AGC Orders Creation Of “Pay-if-Paid” Subcontract

Kegler Brown Construction Newsletter

In a disappointing but not entirely surprising move, AGC is apparently contemplating the withdrawal of its endorsement of the AGC 640 form subcontract that had been jointly endorsed by AGC, ASA and ASC in the Spring of 1994. A furor over the "pay when paid" clause created by AGC members who think that only "pay if paid" is appropriate and that AGC "sold out" its members is likely to blame for AGC's apparent change of position on this key issue. AGC has authorized the development of a subcontract containing pay-if-paid language that may replace the existing AGC 640 form.

If this withdrawal of endorsement occurs, the contracting and subcontracting community will be free to return to their adversarial way of doing business —fighting over each and every contract provision during the time between the bid and the time work commences. Contractors will return to imposing one-sided subcontracts upon those lower on the construction "food chain," regardless of whether these provisions are fair and who is in the best position to manage the risk.

Even though AGC is apparently seriously considering withdrawing its endorsement of the AGC 640, the model subcontract can still be used by those contractors and subcontractors enlightened enough to do so.

The AGC 640 subcontract remains technically endorsed by both AGC and ASA for the moment. The AIA 401 subcontract is still endorsed by ASA.

In view of the emphasis on "pay-if-paid" language in many subcontracts, it is more important than ever that subcontractors condition their bids upon acceptable subcontract language. Subcontractors will only be successful in negotiating equitable subcontract payment language if they retain leverage through conditioning their bids. The subcontractor who simply submits a price which is relied upon by the contractor is hard pressed to refuse to sign a one-sided proprietary subcontract without fear of being replaced by the next highest bidder and faced with a lawsuit from the contractor over the increased cost.

In contrast, a subcontractor who conditions his bid upon acceptable subcontract language can walk away from the project without liability if an agreement on language cannot be reached with the contractor. This approach also helps avoid the inevitable disagreement and friction that occurs when a subcontractor's bid is accepted, he starts work and later receives an unacceptable subcontract in the mail.