May  5, 2000

Bulletin # 35: The Search for a User–Friendly Contract Part III

Every subcontractor recognizes that its position in the “food chain” of a project can be a tenuous one. If the owner’s financing collapses, the subcontractor will likely not get paid. If the general contractor goes bankrupt, the result can be the same. If a project is significantly delayed, the subcontractor is likely to be dragged into court or before an arbitration panel before it receives reasonable compensation for its delay damages. The general contractor may choose to play games in delaying payment, squeezing the subcontractor on price or scope of work, or blaming the subcontractor to cover up problems with its own performance. The subcontractor may find that the general contractor views payment of the contract retainage as optional. When a project goes bad, the subcontractor may be able to walk off the job, file an arbitration claim, or sue, but most subcontractors would just as soon do their work and get paid for it. Since the subcontractor occupies a particularly vulnerable position within the construction process, its leverage in a dispute is likely to be dictated by the terms of its contract. Is the contract clear on when a claim arises and when it is waived if no notice is given? Can the general contractor reinterpret the scope of work to fit its own purposes (and carve into the subcontractor’s profit)? Is the general contractor permitted to hold back an entire progress payment because of an issue over a small portion of the work? Has the subcontractor waived its lien rights or agreed to hold the general contractor harmless against the general contractor’s own mistakes? Is retainage to be released when the subcontractor’s work is complete, or only when the entire project has been completed? There is no limit to the number of surprises that can lurk within a subcontract form. The more complex the form (particularly in the case of proprietary contracts), the more numerous are the hiding places. Somewhere in the midst of the “notwithstanding any of the foregoing to the contrary” or “except as otherwise provided herein” phrases, “flow down” clauses, cross-references to the unseen prime contract, and confusing quarter page long sentences may rest the ticking bomb that can put the subcontractor out of business.

Given these factors, it would not be unusual for a subcontractor to be concerned, or even paranoid, when confronted with a new subcontract form. The project may be desirable and the pricing may look good. A substantial amount of work may have gone into preparation of the bid. The subcontractor may need the work to keep its forces occupied. Then the proposed contract form lands with a thud on the desk. The longer and more confusing the contract (and the better the potential economics of the job), the more likely the subcontractor is to flip quickly through the pages, sign the form, throw the contract in the drawer, and hope for the best. (In some markets, the subcontract may also come with the explicit or implicit message from the general contractor that it is non-negotiable in any case). It is ironic that, as the construction industry has dramatically advanced through the use of technology and a focus on the stream-lining of processes, contracting continues to be handled, in many cases, like it has been for the last 50 years. Floor plans may be on CAD, scheduling based on a “critical path” system, and inventory managed through “just in time” controls. The industry is constantly in pursuit of the goals of greater speed, quality, efficiency, and predictability (as well as profitability). That is, until the fifty page, single-spaced, contract appears on the scene. Since contracts can play such a central role in a project, there would seem to be a clear benefit to all concerned in pursuing the same efficiencyrelated goals with regard to the contracting process. Fortunately, there is some movement in that direction. The new AGC-603 Subcontract Form, along with the recently updated AIA A-401 Subcontract are current indications of progress toward that goal. In each of the forms, an effort has been made to make the language clear and to eliminate unnecessary legalese. The concepts of “reasonableness,” “cooperation,” and “consultation” appear. Each form is structured so that the parties can generally refer to a single section of the document in determining how to handle such matters as filing a claim, applying for payment, implementing a change order, etc.

The subcontractor will no doubt perceive the benefit of a shorter, clearer contract form. It is more likely to be given a careful review and to be fully understood by the subcontractor’s staff. Since the subcontractor can review the document more quickly (and prepare the necessary exhibits knowing precisely what must information must be included), the turnaround time on the subcontract can be shortened (which is also a benefit for the general contractor and the overall project). In understanding its obligations, the subcontractor can procure the appropriate insurance and bonding. The subcontractor’s staff can more easily administer the contract, making certain that applications for payment contain the required information, that required notices are given by the appropriate date, that change orders are properly documented, and that the project otherwise proceeds in an orderly manner.

The skeptic may ask why a general contractor would have any incentive to adopt a clear and concise contract form, when the lengthy and confusing forms may enhance its position in future fights with the subcontractor. In fact, the “killer” contract may blow up in the face of the general contractor. As one example, language crafted to unreasonably shift responsibility or liability to subcontractors may cause the general contractor’s insurance carrier to deny coverage that might otherwise exist. At the same time, the subcontractor’s insurance may not cover the risk because of applicable law or a court’s determination that the attempted shifting of risk was unreasonable (i.e. in some states, a party cannot legally be indemnified against its own negligence and yet many contracts attempt to impose a blanket indemnification obligation on the subcontractor). The result can be the absolute worst case scenario where all of the insurance carriers avoid responsibility and a significant claim is covered by no insurance. The risk of such an outcome increases as a contract gets more confusing or one-sided. The unduly complex contract may also increase the likelihood that the general contractor and subcontractor will ultimately end up fighting with each other. The first time a subcontractor’s claim is rejected because the general contractor attempts to hide behind an unreasonable contract provision (i.e. notice of claims within two business days of occurrence), the relationship of the parties for the rest of the job will inevitably change. The subcontractor will (rightfully) begin to question the general contractor’s motives when it requests that the subcontractor proceed based on a field directive or asks for an informal change to the schedule. A request that the subcontractor cut a wall opening to keep the project moving may be viewed as a broader attempt by the general contractor to change the scope of the work. A delay of several days in the delivery of a payment may trigger a call by the subcontractor to its attorney, rather than a friendly inquiry of the general contractor or construction manager. No party benefits from a work site immersed in paranoia, where all of the parties are positioning themselves for an inevitable legal battle. In fact, parties anticipating a “war on the job site” may very well build a premium into their bids or not bid a project based upon what they expect will occur. In the end, no party benefits (with the possible exception of the lawyers).

The Associated General Contractors of America and American Institute of Architects should be applauded for their continuing efforts to bring order and fairness to the contracting process. Through the effort of these associations and the specialty contracting groups that work with them, (ASC – The Associated Speciality Contractors in particular) there actually exists the possibility that user-friendly contracts will become the standard, rather than the exception, in the construction industry.


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