Ten Things Every Sub Should Think About Before Signing That Subcontract

Kegler Brown Construction Newsletter

Many subcontractors feel increasingly hopeless about securing fair subcontract language, particularly in view of the shortage of profitable work during the economic downturn. While it is hard to walk away from work, sometimes it is better to lose a job than to do an unprofitable one. So subcontractors would be wise to ask themselves these questions before signing any significant contract.

  1. Did you condition your bid upon satisfactory subcontract language?
    If you were wise enough to condition your bid, you maintain the leverage to walk away absent fair contract terms. ASA has developed a bid proposal form available to members at www.asaonline.com.
  2. What is the reputation of the contractor and owner?
    Are you familiar with the reputation of the contractor, owner and other project participants? If not, ask around. The information that you can learn from others in the industry may save you from a costly firsthand learning experience.
  3. What proof of financing exists on the project?
    Contractors are often asking for your financial statements, but subcontractors, who provide financing in the form of labor and materials, to say nothing of retainage, seldom ask for the contractor’s (or owner’s) proof of financing on the job. They should.
  4. Is the contract “pay-when-paid” or “pay-if-paid?"
    "Pay-when-paid” and “pay-if-paid” clauses have far different legal effects and consequences. “Pay-when-paid” delays the timing of payment, but in most states still requires a contractor to pay you within a reasonable period of time. In contrast, under “pay-if-paid” the contractor never has to pay you if he is not paid by the owner.
  5. Are lien rights (or bond rights) preserved?
    Lien rights were initiated by the founding fathers, like Thomas Jefferson, to protect builders who would be constructing the great improvements of the new capital city of Washington, D.C., centuries ago. They should not be waived without payment. Contrary to popular belief, in many states (including Ohio) mechanic’s lien rights can be waived upfront by contract.
  6. Are the indemnity obligations reasonable and insurable?
    Many subs are rightfully concerned about indemnifying contractors and others upstream from their own negligence, particularly in states without anti-indemnity laws. And while property damage and personal injury indemnity obligations are generally insurable, broader contractual obligations may not be.
  7. Have the insurance and indemnity provisions been sent to your insurance agent?
    Only if you send the precise wording of the insurance and indemnity clauses (or the entire subcontract) to your insurance consultant can you be sure that your insurance agent knows exactly what you need to satisfy the contract insurance requirements.
  8. What happens in the event of delay?
    Time is money on any project, so “no damage for delay” provisions should be avoided. Are liquidated damages recoverable if you delay completion? Be alert for actual damages for a late opening, which could exceed liquidated damages, particularly with respect to casinos, retail establishments and other revenue-generating businesses.
  9. What notice is required for change orders, claims or time extensions?
    Notice in writing is generally required, with more and more contracts containing short periods for action and detailed perfection requirements. Know what you can live with and educate your team on exactly what is required before the job begins.
  10. What happens if there is a dispute?
    Know whether you go to court or arbitration. Try to avoid provisions that require you to take legal action in jurisdictions far from the project location. Think twice before agreeing to waive your right to a jury trial.

Subcontractors who remember these things, and implement strategies to minimize their legal risk, will be better equipped to weather the current economic storm and enjoy the brighter days ahead.