Construction Subcontracts: 3 Things You Should Know

Subcontractors should know that there are three clauses in most all subcontracts which could create significant risks.

PAY-IF-PAID:

Getting paid may be the most important part of any job, and not getting paid could easily bankrupt a subcontractor. Yet in most every subcontract is a pay-if-paid provision stating that payment to the subcontractor by the general contractor is specifically contingent on the general contractor’s receipt of payment from the owner. What this means is that if the general contractor isn’t paid for any reason, then he won’t have to pay the subcontractor, even though the subcontractor has done its work and is perfectly entitled to get paid. Such provisions are generally enforceable so long as they are clearly and unambiguously stated.

FLOW DOWN:

General contractors like to protect themselves – no surprise. One way they do so is to incorporate their prime contract responsibilities into all their subcontracts. All rights, remedies and responsibilities in the prime contract then apply to the applicable subcontractor so that the subcontractor becomes bound to the general contractor to the same extent that the general contractor is bound to the owner. Subcontractors could therefore find themselves taking on more responsibilities than they actually contemplated.

INDEMNIFICATION:

Risk shifting is not new in construction; it is quite standard and most visible in the indemnification provisions within most subcontracts presented by general contractors to their subcontractors. Many of the clauses not only have the subcontractor indemnify the general contractor, owner, architect and engineer for damages and losses stemming from the subcontractor’s own negligent acts or omissions but many as well include the negligent acts of the general contractor, owner or other third parties. This means the subcontractor is actually agreeing to indemnify the general contractor and others for their own negligence.  May not sound fair but this shifting of responsibility is enforceable if clearly expressed.

Subcontractors need to know these clauses are likely to be in each of their subcontracts. Depending on the circumstances, subcontractors would do well to consider negotiating or even neutralizing these clauses.