Negotiating Subcontract Agreements - There has to be a better way

I have spent a good part of my career either as a General Contractor (GC) myself or in an executive management position within the GC management team or as a consultant to the GC.? While the GC is certainly central to any project, subcontractors are often the ones physically building the project and yet surprisingly take on the most risk, while reaping the least reward.? The disproportionate amount of risk undertaken by subcontractors is due entirely to the GC/subcontractor agreement that is typically written, in its entirety, by the GC with iron clad protections to the GC.? Typical subcontract agreements include the following clauses that are designed to eliminate risk to the GC and transfer that risk to the subcontractor.? Due to the risk imbalance, subcontractors often push back on the contract language, making mutually acceptable agreements difficult to find.? Some of the most ominous clauses are:

1.?????? ?Paid when paid.? This clause forces the subcontractor to wait until the GC is paid before the GC is required to pay the subcontractor.? While this may seem fair, it does place significant risk onto subcontractors as they do not have the same ability to defer payment for labor and materials until after payment is received.? Subcontractors must pay as the work progresses and, at least from a subcontractor perspective, fairness dictates that they should be paid accordingly.? Another unfair reality when this clause is used is that delayed payments to the GC by the Owner may have nothing to do with the subcontractor’s work, but rather may involve an unrelated GC/Owner dispute, poor or late performance by others, slow processing of payments by the Owner or even slow or late submission of invoices to the Owner by the GC.? If the GC was required to pay the subcontractor as the work progressed and regardless if he has been paid by the Owner, you can bet that the GC would be aggressively pursuing payment from the Owner, which is as it should be.? When the GC does not feel the pain of non-payment or delayed payment from the owner, they are less likely to be a strong advocate for subcontractor payment.

2.?????? Paid if paid.?? This clause is similar to the clause above but is associated with change order work rather than work within the original contract scope.? This is a particularly harsh contract clause as the GC will generally have the option of moving forward with the change order in advance of a pre-priced formal agreement as long as he proceeds “at his own risk”.? GCs often choose to proceed, particularly when the change only involves subcontracted work and, when this occurs, proceeding is at the subcontractor’s risk despite the fact that the subcontractor may not have been provided with a proceed at risk option. ?Ultimately, if the Owner fails to issue a formal change, the GC never gets paid and under the paid if paid clause, has no obligation to pay the subcontractor.? Subcontractors rightly feel that if a GC decides to proceed with change order work in advance of a formal agreement with the Owner, the risk of non-payment, late payment or underpayment for that work should be borne by the GC, as the decision to proceed at risk was his and his alone.

3.?????? No damage for delay.?? This clause basically provides for a no cost time extension as the only remedy available to the subcontractor for delay to the subcontractor’s work, regardless of who is responsible for the delay, even if the delay is the GC’s fault.? This again is a very harsh clause for subcontractors and certainly unnecessary for government contracts which generally allow for delay damages that occur as a result of government-caused delay.?

4.?????? Specified overhead and profit rate.? There is really nothing wrong with a specified rate as long as it is acceptable to both parties and as long as overhead is defined.? However, there is a major distinction between home office overhead (HOOH), sometimes called General and Administrative (G&A) costs and Field Office Overhead (FOOH), sometimes referred to general conditions.? HOOH is the cost of operating a business with these costs distributed across all projects, whereas FOOH refers to certain direct costs associated with a particular job within a particular project.? Many of the FOOH costs are time related, such as trailer rental, utilities and supervision whereas some of these costs are not, such as mobilization and permitting.?? Typically, overhead, as used within the fixed rate clause, refers to HOOH; however, this is not a universal interpretation.? Often Owners or GCs are much more liberal in their application of this clause and include many more costs under the overhead umbrella which stresses the importance to define overhead when this clause is used.?

5.?????? Unconditional waiver and release for payment.?? This clause requires the subcontractor to provide an unconditional release of all claims for the work performed as a condition precedent to payment (i.e. no release, no payment).? This is particularly harsh when the subcontractor has a legitimate dispute with the GC that has not been resolved.? Use of this clause forces the subcontractor to give up his rights to a claim or forgo payment.?

6.?????? Complete agreement.? Virtually all contracts include a clause similar to: This Subcontract and the Subcontract General Conditions attached constitute the whole agreement between Contractor and Subcontractor, superseding all prior negotiations, representations, proposals, stipulations, or agreements, either written or oral.? This clause effectively negates a subcontractor’s proposal which typically contains a significant number of exclusions, limitations, reservations and clarifications of work scope that were designed to protect the subcontractor.? Unless the contractor’s proposal is specifically referenced and incorporated into the subcontract agreement, this clause negates any of the language in the subcontractor’s proposal.?

7.?????? Exculpatory language.?? While not a clause per se, many subcontract agreements contain exculpatory language that attempts to cover any contingency and place the burden on the subcontractor.? Examples of exculpatory terms used in many subcontract agreements include:

Subcontractor is responsible for all work necessary to satisfy the Owner’s intent regardless if the work is specifically identified on the drawings or specifications or not.?

Quality of the work will be of the quality to meet the Owner’s satisfaction.

Conflicts, discrepancies and/or errors in the drawings or specifications will be clarified at the sole discretion of the Owner.??

The “Subcontract Amount” includes, without limitation, all labor, supervision, fringe benefit costs, material, equipment, transportation, storage, taxes, insurance premiums, permits, licensing fees, royalties and all things necessary to complete Subcontractor’s work.?

The Subcontractor agrees that it will not make any claim or demand upon the Contractor upon or arising out of any misunderstanding or misconception on its part of the provisions and requirements of the prime contract or this subcontract.

The Subcontractor, therefore, agrees to perform the work called for in such a manner that it will not injure, damage or delay any other work performed by the Contractor or any other subcontractor, or any separate contractor of the Owner, and further agrees to be responsible for any damage or delay that may be caused to such other work, as a result of acts or omissions of Subcontractor or his agents or employees.

Any application for payment may be reduced by Contractor on account of claims filed or reasonable evidence indicating probability of filing claim.

In most cases the above terms place all risk onto the subcontractor with all inclusive and limitless language and further limit any right of the subcontractor to dispute or seek redress.? In some cases, the terms themselves are well intended but unreasonably inclusive by using such words as any or all which places risk onto the subcontractor for circumstances that may not be within his control.? For example, a subcontractor could be held responsible for an excusable delay (such as weather), if that delay in turn delays a follow-on subcontractor.? ?The GC could argue that if overtime or weekend work was necessary to recover the time lost due to bad weather or any other reason, the subcontractor was obligated to accelerate the work as he is required to perform work in such a manner as not to delay any other work.? The subcontractor’s failure to recover the lost time would be considered an omission (failure to accelerate) that caused delay to the follow-on subcontractor.?

Given the unbalanced nature of many GC/subcontractor agreements, reaching agreement to specific subcontract terms can be a daunting effort that can lead to very difficult negotiations.???

While it may be perplexing why a subcontractor would ever agree to such unfavorable terms, many subcontractors often feel that they are not in a position to request changes to the contract terms proposed by the GC and fear that attempting to do so would risk the ability of the subcontractor to win the work.? Other subcontractors, who have had prior relationships with the GC and/or the Owner, agree to sign off on the subcontract agreement based on the belief that, should a dispute occur, the GC would be fair and issues would be worked out, despite the actual language of the contract.? In both of the above circumstances, the project can be completed with all parties satisfied if the work goes well and the parties act reasonably.? However, if things do go wrong, the subcontractor can quickly get in over his head and find himself with little legal recourse.? Things can get ugly very quickly and getting out could be very painful.

However, there is a better alternative that is fair to all parties and that provides equitable protections to both the GC and the subcontractor.? That alternative is use of the American Institute of the Architects (AIA) standard form of agreement, entitled document A401?-2017.? The AIA has a 136-year history of publishing uniform contracts with its first GC/Owner contract published in 1888.? The AIA relies on a committee of experts from the construction industry and working alongside legal counsel to draft and update its documents on a regular basis.? Owners, architects, contractors and legal professionals recognize AIA contract documents as an equitable contract format for the construction industry that has withstood the test of time and legal challenge.? ?AIA documents can be viewed in their entirety online with appropriate water markings to preserve their copyright.? Brief review of these documents quickly demonstrates the quality, organized structure and appropriate legal language that provides protection to all parties.? As the AIA format is well known and broadly accepted within the construction industry, GCs should be receptive to utilizing this format when presented by a subcontractor who is simply looking for a fair and balanced agreement that can be accessed, edited and tailored for any project online for a very reasonable cost.? At the end of the day, the end objective should be fairness and protection for both parties.

Disclaimer: No part of this article should be construed as legal advice and any contract, regardless of format, should be reviewed by appropriate legal counsel.? The author is not in any way affiliated with AIA nor receives any financial benefit from the AIA for recommendation or use of AIA products.?

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