Contractor Subcontractor Contracts: What You Should Know
Contractor subcontractor contracts are often misunderstood, and their importance is often overlooked. Contractor subcontractor forms can be complex and lengthy, filled with legalese and multiple sections which clearly lay out the relationships between parties and the requirements for subcontractors which must be met. While filed at the municipal or county level, the significance of contractor and subcontractor forms cannot be emphasized enough. However, this is the nature of the contractor subcontractor relationships, they are vital to a good job. The relationship between the owner and general contractor can make or break the whole project.
The contractor subcontractor contract is very long, and incorporates a lot of different key elements. While both forms are important, the contractor/subcontractor forms contain some very interesting ownership clauses. Who is the owner on a contractor subcontractor contract? The contractor will be the party principally responsible for the project, with full responsibility over the entire project and its workforce. In order for the contractor to do this, he or she must delegate certain duties to his own employees , or those persons or entities he hired himself – the subcontractors. The subcontractor will be vital to any building project. It’s more than likely that the subcontractor will be a person or organization that specializes in some phase of a project. For example, a general contractor may hire a subcontractor to perform all electrical work on the premises, because the general contractor doesn’t possess the right training. Other subs might be involved as well. For a simple remodel job on a bathroom, it might involve just the general contractor and a plumbing subcontractor who will take care of all water pipes and disposals in the home. For a larger scale project, there could be a number of subcontractors with a number of specialized functions. For example, a hospital project might have subcontractors who are responsible for the HVAC system, electrical power, plumbing, painting, construction, and so forth. The contractor subcontractor agreement must involve all the parties and include all details about how their relationship will work. This protects all of those involved, the property owner, the contractor, the subcontractor, and any other interested third parties. Properly drawn, a contractor subcontractor agreement will encompass all relevant responsibilities, duties, and stipulated conditions.
The Essentials of a Subcontractor Contract
Every contractor-client relationship is personal and unique, yet every relationship hinges on the principal of providing a quality product or service in exchange for compensation. A written subcontractor contract codifies that principle such that all parties involved have a clear roadmap of what to expect from the other. The majority of subcontractor contracts include the following components that will prove very useful should disputes arise over interpretations of the agreement.
Scope of Work
The first and foremost component of a subcontractor contract is a precise statement of what work will be performed by the subcontractor. Depending on the type of project, the scope may be broad or narrow. Vague references to performance may present difficulties in obtaining enforcement of the contract and also lead to disagreement as to whether a particular piece of work falls outside of the intended scope of the contract, i.e. when an owner or general contractor approaches a subcontractor with an additive change order for a portion of the work, the subcontractor may seek to benefit from a very narrow scope of contract assertion.
Payment
As a subcontractor, payment provisions are one of the more important elements of the contract. The contractor-client relationship can often be put at risk by payment disputes. A subcontractor contract should specifically state the payment considerations for the scope of work, such as the exact dollar amount, frequency of payment, schedule of payment if the work spans several months, whether payments are to be made regardless of the contractor’s ability to maintain cash flow, when payment is due if not dependent on a specific term, etc.
Deadlines
Just as the subcontractor contract should clearly outline the scope of work, payment, and the resolution of disputes, the timeline for completion of the scope of work should be clearly specified and agreed upon by each party. Often times the contractor relies on the subcontractor to perform vital portions of the contract that are essential for the project to proceed in a timely fashion. Breach of this provision may require show cause hearings or other punitive actions from the contractor and could result in the termination of the subcontractor.
Legal Considerations and Obligations
Compliance with applicable legal requirements is especially important in a contractor/subcontractor contract, as these can vary greatly by state. For example, some states may require that the contractor be licensed in order to operate within the state, whereas other states do not impose any such requirements.
Licensing Requirements
As you can imagine, depending on the project, subcontractors may have differing licensing requirements from the contractor. Because of this, it is essential that the contractor reserves the right to request proof of any licensure or certifications if necessary. Certain contractor/subcontractor contracts require that the contractor be licensed in order to ensure that those individuals working on the project are of the requisite experience and knowledge.
Insurance
This category encompasses several different areas of coverage, but generally, insurance requirements are a vital component of a contract. Most contractor/subcontractor contracts and master construction contracts require both the contractor and subcontractor to carry general liability insurance, workers’ compensation insurance (or WC exemption), and property insurance. Additionally, the contractor will likely require the subcontractor to list the contractor as an additional insured on these policies in order to protect against contractual liability in the event a suit is brought by an injured worker or a third party.
Compliance with Laws
Most agreements will include a provision whereby the contractor and subcontractor agree to comply with all applicable laws, rules, and regulations. A contractor/subcontractor contract should clearly assign who has the responsibility for obtaining necessary permits, filing drawings, and ensuring compliance with state, local, and federal construction codes. Additionally, it is important to discuss how any necessary changes to the plans and specifications will be implemented with regard to obtaining a permit.
Dispute Resolution
Contractor/subcontractor agreements also contain dispute resolution provisions. These provisions set forth the rationale for a more streamlined resolution process. For example, courts are generally reluctant to interfere with private dispute resolution proceedings, and therefore, they will generally honor agreements to delegate matters to arbitration, as they are more presumptively private.
Forcing arbitration, without an option for litigation, is not necessarily appropriate for all disputes – especially those of significant dollar amounts which are more difficult to assess. Therefore, in some cases, it is important for the contractor and subcontractor to designate whether small disputes should go to arbitration or litigation in order to memorialize their intent.
Indemnification Agreements
In addition to other provisions, the contractor/subcontractor contract will contain an indemnification provision, as well as several disclaimer provisions. For example, the contractor will likely disclaim any responsibility for specific damages incurred by the subcontractor during the project. Some parties even waive their right to claim consequential damages arising from the performance of the work. However, there is a fine line here. The law generally prohibits a contractor from waiving liability for property damage and personal injury to the extent that the eviction of such waiver is against public policy. Therefore, public policy concerns in some jurisdictions may affect the validity of broad waiver and indemnification provisions. Other courts, however, recognize that contracting parties are free to waive their potential liability in such contracts.
Managing Risk
A critical component of contractor-subcontractor contract negotiations is risk management. Subcontractors are typically required to indemnify the contractor for certain events, such as defective or incomplete work performed by the subcontractor, and potentially for injuries and damages incurred during the work performed by the subcontractor. As with all indemnity clauses, a careful analysis is required so that the clause is not construed as too broad and not enforceable in the event of litigation. Particularly susceptible to challenge are indemnity clauses in which the subcontractor agrees to indemnify the contractor for the contractor’s sole negligence.
Dispute resolution mechanisms are also important tools of risk management to consider when negotiating your contract with the contractor. Often, contractor-subcontractor contracts will have in them requirements that all disputes be submitted to arbitration. In arbitration, an arbitrator (or panel of arbitrators) hears the parties’ evidence and renders an award. On the one hand, arbitration can be less expensive and less time consuming than litigation in court. On the other hand, arbitration is typically not conducive to full discovery, nor is there as much information available to the public regarding pending arbitration matters as there is regarding pending court cases.
Any indemnity clause and/or dispute resolution mechanism should be tailored to your particular project and risks inherent in the project. In short, it is best to consult with an attorney when negotiating your contract with the contractor.
Best Practices in Contract Drafting
Given the power that contracts have to dictate the scope and terms of your relationship with your subcontractors, it’s critical that you draft clearly enforceable subcontractor contracts. These are a few tips that can help you build airtight agreements:
Communication is key. Having open lines of communication with your subcontractors will make it so much easier to create enforceable contracts. It will also make it more likely that you’ll be able to address potential issues before they become attempts at contract renegotiation.
Get everything in writing . Don’t attempt to negotiate important agreements over the phone or via email—get everything in writing. When you get everything in writing, you will have clearer documentation in place that will outline your expectations for the subcontractor’s work.
Don’t sign contracts the subcontractor wrote. If your subcontractor submits its own contract, review it line by line to get as much information as possible about its expectations and stipulations before drafting an agreement of your own that fits your needs and yours alone. Then, keep all drafts of your contract and the subcontractor’s contract so you have a clear record of every term discussed.
Common Contractor/Subcontractor Challenges
One of the most difficult aspects of any construction project is the challenge faced by subcontractors and contractors to come to an agreement on price and methodology for a job. The first step in this process is a clear project scope of work. But all too often, disputes arise, not necessarily because of what is in writing, but simply because the parties cannot agree on how to get a job done.
The difficulty can be blamed on any number of factors, ranging from the lack of written terms, disagreement over what the written terms mean, or the simple issue that many times a third party has inserted itself in the process. In either event, subcontractor and contractor disputes are not uncommon.
There are a number of steps that can be taken prior to project commencement to avoid such problems. Most often, having a clear, written scope of work that also addresses payment terms, performance standards, and maybe even some incentive or damage provision can go a long way to address issues as they arise either during or after the project is completed.
Sometimes, however, issues just develop which even the best written form contract cannot resolve. In such instances, it often becomes necessary to try to resolve such disputes fairly and quickly, whether through mediation or, in some cases, litigation.
Successful Contractor/Subcontractor Agreements
In today’s construction industry, subcontractors are crucial to the successful completion of a contractor’s project as they often have specialized knowledge and skills that are necessary for a job. Yet, when a contractor-subcontractor relationship goes awry, it can spell disaster for both parties. Here, we take a look at three case studies of successful contractor-subcontractor partnerships and analyze the reasons behind their success.
Case Study 1: Mullins Construction and Bright & Sons Electric
Mullins Construction, a mid-sized general contractor, was awarded a contract to construct a new hospital rear addition. To complete the job, they subcontracted with Bright & Sons Electric, an electrical contractor for commercial and retail projects. The first leg of the project involved the construction of steel framework, which later supported the middle tier of the hospital. With construction prepared to begin on the second floor, Bright & Sons Electric began constructing the electrical work and installing conduit in the steel framework.
Due to heavy rains, construction at the site was delayed, which pushed back the installation of the steel framework. As a result, Bright & Sons Electric’s work was delayed by weeks. After Mullins Construction and Bright & Sons Electric were both delayed by the rains, the job site was ready for the electricians to resume the remaining work on the project. They returned to find the steel framework had been coated with a primer, which inhibited the bonding process for the installation of the conduit. The coating spread throughout the entire interior, exterior and additional areas of the structure. Unable to perform its work, Bright & Sons Electric asked Mullins Construction to remove the coating so they could proceed with installation.
Although the contractor was responsible for the design drawings, Mullins Construction did not consider the electrical contractor’s issues and problems in the design for the project. As such, Mullins Construction was liable for damages incurred during the electrical company’s delay.
Case Study 2: Clark Construction and Shapiro Mechanical
Clark Construction, a general contractor, won the contract to build a school. Clark Construction reached out to Shapiro Mechanical for the contract to install mechanical and plumbing work. The mechanical subcontractor responded with a list of values for each item in order for the contractor to budget correctly for the job. Clark Construction submitted the proposed bid and won the contract.
Just prior to the start of construction , Shapiro Mechanical submitted a second bid with lower offered prices due to market conditions for the equipment needed on the job. The contractor accepted the mechanical company’s second offer. Even after the subcontractor had the drawings for the project, Shapiro Mechanical continued to hold the offered price for the job. Four months later, however, the subcontractor asked for a price increase due to market price increases, which reflected a discrepancy between the offered price and costs it incurs.
Clark Construction refused to pay the subcontractor’s increase, so the mechanical contractor filed a claim for damages for the unforeseeable market price increase incurred due to job delays. Despite having signed the contract, the contractor omitted a ‘changes clause’ in the document. This lack of a ‘changes clause’ made the original offered price binding and the mechanical company had no right to an increase from the contractor. The subcontractor may have been able to keep to original contract price if it did not wait four months to request a price increase.
Case Study 3: Barton Construction and Paul’s Plumbing
Barton Construction won a contract for the construction of a commercial building. The general contractor made no changes to its contractor agreement with any of its subcontractors on the project. A plumber submitted with the offer bid of $720,000. The contractor executed the contract for the job with the plumbing company.
During the final month of construction, Barton Construction realized that its contractor had not provided enough time to complete the work. The general contractor requested a time extension, which it received. Then, the contractor requested a change order to increase the contract amount by $160,000. The contractor explained that the additional payment was necessary because it would have to use a mechanized cutting tool to adjust a "concrete patio pour."
Paul’s Plumbing refused Barton Construction’s request for the change order and filed a suit against the general contractor for breach of contract. Upon further investigation, the defendant stated that it informed the plaintiff that it should have a changed condition clause or a change requirment clause in its contract. Barton Construction ultimately included an addendum which included the "condition" in the contract. The plaintiff was entitled to the extra amount under its contract.