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Five Clauses to Watch Out for In Your Construction Subcontract

Construction is booming in Arizona. There continues to be plenty of work for subcontractors as many general contractors do not self-perform the work. Your company submits a bid for a project and your bid wins! Time to get to work, right? Not so fast. General contractors often require subcontractors to agree to some form of a subcontract agreement prior to starting work. It is easy to think that nothing will go wrong and just sign the contract without even giving it a second thought. After all, your company provides excellent work. Unfortunately, failing to read, understand, and negotiate your subcontract before signing it can open your business up to liability down the road. While there is no shortcut to reviewing your entire subcontract, these are some of the top subcontract provisions—in no particular order—to which you should pay very close attention.

1. Incorporation Clauses

It is extremely important to obtain copies of and understand the contents of all “Contract Documents” because they are all considered a part of your contract. Often times, the general contractor will incorporate not only exhibits, but also the plans, soils or other pre-construction reports and EVEN THE PRIME CONTRACT WITH THE PROJECT OWNER. Yes, under an incorporation clause, a subcontractor can be bound to the provisions of the prime contract between the general contractor and the owner, even when the subcontract states something different. Since you will likely be bound to all documents incorporated by reference it is imperative you obtain and review these documents before you sign the contract.

2. Scope of Work

The scope of work is one of the most important provision in a well-crafted construction agreement. Most construction disputes arise out of or relate to some type of disagreement as to what is and what is not in the trade’s scope of work. This impacts a variety of other provisions in the contract, not the least of which is the indemnity. A well-crafted scope of work provision will carve out exactly what the trade is expected to do and, often more importantly, what the trade is not expected to do. This will help to preclude disputes and ensure a clear understanding as to which party is responsible for what work and who bears which risks on the job.

3. Termination

There are generally two types of termination provisions: (1) termination for cause and (2) termination for convenience – i.e. no cause. There are important issues and requirements to look for regarding each respective type of termination. Often, the termination for convenience is drafted wholly in favor of the general contractor making it extremely important to closely review this provision. Subcontractors should request, in the event of any termination for convenience, the subcontractor be entitled to payment for work completed plus reasonable overhead, and expenses. There are many ways to try to balance these provisions for the subcontractors so that the contract is more equitable.

4. Indemnification

Indemnity clauses are risk shifting clauses. They obligate one party (the Indemnitor) to reimburse a second party (the Indemnitee) for the losses that Indemnitee incurs usually for damages “arising out of, relating to, or resulting from” a trade’s work. Basically, one party to the contract agrees to assume responsibility for certain liability resulting from third-party claims against the other party to the contract. General contractors have these in their contracts to avoid being held responsible for property damage or bodily injury caused by the negligence of others on the project. These provisions are usually drafted to be very broad and, in addition to requiring indemnity against damages incurred, they trigger an immediate duty to defend regardless of whether the damages are yet shown to be caused by the subcontractor’s work. Subcontractors should always try to negotiate a more balanced indemnity clause if they are able.

5. Dispute Resolution

Dispute resolution clauses dictate the forum in which the parties may resolve legal disputes. Ways of resolving disputes include mediation as a prerequisite to litigation, litigation through arbitration instead of court, litigation in court, or the use of dispute resolution boards. There are many advantages and disadvantages for each forum to consider before agreeing to the terms in this provision of your contract.

The above list and discussion on subcontract provisions is not exhaustive. There are other issues to take into consideration such as history of doing business and volume of business with the general contractor. Nonetheless, it is still important to review each contract closely and consider consulting with your attorney for possible revisions before you sign it.

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