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Five Key Construction Contract Terms That Every Subcontractor Needs to Negotiate
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Five Key Construction Contract Terms That Every Subcontractor Needs to Negotiate

June 1, 2021 Construction Industry Legal Blog

Reading Time: 8 minutes

One of the most important aspects of construction project success for subcontractors can be the subcontract agreement.  A one-sided subcontract in favor of the contractor can make problems experienced by the subcontractor on the project even worse, and leave the subcontractor with very few options.  While subcontractors may not always have the ability to renegotiate the entirety of a contractor’s standard form subcontract, this blog highlights five of the key provisions that every subcontractor should carefully review and try to negotiate in order to try to put themselves in a position to achieve successful project outcomes and minimize the effects of project problems.  Other subcontract provisions are also important, so having an attorney experienced in construction law evaluate the subcontract is recommended.

subcontractor construction contract subcontract scope of work construction change order force majeure

1. Subcontract Scope of Work

Subcontractors need to pay close attention to and negotiate subcontract scope of work provisions because they describe the parameters of what the subcontractor is contractually obligated to provide the contractor in exchange for the subcontract price.  It is critical for the subcontract scope of work provision to be as specific as possible regarding what work the subcontractor is required to perform, and what is excluded from the subcontractor’s scope of work.

Subcontractors should try to make sure that all of their clarifications, assumptions and exclusions are incorporated into the scope of work provision.  If possible, subcontractors should try to have their bid or proposal incorporated by reference into the subcontract or identified as a subcontract document, in order to be able to point back to clarifications and exclusions in the proposal as limiting the subcontractor’s scope of work.

Similarly, subcontractors should try to avoid general catch all language in the scope of work that could make the subcontractor’s obligations broader than expected.  For example, language requiring the subcontractor to provide all work “reasonably inferable” from the plans and specifications should be avoided if possible, or if not, the subcontractor should try to include language limiting “reasonably inferable” to only additional work that is incidental to the plans and specifications and is non-material in added cost.

2. Subcontract Payment Terms

The payment provisions of the subcontract are critical because they govern how and when the contractor is obligated to pay the subcontractor for its work.  The payment provision needs to clearly state the timing for submission of pay applications and what is required to be included in order to provide clarity and avoid disputes as to what is needed to make the pay application complete.  The provision should also expressly state the timing for when the contractor is required to make payment after receipt of the pay application.

One of the most critical provisions that subcontractors should try to avoid are pay if paid provisions, also known as contingent payment provisions.  Pay if paid provisions make the contractor’s obligation to pay the subcontractor entirely dependent on the contractor first receiving payment from the owner.  In other words, pay if paid clauses shift the risk of the owner’s nonpayment from the contractor to the subcontractor, so that if the owner never pays the contractor, the contractor has no legal obligation to ever pay the subcontractor for its work.

Although not enforceable in every state, many states, including Florida, will enforce a pay if paid provision if it clearly and unambiguously states the intent to shift the risk of nonpayment by the owner to the subcontractor.  Provisions which expressly state that payment from the owner is a “condition” or a “condition precedent” to the contractor’s obligation to pay the subcontractor, or that expressly state the contractor’s payment obligation is “contingent” upon the contractor receiving payment from the owner, are likely to be enforceable.[1]  If the provision does not include such express language, courts will construe the provision as a pay when paid provision, requiring payment by the contractor within a reasonable time even if the contractor has not received payment from the owner.

Subcontractors should attempt to negotiate pay if paid provisions out of the subcontract if possible.  If not, subcontractors should try to negotiate an ability to stop work if the subcontractor has not been paid within some period of time, such as 60 days for example, due to no fault of the subcontractor.  This can allow the subcontractor to attempt to stop digging the payment hole further by being forced to continue to work without payment, even if payment for prior work is subject to the pay if paid provision.

3. Change Orders

Changes are a common occurrence on construction projects, and subcontractors therefore need to pay close attention to the subcontract provisions governing change orders.  Subcontractors should try to include language that provides that the subcontractor is only required to perform change work after a change order has been signed by the contractor, and approved by the owner if applicable.  This helps avoid the situation where the subcontractor is directed in the field to perform work but the contractor or owner later disputes payment for the change after the work is performed.

Subcontractors should also ensure that the subcontract provides a mechanism for the subcontractor to seek a change order for additional money and/or time for events or causes outside of the subcontractor’s control. Given the recent extreme rise in certain material costs, such as lumber and steel, subcontractors should try to negotiate a material escalation clause entitling the subcontractor to a change order if material prices increase by some predetermined percentage.   Additional details on dealing with material price increases can be found in another recent blog here.

Subcontractors should attempt to avoid strict notice requirements, such as provisions deeming a change order or claim waived if notice is not provided timely.  If such provisions cannot be avoided, subcontractors should negotiate reasonable time periods for notice, with the time beginning when the subcontractor actually became aware that the event would have a cost or time impact.

4. Force Majeure

The last year with the COVID-19 pandemic has brought to the forefront the importance of force majeure provisions in subcontracts.  A force majeure clause permits a party to delay performance or to be excused from performance upon the occurrence of a “force majeure event” that renders performance commercially impracticable, illegal, or impossible.  Subcontractors should try to identify in the force majeure provision numerous specific causes, such as fires, floods, hurricanes, and other Acts of God, as well as things like war, riots, strikes, and specifically pandemics and government actions.  Subcontractors should also include catch-all language covering any event that is unforeseeable and beyond the reasonable control of the subcontractor to try to ensure that even if a specific cause is not listed it will be more likely to fall within the catch all portion of the force majeure clause.

Force majeure events not only cause delays, but can also cause increased costs of performance.  Therefore, subcontractors should try to negotiate to include that the force majeure excuses performance and entitles the subcontractor to additional time to perform, and to an equitable adjustment of the subcontract price.

5. Subcontract Termination

Both the provisions that govern when the subcontractor can be terminated, and when the subcontractor can terminate, are important areas for negotiation.  First, most subcontracts allow the contractor to terminate the subcontract for convenience.  Subcontractors need to try to make sure that in such case, the subcontractor not only receives payment for its completed work, but also the reasonable costs involved in terminating, such as demobilization costs, as well as overhead and profit on work not performed due to the termination.

In the case of the contractor’s right to terminate the subcontract for cause, subcontractors should try to limit the bases for termination for cause to specific and objective items and try to avoid provisions that give undue discretion to the contractor to determine whether or not subcontractor is failing to perform.  Subcontractors should also insist on prior written notice and try to obtain a reasonable time period to cure, such as 30 days, prior to the contractor having the right to terminate.  Subcontractors should also try to avoid language giving the contractor the right to withhold payment for work performed prior to termination.  If the provision states that the subcontractor will not be entitled to payment until the subcontractor’s scope of work is completed, and the costs of completion will be assessed against amounts owed by the subcontractor, the subcontractor should insist on those costs being limited to only reasonable costs necessary to complete the work.

With respect to the subcontractor’s ability to terminate the subcontract, the subcontractor should try to obtain the ability to terminate the contract for cause, particularly for failure of payment by the contractor.  Even if there is a pay if paid provision in the subcontract, the subcontractor should try to negotiate the ability to terminate (or at least stop work) if payment is not made after some period of time due to no fault of the subcontractor.  In the case of a termination for cause, the subcontractor should try to negotiate the right to payment for all work performed, costs and damages due to the termination, and lost overhead and profit on work not performed due to the termination.

[1] See e.g., DEC Electric, Inc. v. Raphael Constr. Corp., 538 So. 2d 963, 964-65 (Fla. 4th DCA 1989) (“In most cases which have found that the language of the payment provisions created condition precedents, the term ‘condition’ or ‘contingency’ was explicitly used.”)

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