Identifying Unfavorable Subcontract Clauses

Identifying Unfavorable Subcontract Clauses

This article contains a Subcontractor Clause Checklist intended to help subcontractors identify unfavorable contract clauses. It follows the order of the Long Form Standard AGC Subcontract, so that you may compare it with the corresponding subcontract clauses.

1. Entire Contract

A. Were representations made by the general contractor which are not included in the subcontract?

B. Is the subcontractor's bid document included by reference in the subcontract? If so, have any inconsistencies been resolved?

C. Does the subcontract refer to the plans and specifications and schedules you relied on in your bid?

2. Scope

A. Have you reviewed all the documents listed as the construction documents?

B. Does the contract obligate the subcontractor to the same obligations that the general contractor has to the owner? If so, have you reviewed the general contract?

C. Is the scope of the work specifically defined?

D. What amount is applied to retention? Does the scope of work require the subcontractor to perform additional work in the event there is any ambiguity between the plans and specifications?

E. Does the scope of work require the subcontractor to perform work to Code even if the plans and specifications do not meet Code requirements?

F. Is the Scope of work a performance standard, e.g., design-build obligations; or does it specifically define the work on an item-by-item basis? If it is a performance standard, is it properly defined?

G. Are the referenced plans and specifications vague or ambiguous?

H. Do the contract specifications include construction methods you are not familiar with?

3. Contract Price

A. Is the method for determining the cost of extra or additional work defined?

B. If the contract is a time-and-material subcontract, is the responsibility for each of the items of costs clearly defined?

4. Payment Schedule

A. Is payment to the subcontractor contingent upon payment of similar amounts by the owner to the general contractor?

B. Does your contract provide for interest at the highest legal rate in the event of non-payment?

C. Does an attorneys' fees provision in the contract allow you to recover attorney's fees if you are not paid? (Such clauses are reciprocal by law.)

D. What amount is applied to retention? Does the general contract call for retention? If so, is the same amount called for by the subcontract?

E. Are payment or performance bonds provided for under the subcontract? If so, should there be retention?

F. If there are mechanics lien release forms, who is required to provide them?

G. Review the lien release forms to ensure that they comply with the appropriate statutory requirements.

H. Determine from whom you will need mechanics' lien release forms.

I. Does the payment provision provide for joint checks without first receiving your permission?

J. Are the dates set out in the subcontract for payment?

K. Can the subcontractor stop work in the event the progress payments are not timely made?

5. Time

A. Does the subcontract describe a specific time for the project to start?

B. Does the subcontract provide sufficient time for your start after notification?

C. If the subcontract incorporates by reference a schedule, have you reviewed the schedule and found it acceptable?

D. Does the subcontract bar you from recovering monetary damages in the event of delays caused by a party other than yourself?

E. Does the subcontract provide for a reasonable time to notify the general contractor of a delay?

F. Does the subcontract allow for additional time only in the event of delays caused by persons other than the general contractor or owner?

G. Does the subcontract provide for unreasonable liquidated damages in the event that the subcontractor causes a delay?

H. Are liquidated damage clauses from the general contract incorporated by reference into the subcontract?

6. Changes in the Work

A. Who has the authority to authorize changes in the work? If limited to office personnel, modify it to field personnel.

B. What are the terms for payment for changes in the scope of the work?

C. Does the subcontract require the subcontractor to perform disputed additional or change order work?

D. Does the general contractor have an unlimited right to require the subcontractor to provide and perform changes in the work even if the amounts to be paid for change order work have not been defined?

7. Bonding of Subcontractor

A. Does the subcontract require the subcontractor to obtain an bond? If so, are you bondable?

B. Who is responsible for paying the cost of the bond?

C. If a bond is required, when must the subcontractor post the bond?

D. In the event that a bond may be required at any time, will it be sufficient cause to justify ejection of the subcontractor from the job if the subcontractor encounters financial difficulties which prevent him from receiving a bond?

E. To what extent must the surety company be acceptable to the owner?

8. Liens

A. What provisions for lien release are in the subcontract? Do they meet California Civil Code requirements?

B. What obligations are placed on the subcontractor in the event that its subsubcontractors or materialmen lien the project? Is the subcontractor allowed or required to bond around the lien?

C. If the project is for numerous single-family detached residences, may the subcontractor lien each individual unit as its completed without being deemed in breach of the subcontract?

D. Is the subcontractor required to keep the project free of liens from its suppliers, even if the general contractor is behind in progress draws

9. Provisions for Inspection

A. What right does the general contractor have to inspect work in progress being performed offsite?

B. What rights do the general contractor and/or the owner have to inspect subcontractor records as to increased costs and/or change orders?

10. Materials and Work Furnished by Others

A. Does the subcontract require the subcontractor to be responsible for the defective work of others after the subcontractor starts furnishing material or performs work over the work done by other subcontractors?

B. If the answer to 10(A) is yes, have you reviewed the work of those other subcontractors?

11. Protection of Work

A. To what extent is the subcontractor required to protect the work of others?

B. Must the subcontractor repair work of others even if the work was damaged by parties other than the subcontractor?

C. Does the subcontractor have insurance which covers him for damages caused by others but assumed by way of this type of contractual provision?

D. Does the owner or general contractor provide for builder's risk insurance?

12. Labor Relations

A. Does the subcontract require the subcontractor to be bound by the general contractor's union agreements?

B. Does the subcontract permit the general contractor to terminate the subcontract if another subcontractor refuses to work behind a reserved (dual) gate system?

C. Does the subcontract language hold the subcontractor responsible for delays due to a labor dispute or picketing directed at it? The subcontractor should be responsible only if it fails to perform where performance is possible. Language requiring the general contractor to set up a reserved (dual) gate system is desirable.

D. Does the subcontract require payment of state or federal prevailing rate requirements? If so, are the rates specified, and have you added your increased 'paperwork' overhead to your bid price?

E. If this is a prevailing wage project, is the subcontractor required to independently determine the prevailing wage rates regardless of rates attached to the bid package?

F. Does the contract allow the general contractor to pay off union trust fund liens and deduct the amount paid from amounts owed the subcontractor, or eject the subcontractor from the job, in the event such a lien is filed?

13. Recourse by Subcontractor

A. Under what conditions can the general contractor cancel the subcontract?

B. Can the general contractor cancel the contract for its own convenience?

C. What constitutes a 'material breach of contract' which would allow the contractor to cancel the subcontract? For example, is there a provision allowing the contractor to cancel in the event of a minor breach of contract?

D. Does the general contractor have the right within its sole discretion to determine if there is a breach of contract?

E. What are the remedies in the subcontract for a default?

F. In the event of a default, is the general contractor allowed to keep the subcontractor's equipment and materials until the work is completed?

G. What is the jurisdiction for litigation C California, or another locale?

H. Is the subcontractor required to continue to perform if there is a dispute between it and the general contractor?

I. Is the subcontractor required to continue working despite any dispute, including nonpayment?

J. Does the subcontract allow the contractor to back-charge the subcontractor without notice or prior approval?

14. Indemnification

A. How broad is the indemnification provision in the subcontract – e.g., does it require the subcontractor to indemnify under all conditions except when the general contractor is solely negligent?

B. Does the indemnity clause match that included in the contract between the contractor and the owner?

C. Does the subcontractor's insurance provide for contractual liabilities, including indemnification obligations assumed under subcontract indemnification clauses?

15. Insurance

A. Does the owner maintain builder's risk insurance?

B. Does the subcontractor maintain comprehensive general liability insurance on an occurrence basis with broad form coverage, including endorsements for excavation collapse and underground, contractual liability, products and completed operations, and premises coverage?

C. Do you have sufficient insurance to meet the requirements established under the subcontract?

D. Does the subcontract require you to name the owner as an additional insured under your policy? If so, will the cost of doing so be prohibitive?

E. Have you reviewed the insurance requirements with your insurance professional?

16. Claims Resolution Procedure

A. Does the subcontract provide for arbitration? If so, what is the forum for arbitration (e.g., American Arbitration Association)?

B. Are there limitations on the time in which the subcontractor must request arbitration?

C. Must the subcontractor wait for the general contractor and the owner to arbitrate an issue of dispute prior to proceeding with his own arbitration?

D. Is the subcontractor bound by the results of any arbitration between the general contractor and owner?

E. If there is a dispute over a change order or other continuing dispute, must the subcontractor continue to perform until the project is completed and arbitration commences?

F. Does the subcontract claims- resolution procedure limit discovery at the time of arbitration or trial?

G. Does the claims resolution procedure limit the ability to join other responsible parties in the event of a dispute?

17. Safety Practices

A. Does the subcontract require the subcontractor to indemnify the general contractor for claims of the subcontractor's employees against the general contractor which are related to OSHA violations? This can result in a double payment; one for workers compensation, and one for reimbursement to the general contractor for recoveries obtained from the general by the employee.

B. Who is responsible for establishing safety requirements and coordinating safety on the job site?

18. Warranty

A. Does the warranty in the subcontract represent a contractual obligation or guarantee which would require the return to the site and correction of defective workmanship?

B. Does the warranty provision require the subcontractor to conform all work to the requirements of the subcontract documents? If so, will the field conditions vary from the specifications and plans?

C. What time period is provided for the warranty provision, and when does it start?

D. Are there are any warranty provisions between the general contractor and the owner which are incorporated by reference into the subcontract?

E. If the subcontractor fails to replace or correct defective work does the subcontract provide remedies that will exceed the actual cost of replacing the defective work?

F. What effect, if any, do the warranty provisions have on your insurance coverage?

19. Use of Subcontractor's Equipment

A. Does the subcontract establish a fee for the use of the controls equipment, e.g., scaffolding?

B. Does the subcontract fully describe any agreements relative to the use of the contractor's equipment by the subcontractor?

20. Assignment of Subcontract

A. Does the subcontract limit your use of sub-subcontractors on the project?

B. Does the subcontract allow the general contractor to assign the subcontract to a new contractor without first seeking the subcontractor's approval?

21. Independent Contractor

A. Does the independent contractor clause fully describe your relationship with the general contractor?

22. Clean-Up

A. Who provides for the clean-up?

B. Who pays for the clean-up?

C. Are there any provisions for back-charging clean-up work, and at what rate?

23. Attorneys' Fees

A. How broad is the subcontract clause concerning attorneys' fees? E.g., does it allow attorneys' fees incurred for acts short of actually filing a lawsuit?

24. Special Provisions

A. Do special provisions typed in or included as addenda fully describe any oral agreements or understandings that you have with the general contractor?

This article, ©1997, was written by William C. Last, Jr. Mr. Last is an attorney who has been specializing in Construction Law for 20 years. Mr. Last also holds a California A & B contractors license. He can be contacted at 650-425-7679. This bulletin is published periodically to provide general information about current legal issues. If you have a specific legal question or need legal advice, you should contact an attorney.