SUBCONTRACT GUIDANCE FOR THE SUBCONTRACTOR:
Achieving Consensus Without Absorbing All the Risks

INTRODUCTION

THE CONTRACTING PROCESS

TYPES OF SUBCONTRACTS

SPECIFIC CONTRACT CLAUSES
Flow-Through
Scheduling
No Damage for Delay
Changes
Comprehensive Lien Waivers
Periodic Lien Releases
Contingent Payment
Stop-Work
Indemnity
Insurance
Termination for Convenience
Dispute Resolution

CONCLUSION

Over the past few decades, the role of the subcontractor has expanded. Today few prime contractors self-perform significant portions of their contract work, instead opting to serve as a broker between the owner and those subcontractors actually carrying out the construction. In practice, most prime contractors function in the capacity of at-risk construction managers. As subcontractors are now called upon to accept more project responsibility, they are also expected to bear a greater percentage of the associated risk. Some prime contractors actually attempt to transfer all of the project risks onto their subcontractors, in effect removing the “at-risk” from the construction manager moniker.

Of course, shifting some of the risk to the subcontractor makes sense. Because subcontractors perform most, if not all, of the work, they are in a better position to control many of the performance risks. And, with the increasing sophistication and risk aversion of institutional owners, prime contractors are also compelled to accept more onerous obligations under the prime contract. It is not surprising that prime contractors venture to pass these obligations through to their subcontractors.

While successful subcontractors have grown in terms of contract volume and per contract price, many have not adjusted their business and contracting practices to appropriately deal with the increased responsibility and risk. Some are ill equipped to effectively negotiate fair and balanced subcontract agreements. While many prime contractors engage legal counsel to assist with the process, this practice is still considered a luxury across much of the subcontracting industry. With subcontractors frequently entering into multi-million dollar subcontracts, the attendant level of exposure warrants consultation with legal counsel at some level to ensure that the subcontractor is adequately protected.

This paper provides guidance to the construction lawyer in assisting the subcontractor with this process. As discussed more fully below, this undertaking can be difficult given the subcontractor’s relative bargaining position. However, even minor revisions to otherwise overreaching subcontracts can be the difference between a successful subcontractor and one that fails by taking on too much responsibility or risk on a given project.

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