Three’s The Charm: Critical Subcontract Terms

subcontract agreement termsMany contracts seem impenetrable, with pages upon pages of fine print and complicated language. What is a subcontractor to do? At the very least, smaller construction firms should focus on the areas where a mistake could be costly and exposure is likely. Three categories could make the difference between profit or loss, and liability or success.

Scope of Work

A subcontractor can gain a tactical advantage and protect itself in advance of an issue through the delineation of the exact scope of work. While a primary contractor may try to have the description of the work be as broad as possible (for example, stating “subcontractor is responsible for all work, labor, materials and services on the project”), the subcontractor should try to narrow the subcontract to cover only that for which it is responsible.

The subcontract should list not only the specific work the subcontractor will actually perform, but also that for which it will not be responsible. Such specifics should allow a subcontractor to prevent disputes on whether an item should have been included in the subcontract.

Time

Most subcontractors don’t think twice about entering into subcontracts that state “time is of the essence.” When time is determined to be of the essence, it means a breach of the time provision will be a material breach of the subcontract. Because delays are common on construction projects and may be outside of the subcontractor’s control, a subcontractor should exclude this provision from any subcontract.

If eliminating this provision proves difficult, the subcontractor should at least broaden the time requirements. For example, many contractors refer to a critical path schedule or require periodic updates from the subcontractor. Limit or exclude these schedules and requirements while adding more time to complete assigned tasks.

Three’s The Charm: Critical Subcontract Terms

Payment

Most importantly, a subcontractor must look carefully for popular “pay-when-paid” provisions, which effectively state the contractor will not be required to pay the subcontractor until it receives payment from the owner. These provisions generally mean exactly what they say and can result in payment being delayed or withheld without any fault of the subcontractor.

If eliminating these provisions is not possible, then the subcontractor should look to ensure any pay-when-paid or pay-if-paid provision creates a reasonable time for payment to be made versus an absolute condition precedent to payment. Subcontractors also should not reduce or diminish their lien rights or abilities to lodge a claim against any existing bond-something primary contractors often attempt to do.

It can be easy to get lost in the minutiae of a subcontract agreement. But it really comes down to three things: You contract to perform certain work; you need an amount of time to complete the work; and you want to be paid for the work performed. Tweaking a subcontract in these three areas will significantly enhance a smaller company’s chances of getting through a job successfully.

Three’s The Charm: Critical Subcontract Terms was last modified: February 16th, 2016 by Alexander Barthet

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