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The commercial construction industry relies on a number of mutually beneficial relationships. This is most evident is the relationship between general contractors and trade contractors. General contractors typically subcontract out work to a variety of subcontractors in order to successfully complete construction projects. In turn, trade contractors rely on general contractors to provide them with work on projects they have been awarded.
In a previous post, we discussed Tips for Avoiding & Dealing With Subcontractor Default. Today we’re flipping the script a bit and talking about how trade contractors can ensure they are finding and building relationships with the right general contractors and hopefully avoid the unscrupulous ones.
Establishing the General Contractor - Subcontractor Relationship
Do your homework. General contractors often require subcontractors to get prequalified to do work with them before being invited to submit pricing or bid on projects. General contractors typically request information on a potential subcontractor’s safety record, finances, bonding capabilities, litigation history, insurance coverage, relevant work history, and experience, etc.
The sharing of this type of information should be a two-way street. It’s only fair that trade contractors be able to perform a vetting process of their own to determine that they will be working with a reputable general contractor should they be awarded a project. General contractors often have to provide this information to owners, both public and private, as either part of a prequalification process or prior to being awarded a contract.
Make sure you have a contract in place before beginning any work. You’re taking a big risk if you don’t have a contract in place and you start work on a verbal agreement or letter of intent. Have the general contractor provide the most current set of plans and specs with the subcontract. The scope of work may have changed since you submitted your bid or provided pricing. It is important that you review any changes to the plans and specs to avoid being bound to performing additional work that wasn't included in your bid amount.
The devil is in the details. Carefully read and understand the contract before signing. There may be provisions or clauses in the contract that you aren’t comfortable with. If the general contractor is unwilling to negotiate more favorable terms it might be wise to walk away. Because the general contractor-subcontractor relationship is supposed to be mutually beneficial to both parties it also means that both parties will share some of the risks.
Risks should be allocated fairly, typically to the party best capable of managing them. Here are some clauses to watch out for in your subcontract:
Understand the Clauses in Your Subcontract
Pay-when-paid or pay-if-paid clauses. Be very careful with pay-when-paid provisions and avoid pay-if paid-clauses like the plague. Pay-when-paid means the general contractor doesn’t pay the trade contractor until the owner pays them. Pay-if-paid means that if the owner never pays the general contractor then they aren’t obligated to pay the subcontractor. Ideally, you want a payment schedule that requires you to invoice the general contractor by a specific date each month and that they will pay you within a specified number of days after receipt regardless of whether they have been paid by the owner.
Flow-down or pass-through clauses. These clauses typically incorporate by reference the terms of the general contract with the owner into the subcontract. This means the subcontractor assumes the same duties and obligations toward the general contractor that the general contractor is bound to the owner. You should never agree to a flow-down clause unless you are provided with a copy of the prime contract to review. If there are terms in the prime contract that you don’t like you should ask the general contractor to alter or remove the flow-down clause to avoid unintended consequences.
Change orders. The subcontract will generally require that any changes in work be submitted in writing. Never begin any work on a change order until you have something in writing from the person authorized to issue change orders. Remember to promptly submit claims to the general contractor for all additional costs and time extensions for the revised work.
Indemnification clauses. These clauses will hold a trade contractor liable for any negligence on the part of the general contractor or others on the jobsite that you have no control over. The subcontract should only require you to assume liability for your own negligence and not that of the general contractor or any other third party on the jobsite.
Payment bonds. Almost all public projects require that the general contractor posts a payment bond to protect the owner. Increasingly, private owners are also requiring payment bonds as well to avoid having liens filed against their property in the event the general contractor fails to pay his subcontractors and suppliers. Trade contractors should obtain a copy of the payment bond from the owner to review. If you have to file a claim, make sure you fully document it and notify the surety in writing. Familiarize yourself with any state statutes that may override the conditions in the bond contract for filing a claim.
A healthy business relationship between a general contractor and a subcontractor is built on respect and mutual respect. Both parties must work well together in order to complete projects on time and within budget. In order for this to happen, general contractors needed to communicate effectively to their subs and treat them fairly. Subcontractors, in turn, should provide the general contractor with outstanding service and quality work.
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