Whether you negotiate your own subcontracts or rely on your lawyer to do the heavy lifting at contract time, a savvy subcontractor should understand the basic purpose of common subcontract provisions, and be prepared to negotiate for fair and commercially reasonable terms. While most sophisticated subcontractors are skilled at negotiating the core terms of a subcontract—scope of work, price, and time—a few simple but less obvious tweaks to common subcontract terms and conditions can go a long way to protect a subcontractor from unfair results when a dispute arises.
From the desk of an experienced construction lawyer, below are the first three of the top five “boilerplate” provisions that subcontractors too often overlook during contract negotiations, along with tips on language to include and to avoid.
1.Delay / Liquidated Damages
Contrary to popular belief, liquidated damages are not a penalty for late performance. In fact, in many cases the consequence of late performance can be much higher without a liquidated damages provision than with one. Below is a checklist of points to negotiate a fair liquidated damages provision to benefit all parties:
- Clearly define when liquidated damages will apply. This can be based on a specified duration or a date certain. Clearly state all assumptions supporting the contract time. Where feasible, the general contractor’s schedule should be attached to your subcontract to establish your baseline schedule.
- Negotiate a Reasonable Rate. This requires a project-specific inquiry, considering factors such as daily project burn rates, anticipated management/consultant costs, extended overhead, upstream liquidated damages, and subcontract scope and size.
- Make it Exclusive. Negotiate for express language indicating the specified liquidated damages are the exclusive remedy for late performance. An example is as follows:
Subcontractor’s payment of liquidated damages as specified in this section shall be the sole and exclusive remedy for any delay by Subcontractor in the performance of the work or completion thereof.
- Caps. Consider negotiating a cap on the aggregate liquidated damages. The cap may be an amount equal to your fee, the total contract price, or any other justifiable amount.
Use Net Payment Terms, and Clarify Pay-When-Paid Provisions. In a subcontractor’s ideal world, payment would always be due within a defined time period after each application for payment (e.g. “Net 30”). Some subcontractors can achieve this by specifying “net” payment terms in their proposals. More often, however, general contractors will not commit to pay subcontractors until they receive payment from the project owner. As such, “pay-when-paid” provisions have become commonplace, with contractors agreeing to pay subcontractors within X days after receipt of funds from the owner. As a subcontractor presented a pay-when-paid clause, you should negotiate for language calling for payment within a “reasonable time” if the owner fails to pay, and specify what time will be deemed “reasonable” if there is a significant payment delay. At a minimum, this will clarify the issue is only one of the timing of your payment, not your right to payment. That is, your “pay-when-paid” provision will not be misconstrued as a “pay-if-paid” provision, under which you are not entitled to any payment if the owner fails to pay.
Pay-if-paid or “conditional payment” terms are unlawful in some states, and require specific language to be effective in others. As a subcontractor, you should strike pay-if-paid language wherever possible, and many general contractors are willing to negotiate to convert pay-if-paid into pay-when-paid terms.
Negotiate for a Right to Stop Work for Nonpayment. Absent from most contractor forms, insert a provision that you may suspend work if you are not timely paid all undisputed amounts. For example:
- In the event Subcontractor does not receive payment of all undisputed amounts within thirty (30) days after submission of an application for payment, then upon seven (7) days’ written notice to Contractor, Subcontractor may suspend work until all undisputed amounts are paid. For purposes of this paragraph only, an “undisputed amount” means any amount or portion thereof specified in Subcontractor’s application for payment, including any payment items, changes, and claims therein, to which Contractor has not provided specific written objection. The subcontract time and price shall be equitably adjusted to reflect any shutdown, delay, and start-up pursuant to this paragraph.
You can usually cleanly insert such suspension language directly into the section governing the timing of payments, the provision for suspension of work (if any), or the terms governing continuation of work during disputes (if any).
Never Give Up Your Lien Rights. This is unlawful in many states. A subcontractor’s lien rights are a powerful source of leverage and a possible last resort on a financially distressed project.
An indemnity provision comes into play when the general contractor or owner incurs some liability as a result of a subcontractor’s work. Your overarching goal as a subcontractor is simple: You should only be required to pay for liabilities to the extent caused by your fault, and covered by your commercial general liability (CGL) insurance. Otherwise, you could be required to pay for a claim even if you did nothing wrong, and even if you had no reasonable way to manage and price for the risk of that claim.
Generally, your CGL insurance will only cover claims by third parties for bodily injury or physical property damage caused by your negligence. As such, you should always negotiate for an indemnity provision limited to the following:
- Third party claims
- For bodily injury or physical property damage
- To the proportionate extent caused by your negligence
As a practical matter, these points can often be incorporated through relatively simple redlines. For example, the following broad-form indemnity provision that could require you to defend and pay for a claim not caused by your fault (or pay a grossly disproportionate share) and not covered by your insurance:
- Subcontractor shall defend, indemnify, and hold harmless Contractor and Owner from and against any and all claims, liabilities, or obligations of any kind whatsoever, arising out of or relating to Subcontractor’s work.
The subcontractor’s indemnity checklist above can be inserted through simple edits:
- Subcontractor shall defend, indemnify, and hold harmless Contractor and Owner from and against any and all claims, liabilities, or obligations of any kind whatsoever by third parties for bodily injury or physical property damage, but only to the proportionate extent arising out of or relating to negligence by Subcontractor in the performance of Subcontractor’s work.
Many state-specific laws may affect the indemnity provision—and you should consult your legal counsel on this complex issue—but these basic points will go a long way to avoid turning your company into the project’s insurer.
Next week, we will cover the final two provisions: Changes & Claims and Dispute Resolution.