Tips for Drafting an Effective Subcontractor Agreement
Many or most general contractors use subcontractors to get trade work — plumbing, electrical, roofing, etc. – done. To protect themselves from problems and disputes that could prove costly, they need to draw up a good agreement for each subcontractor.
Justine Kastan, an attorney in the construction law practice at Rutan & Tucker in Palo Alto, California, said trying to draft an agreement from scratch is a mistake.
“There are good, industry-standard templates available — for example, the AIA documents — and by and large it is better to work off of one of those than start from scratch. Working off of a template will help to prevent the contractor from overlooking key elements of the contract,” said Kastan.
She also noted there are several contract provisions, listed below, that can make these agreements more effective.
Full "flow down." It's important that provisions in the contract between a general contractor and subcontractor mirror those in the contract between the GC and owner (the prime contract), Kastan said. For example, if the prime contract has limitations on what qualifies as a reimbursable expense, those restrictions should be included in the subcontractor agreement.
Scheduling. Subcontracts should establish clear deadlines for performance. In addition, any damages for delays that are specified in the prime contract should be included in the subcontract — another example of "flow down" provisions.
Workforce. Kastan advised including a statement as follows: "The subcontractor will at all times provide a workforce of competent, qualified personnel to perform the Work and shall cause those personnel to prosecute the Work continuously to completion in accordance with industry standards and trade practices, free from defects, and in accordance with the requirements of the Contract Documents."
Contract price, payment format and payment procedures. Include the total price, which format will define overall payment (for example, lump sum, cost plus fee with guaranteed maximum price, time and materials) and when and how the subcontractor will be paid. The agreement should also address when applications for payment must be submitted, if there are any documents that must accompany a pay request or any additional requirements for final payment, like manufacturers' warranties and as-built plans.
Change orders. Specify that all subcontractor change order requests be made in writing and that they be mutually agreed upon by the subcontractor and general contractor, Kastan advised.
Indemnity. "[Include provisions] that the subcontractor will indemnify the owner for all third-party claims arising out of or related to the subcontractor’s performance of the work and, in particular, for any liens against the project,” Kastan said. She called overlooking indemnity a big but common mistake.
Insurance. Insurance requirements for general liability, workers' compensation and other coverage should mirror those in the prime contract.
Dispute resolution. Most contracts include provisions about where or how a dispute that arises during a project will be settled. But Kastan said a subcontractor agreement should also require that the subcontractor continue to perform work while disputes are being resolved. In addition, the agreement should require the project leads to meet and/or go through mediation as a prerequisite to arbitration or litigation.
Termination. Kastan said termination provisions should make clear how much money is owed the subcontractor if terminated for convenience or cause.
She called failure to think through and spell out dispute resolution and termination provisions a form of “optimism bias.” It’s fine to hope that all goes well — but critical to protect yourself in case it doesn’t.
Crafting an effective agreement takes time, so plan accordingly. One of the biggest mistakes GCs make, said Kastan, is rushing it.
Kim Slowey is a writer who has been active in the construction industry for 25 years and is licensed as a certified general contractor in Florida. She received her BA in Mass Communications/Journalism from the University of South Florida and has experience in both commercial and residential construction.