Because of time constraints and the desire to get the business, subcontractors and suppliers routinely sign lengthy subcontracts and master service agreements without closely reading the terms and conditions. Below are some clauses that every subcontractor and supplier should review in a contract.
1. Payment Conditions – You should minimize and narrow preconditions to receiving payment. For example, you should strike any clause that makes your payment contingent on your customer getting paid (aka “Pay if Paid” clauses). Even more harmless preconditions (e.g., submitting certain paper work, invoice requirements) deserve scrutiny because you should ensure they are practical and that you understand how to comply with them, so there is no delay in payment.
2. Change Orders – The contract should define circumstances (especially for unforeseen events) in which you may receive a change order providing additional time and/or pay for work under certain circumstances. The more circumstances that allow change orders, the better from a subcontractor’s point of view. Some common examples include: owner or designer change of opinion or preference; code changes; unexpected weather conditions; change in the owner’s available funding; and design error or omission.
3. Termination – Most contracts differentiate between termination for cause and termination for convenience. Naturally each party wants broad discretion to terminate the contract, but would prefer the other party have narrow discretion to terminate the contract. It is best for all parties if “cause” is clearly defined to mean certain specific events. The termination clause should also clearly identify how much money you will be paid if the contract is terminated for convenience or for cause. The termination for cause provision should provide a right to cure the problem before the contract may be terminated.
4. Indemnity – Subcontracts or MSAs almost always require subcontractors and suppliers to indemnify the contractor from damages arising from various claims. Such indemnities frequently shift a substantial amount of the risk to subcontractors and suppliers. Indemnities are very complicated and there is not a one size fits all approach. But as a general rule, look for mutuality and strike one sided indemnity clauses, especially where the subcontractor is indemnifying the contractor for its own negligence and the contractor is not indemnifying the subcontractor for anything.
5. Warranties – Subcontractors are generally required to warrant that the work performed is free of material defects and has been performed in a workmanlike manner for some period of time after completion. As a general rule of thumb, take care that the warranty language does not go beyond what you actually did. Also, review the time period covered by the warranty obligation (3 months, 12 months, etc.) and what the remedy is in the event of a defect.
6. Limitations on Liability – Subcontractors and suppliers should negotiate for a broad waiver of consequential damages (e.g., lost profits, business interruption, etc.) and punitive damages. These clauses protect subcontractors and suppliers from unforeseeable and uncontrollable damages. In addition, consider requesting a cap on liability (e.g. contract price, contract multiple, a fixed dollar amount, or equal to insurance limits).
7. Flow down – Many subcontracts contain clauses which impose the terms and conditions of the prime contract on the subcontractor. If you see such a clause, then request a copy of the prime contract so you know what you are agreeing to.
8. Arbitration – Many construction contracts and Master Service Agreements require arbitration clauses. Arbitration by itself is not disadvantageous for a subcontractor or supplier, but there are many nuanced provisions that should be considered, such as, the scope of the clause, the procedural rules that will govern the arbitration, the number and selection of arbitrators.
9. Lien Waivers – Although in some instances, mechanic’s and materialmen’s lien waivers cannot be enforced, subcontractors and suppliers should always strike lien waiver clauses. Waiving the right to perfect and enforce lien and bond claims can have a ripple effect and cost a subcontractor money in the long run.
10. Choice of Law and Venue – Master Service Agreements and even subcontracts may choose a law or venue unrelated to the project. Always review governing law and venue clauses to avoid unintended consequences and being pulled into an unfavorable jurisdiction.
Every clause in a construction contract is important and warrants your attention. Once you sign a contract, you are obligated to follow every word of it – it is important to understand your rights and obligations before you sign on the dotted line. And in many cases, it is wise to retain counsel.