far away states and any clause awarding the attorney fees to a party should be negotiated to be mutual, providing that “the prevailing party in such litigation be awarded their reasonable attorney fees and costs.” Like arbitration clauses, attorney fees provisions can be negotiated to greater level of detail such as caps on fees and costs awardable. Provisions concerning the duty of a subcontractor to continue working during the dispute or for the subcontractor to follow unilateral direction of the general contractor should also be scrutinized and are often a “flow down” provision from the prime (general) contract.
Change Order Clauses:
The change order clause typically requires approval of changes to the subcontractor's work to be in writing and signed by both parties prior to the subcontractor performing additional or modified work. This is not a clause that can or necessarily should amended, but one that can be supplemented through additional terms, including the parties’ procedures in the field. When faced with a sudden change in circumstances at the site, the subcontractor often requests approval of additional work and expediency could allow such to be approved by email in today’s reality where nearly every project manager carries a smartphone at all times. Such a practice could be permitted, protecting the subcontractor from risk of loss when the general contractor refuses to pay for additional work unaccompanied by a hard-copy, mutually executed change order.
The subcontract should be amended with regard to change orders to specifically state that the general contractor’s project managers and superintendents that are on-site and in the field have the authority to bind the general contractor to its written commitments to pay for and approve change orders.
Flow Down Clauses:
Many contracts bind the subcontractor to the terms and conditions of the prime (general) contract between the general contractor and the owner. This is problematic on several fronts. First, the prime contract is often comprehensive, involving every scope of work on the project from design through punch list for all trades and material suppliers. Second, the general contractor almost never provides a copy of the general contract when entering a subcontract, although the subcontract may state that it was “made available” to the subcontractor for review.
The clauses of the general contract that “flow down” and are considered a part of the subcontract are often unidentified. The general language in the subcontract may simply state that all terms in the general contract appy that are not in conflict with the subcontract. The task of sifting through the general contract for conflicting provisions is labor and time intensive. Additionally, it may be difficult to discern at the contracting phase whether a particular provision conflicts with the subcontract. At a minimum, the general contract and all attachments must be provided to you, The subcontract should be amended if possible to specifically identify what sections, subsections, and attachments of the general (prime) contract apply to you as the subcontractor.
Means and Methods and “Per Plans and Specifications” Clauses:
An additional issue related to “flow down” clauses is the project plan and its specifications guiding the subcontractor's work. For some projects or certain trades, the general contractor is not the expert in the subcontractor's field and the design professionals have not dictated the precise specifications of your work. In such contracts, only the outcome of the work is described and the the means and methods, i.e. the how, is left to the subcontractor as the expert in their field. If there are plans and specifications related to your work on the project, they should be provided and the subcontract should clearly state that the identified plans and specifications are current, to be relied upon in performing the work (and bid) and not subject to unilateral amendment without negotiation of applicable changes with the subcontractor.
Every provision on every page of the subcontract has a purpose. As attorneys, we review subcontracts in their entirety. Although the above clauses always require review, they are certainly not be the only ones as there may be other clauses that are more critical to a specific subcontract or subcontractor. All relevant provisions must be reviewed and may need to be modified.
About the Author:
Reed F. Morris is a Denver-based attorney who regularly represents owners, contractors and sureties in payment and performance related construction litigation including bond claims, mechanic’s liens and related disputes. He is a partner at MLMW and represents parties to construction disputes in state and federal courts and all alternative dispute venues including mediations and arbitrations (AAA). Reed can be reached for questions at email@example.com or by phone at (303) 927-0011 (direct).
For more information about our law firm’s construction practice and to obtain other resources for construction industry professionals, please visit our website.