Your Subcontract: Deconstructed
A Provision-by-Provision Analysis of Your Subcontract
Part Two of a Five Part Series

By Alexander E. Barthet

Your subcontract; done right, it can be both a sword and a shield in your dealings with your subcontractors. Careful consideration should be given to each provision such that the risk and benefit of each should be measured against the scope of the work and the contract price. This series is designed to give you a better understanding of each provision so that you can better manage the risks and exploit the benefits in your negotiations.

In this third part, we shall discuss Article 8: Change Orders, Article 9: Notices and Claims, Article 10: Bonds and Insurance, and Article 11: Indemnification.

Article 8: Change Orders

Change orders, they are inevitable. Therefore, it is critical to plan for them. In this regard, there are two primary issues to address. The first is the method of calculating the change order price. It is no surprise that many a subcontractor have attempted to make up for losses on a project by inflating change orders. To prevent this, it is important that your subcontract contain both a designated fixed overhead and profit percentage for which the cost of all changes shall not exceed. It is also essential that the subcontract contain a unit price schedule for both men and material (as applicable). The presence of these two provisions should limit your exposure on change orders to the amount of time needed for the work. And even this can be controlled by requiring that all changed work (done on a time and materials basis, versus lump sum) be accounted for separately and that daily tickets be approved and signed for by a representative of the contractor.

Second, you should make the obligation to perform change order work mandatory, not optional. It would be problematic, for example, if the electrician could refuse to perform the requested extra work such that you were forced to hire a replacement electrician just for the extra work.

These two issues are dealt with in the following sample change order provision: “Contractor reserves the right to require Subcontractor to make changes in the Work, including additions and deletions without invalidating this Subcontract. Subcontractor, only upon the written directive from Contractor, shall perform the changed Work as set forth in the Contract Documents. At the request of Contractor, Subcontractor shall submit a detailed written proposal for any applicable price and time adjustment attributable to the changed Work. All change orders shall be priced in a manner not to exceed the actual cost of the net changed Work, less any and all credits and savings, plus 10% for overhead and profit, said amount to be inclusive of any and all taxes, insurance, bond premiums, expenses, labor, materials, fees, costs, and acceleration, inefficiency, out-of-sequence, impact and delay costs. If the parties are unable to agree upon such adjustments, Contractor may elect to issue the change order to Subcontractor directing such work to be performed by Subcontractor and any adjustments to the subcontract price or time shall be subject to ultimate determination in accordance with this Subcontract and the Contract Documents and Subcontractor shall, nonetheless, proceed immediately with the changed Work and Subcontractor shall have work tickets for said changed Work signed daily by Contractor’s project manager. A failure of the Subcontractor to perform this Work shall constitute a material breach of this Agreement, regardless of the legitimacy of the Subcontractor's contentions as it is specifically understood and agreed that the progress of the Subcontract Work may not be delayed by reason of any controversy between the parties. Subcontractor shall keep a detailed account of the direct savings and direct cost due to the changed Work separately from its other accounting records and shall make such records available to Contractor at Contractor's request. In no event shall Subcontractor proceed with changed Work without a change order issued pursuant to this article.”

Article 9: Notices and Claims

To avoid any ambiguity as to how notice is to be provided, it is best that the parties spell out how, where, and to whom notice under the contract must be provided – the more specific the better. To accomplish this, a provision such as the following where the name, address and manner of service are designated by you, as appropriate, should suffice. Note that good practice dictates that notice should be sent to either two individuals (such as you and your lawyer) or to one person, but via two methods (such as fax and first class mail or postal mail and e-mail).

“All notices provided for in this Subcontract shall be in writing and deemed given if delivered via both first class postal mail and e-mail to: For Subcontractor: [Attention, Name, Address, E-mail Address]; For Contractor: [Attention, Name, Address, E-mail Address]. Either party may, from time to time, by notice to the other as herein provided, designate a different address and/or representative to which notices to it should be sent. All notices shall be deemed received the earlier of actual receipt or three business days from delivery.”

With respect to claims, it is important to do two things. First, you should create a time period in which all claims must be submitted. Second, you should limit your liability to the subcontractor to any recovery you may be able to obtain from the owner. These two hurdles should severely limit the amount and type of claims you receive. The following provision accomplishes both of these goals.

“Any and all claims for additional compensation or subcontract time which Subcontractor has against Contractor shall be made in writing no later than seventy two (72) hours from the first event giving rise to the claim. Any and all claims submitted thereafter shall be deemed waived. Subcontractor recognizes that any and all timely submitted claims shall be submitted to the Owner and that Subcontractor’s right to recover on any such claims is expressly contingent upon Contractor receiving payment and/or a time extension from Owner. Contractor shall have discharged its obligation to Subcontractor with respect to the claim when Contractor has paid and/or given to Subcontractor it’s pro rata share of any recovery Contractor may have received from Owner for such claim.”

Article 10: Bonds and Insurance

If your project is bonded, it is highly recommended that you require your primary subcontractors to bond their portion of the work. If you have bonded subcontractors, it is critical to specify certain conditions in your subcontract as to the bonds. First, you want to make sure that the payment and performance bond is written for at least the full subcontract price. Second, it is important that the bond be unconditional, written on a form that is satisfactory to you, and be issued from a company licensed in your state. Third, you should require that the subcontractor tender to you the original bond within a short period of time from contract signing (usually 10 to 30 days). Finally, you should place the burden of bond increases (as the result of change orders) upon the subcontractor. This last part is vital so that the amount of the bond always matches the value of the subcontractor’s contract.

Insurance is more complicated. It is strongly recommended that you provide a copy of the prime contract to your attorney and insurance agent so that he or she can assist you in drafting subcontract insurance requirements that match the requirements of the prime contract. That aside, there are some general issues you should be aware of.

First, you should require that, at a minimum, you and the owner be listed as additional insureds on the policies of your subcontractors. Second, verify that throughout the course of construction, your subcontractor maintains the insurance. This means that if you receive a certificate of insurance that shows that coverage expires prior to completion of construction, you must be proactive in demanding a new and updated certificate of insurance showing coverage for that additional period. The failure to both remember and demand the updated information may leave you bare if a claim arises.

Finally, you should require that the insurer waive any and all rights of subrogation against you, the design professionals and the owner. Subrogation is the ability to seek redress from third parties when the insurance company has paid on a claim. The reason a waiver of subrogation is important is that it minimizes the risk that after an insurance claim is paid out, the insurance company will sue a third party, such as the owner, for recovery, who in turn may sue you. Said simply, it is an easy backstop for potential claims that could circle back against you.

Article 11: Indemnification

A contract provision regarding indemnification cannot be discussed without a brief review of Fla. Stat. Section 725.06 which limits the scope of contractual indemnification provisions. At the risk of oversimplifying Section 725.06, the statute attempts to prevent one party from agreeing to take on the risk of loss caused by another without certain safeguards such as, for example, a cap on the risk of loss and, under no circumstances, losses resulting from the willful or intentional misconduct of the party being indemnified. Recognize that there is no prohibition in requiring a subcontractor to indemnify you for losses caused by the subcontractor.

That in mind, your indemnification provision should have two sections. The first is one directed at losses suffered as the result of the subcontractor’s own acts or omissions (which are not controlled by Section 725.06). The second should address indemnification by the subcontractor for those losses suffered by you as the result of your own acts or omissions (which are governed by Section 725.06). A sample provision follows.

“To the fullest extent permitted by law, Subcontractor shall defend, indemnify and hold harmless Contractor and Owner and their directors, officers, shareholders, employees and agents against any and all losses, liabilities, costs, claims, causes of actions, suits, damages and expenses (including reasonable attorneys fees and disbursements), arising out of or resulting from the act, omission or default, in whole or in part, of Subcontractor, its subcontractors or their respective employees or agents.

Moreover, To the fullest extent permitted by law, Subcontractor shall defend, indemnify and hold harmless Contractor and Owner and their directors, officers, shareholders, employees and agents against any and all losses, liabilities, costs, claims, causes of actions, suits, damages and expenses (including reasonable attorneys fees and disbursements), arising out of or resulting from the act, omission, or default, in whole or in part, of Contractor and/or Owner and their respective directors, officers, shareholders, employees and agents. This indemnity shall be limited to $1,000,000 which the parties agree bears a reasonable commercial relationship to the contract and is deemed part of the project specifications or bid documents. Notwithstanding, nothing herein shall require that the indemnitor to indemnify the indemnitee for damages to persons or property caused in whole or in part by any act, omission, or default of a party other than the indemnitor, any of the indemnitor’s contractors, subcontractors, sub-subcontractors, materialmen, or agents of any tier or their respective employees, or the indemnitee or its officers, directors, agents, or employees. Moreover, such indemnification shall not include claims of, or damages resulting from, gross negligence, or willful, wanton or intentional misconduct of the indemnitee or its officers, directors, agents or employees, or for statutory violation or punitive damages except and to the extent the statutory violation or punitive damages are caused by or result from the acts or omissions of the indemnitor or any of the indemnitor's contractors, subcontractors, sub-subcontractors, materialmen, or agents of any tier or their respective employees.”

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Future articles will discuss other key provisions of your subcontract – look for part four in this five part series.

This series only covers some of the many aspects involved in contracting. Each situation and contract is unique and you should contact a lawyer to assist with your specific situation.

This article was first published in the March 2008 issue of South Florida Homebuilder as the third of a five part series on contractor-subcontractor contracts.

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Article Concepts: contract, written agreements, signers, contract specific, contract documents, work, performance

 

© 2008, The Barthet Firm