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Subcontract Provisions: Sword or Shield?

The typical construction subcontract contains a number of provisions, many of which will favor either the general contractor or the subcontractor, depending on whose form of agreement it happens to be.

But no matter whose form it is, understand three basic contract realities:

  • there is no such thing as a standard contract;
  • most contracts are written to favor one party; and
  • contracts can be modified.

A number of factors can impact a party’s ability to modify any subcontract. Economics play a major role. The general contractor is generally in a position to dictate which provisions it will or will not accept as it controls the selection process. This is especially true when projects are scarce. On the other hand, a particular subcontractor may have the best price or be one of the few qualified firms available at the time for the project at hand. That would move that subcontractor into a preferred position and give it an ability to negotiate terms. Experience is another factor. Both parties will be more willing to accept changes from someone with whom they have successfully worked before.

Attorneys like to stress the importance of incorporating a reasonableness standard–both parties should be expected to act fairly toward each other, and no one should be asking for things that are not customary or just one-sided. Of course, this is easier said than done, but it should be the first area of discussion between the parties, as it sets the proper tone for the negotiations of an equitable agreement.

An example of this can be seen in how the work is defined. To say that it will be everything and anything that can be inferred from the plans and specifications may be an overreach. On the other hand, limiting the work to only what is included within the original proposal may be too restrictive. Finding a middle ground, based on what is traditionally incorporated into the specific work, would be a very good start.

It is no different with the other critical provisions. From setting out payment terms to any penalties associated with late performance, from the extent of any indemnification to the manner of exercising a termination provision, all can be addressed in a fashion that properly and fairly protect each party without giving one party an advantage over the other.

Having said all this, both parties will want to be sure to review the following subcontract provisions:

  • work;
  • price and payment terms;
  • time;
  • insurance and indemnification;
  • claims;
  • warranties;
  • default and termination; and
  • dispute resolution.

Some can be troublesome and many are susceptible to shifting risk from one party to another. Tweaking these provisions to suit one’s particular circumstances could make the difference between a profit or a loss on a job, especially if things don’t go according to plan.

While agreements need not include pages upon pages of terms and conditions, no aspect should be left to a handshake. Having taken the time to get this agreement in writing, avoid subsequent handwritten notes or verbal change orders. Memories become hazy over time, so always convert any modification to a written contract signed by both parties.

A subcontract is in place to minimize any subsequent debate on what was meant between the general contractor and subcontractor. Knowing when a provision is either a sword or a shield will allow both parties to understand the associated risks, liabilities and exposures.

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