Subcontractors: tips on negotiating contracts with general contractors STAFF PICK

Chad William Koplien

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Government Attorney

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Posted almost 6 years ago. 115 helpful votes

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1

Overtime Clause

Most contracts prepared by GC's for subs will contain a provision where the GC has the unilateral right to demand that the sub work overtime to meet deadlines without any obligation that the GC compensate the sub for the sub's expenses related to the extra work. Subs need to make sure that the GC's contract does not have this language, and if it does, re-write it as follows: "Upon written notice by General Contractor to Subcontractor, of the need for overtime by the Subcontractor to meet General Contractor's performance deadlines, General Contractor agrees to reimburse Subcontractor for all costs related to overtime work, plus an additional 10% profit."

2

Change Orders/Extras Clause

Typically in construction contracts, all change orders or extras are required to be in writing. Unfortunately, rarely does this occur, and when it does, the documentation is often ambiguous or faulty. Here is the golden rule: always, always, always get the GC's manager to email or send you a fax, authorizing the change order or extra before you do the work or order materials. Even if you know the manager well and trust his word, this weasel clause will give the GC or the owner a reason which can be used to refuse payment, as the contract will usually require the written approval as a condition of payment. Also, make sure the contract specifically states that the project manager that you are dealing with is authorized to approve the change order. Many times the only person who is authorized to approve the change order or extra is the person signing the contract on behalf of the GC.

3

Pay-When-Paid Clause

The "pay-when-paid" clause is infamous, and the source of many billions of dollars in litigation fees. This clause will state something to the effect that the GC does not have to pay the sub until the owner pays the GC. This is typically phrased as a "condition precedent" in the terminology of the clause. You need to strike this language, and insert something to the effect of: "General Contractor agrees to pay Sub within 30 days of the General Contractor's receipt of invoice, regardless of whether General Contractor has been paid by Owner." In any event, a delinquent accounts receivable on a poject of over 40 days, should be a red flag, and you need to make phone calls to determine the status of the nonpayment before you over-extend your business further.

4

Contract Between Owner and General Contractor

Beware of any clause that binds the Sub to the terms of the Contract between the GC and the Owner. You will assume liabilities and responsibilities that are significant, without compensation. Many times the Owner's contract will not be provided, or will have attachments or amendments which are not disclosed to you.

5

Per Plans and Specs Clause

Many times when you are signing the contract with the GC, there will be a set of plans or specs attached to the contract. You need to know and have the contract affirm that the plans/specs provided are current and complete, and also if possible, have the contract specifically state those pages of the plans, specs, revisions which apply to your work. Many times you will bid on an old set of plans which have changed, but the contract you sign will obligate you to the new plans - which could devastate you financially.

6

Business Licenses/Permits

Most contracts drafted by or for GC's will require that a Sub obtain all necessary permits or licenses to perform the work. You need to contact the municipality not just the county, to make sure you are complying with this provision.

7

Indemnification Clauses

These are bastard weasel clauses which impose liability on the Sub, not only for the Sub's own negligence on the job site, but also for the negligence of the GC or other parties outside the Sub's control. It is absolutely crucial that you re-write this clause to assume liability only for your own negligence, and specifically state that you will not assume liability for the GC or any other third party.

8

Dispute Resolution Clauses

Check your contract to determine: (1) if there is an arbitration clause to resolve disputes under the contract; (2) if there isn't, see if the contract states the location of where any lawsuits must be filed if there is a dispute, and what laws apply (some contracts provide for venue and choice of law in other states, far, far away); and (3) if there is a clause which provides attorneys' fees to the GC in the event that there is a dispute -- re-write this clause to make it mutually beneficial to both parties -- where the prevailing party to any dispute is entitled to reimbursement for actual attorneys' fees and costs.

Additional Resources

These 8 tips will go a long way in helping you to avoid traps that GC's typically set in their contracts. In big contracts, or in dealing with large GC's, you may be given a lengthy subcontractor agreement based on an AIA form, which is designed to favor the GC and disfavor the sub. In my experience, some GC's will negotiate, but most will tell you to take or leave it. With these types of contracts, particularly on the big jobs, it is worth the money to have a lawyer look through it and red line the weasel clauses. If the project is not that big, or, if the GC most likely will not negotiate – it is a business decision on your part whether to assume the significant risks hidden in these weasel clauses. THIS ARTICLE WAS BASED IN PART ON RESEARCH AND INFORMATION CONDUCTED BY DIANE DENNIS, in her article entitled, "Contractor's construction contracts pitfalls to avoid," with all references herein used with express permission. For additional information, check out Diane Dennis' excellent construction form and information website located in the link below. Also, conduct an Internet search for additional articles and information on these issues.

The Contractor's Group

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