Ben Lowenthal, Hendrick, Phillips, Salzman & Siegel
Contractually speaking, subcontractors generally assume the greatest risk and reap the smallest rewards of all participants in any given construction project. To survive and thrive, subcontractors must take all precautions to minimize or control these risks, which include unfair, one-sided contract clauses. Knowing and understanding payment-related contract clauses will increase the chances of getting paid for the good work that subcontractors perform.
Contingent Payment Clauses (Pay-if-Paid) – Try to Remove Any Terms that Make Payment to You Contingent on the Contractor Receiving Payment from the Owner
Contingent payment clauses, or “pay-if-paid” clauses, are contractual payment terms that make payment to subcontractors contingent on the general contractor receiving payment from the owner. For subcontractors, “pay-if-paid” provisions can be extremely burdensome as it allows general contractors to withhold payment for the subcontractor’s timely, completed work in the event that the general contractor has not received payment from the owner, even when the non-payment issue has nothing to do with the subcontractor. Here’s an example of a “pay-if-paid” provision: “Receipt of payment by the Contractor from the Owner for the Subcontract Work is an express condition precedent to payment by the Contractor to the Subcontractor.”
So what can subcontractors do about “pay-if-paid” terms? First, try to turn the “pay-if-paid” terms into a “pay-when-paid” clause. In many cases, you can do this by replacing the “pay-if-paid” with the following: “The contractor shall make payment to the subcontractor within seven (7) days of receipt of payment from the owner for the subcontractor’s work.” Second, subcontractors can revise the “pay-if-paid” provision to make it only subject to non-payment when the non-payment is due to the subcontractor. Here’s an example of some language you can add to make that happen: “If Subcontractor has performed its work but Owner does not make payment to Contractor for some reason unrelated to Subcontractor such as a problem or dispute with Contractor or another trade, Subcontractor shall be entitled to payment.”
Contractual Notice Requirements – Make Sure You Give Proper and Timely Notice to Protect Certain Contract Rights (such as cost impacts).
It is vital that all subcontractors know and understand the notice requirements in their contracts. Not giving proper and timely notice after a notice triggering event could very well make you lose out on your contract rights. For example, a contract may include a provision requiring the subcontractor to give the general contractor notice of any event that might affect the contract price. Here’s an example of an extremely burdensome notice provision: “Subcontractor shall give Contractor written notice of all claims affecting or relating to the Subcontract Price no later than 48 hours after the facts giving rise to the claim.” First, 48 hours is an extremely short time period. And second, this notice requirement still applies even when the subcontractor doesn’t even have any knowledge of facts giving rise to the claim.
So what can a subcontractor do about burdensome contractual notice requirements? First, make sure everyone involved in the project actually knows of the contractual notice requirements. Know when notice is required (such as schedule and cost impacts). Know to whom the notice must be sent (such as additional parties). And know how the notice must be made (such as whether it must be a written notice with any specific contents).
Second, revise the notice requirement language to make it subject to the “knowledge” of the event triggering the notice requirement. Here’s an example of how to revise the example of the burdensome notice requirement above: “Subcontractor shall give Contractor written notice of all claims affecting or relating to the Subcontract Price no later than 48 hours after Subcontractor’s knowledge the facts giving rise to the claim. Notice triggered upon Subcontractor’s knowledge of the event or occurrence.”
Change Order Clauses – Look Out for Terms that Prevent Payment for Change Order Work Without a Written Change Order
The scope of work that a subcontractor bids upon and contracts for is rarely the exact scope of work that is actually performed. Through the life of a construction project, the original scope of work is often changed, altered, delayed, and disrupted by a laundry list of causes and factors beyond the control of the subcontractor. And every one of these factors potentially impacts the actual cost of performance. In order to make sure you’re paid for change order work, make sure you have a written and approved change order in place. If you start change order work without a written change order (a requirement in most construction contracts), you run the risk of the general contractor standing behind the terms of the change order clause and not being required to pay you. In addition, subcontractors can add the following language to their subcontracts to increase the chances of payment: “If Subcontractor is requested by Contractor to perform extra or changed work that was not part of Subcontractor’s original scope of work, Contractor will provide reasonable compensation to Subcontractor for said work. Contractor shall not give orders to Subcontractor for work that is required to be performed at that time and then refuse to make payment on the grounds that a Change Order was not executed at the time the work was performed or the Contractor’s representative was not authorized to order the change.”
Releases and Waivers
Often, a general contractor may request a release or waiver of claims when requesting a change order or payment. Subcontractors need to be aware of what those releases and waivers mean and how signing one might impact the future right to payment. A release or waiver is essentially a written agreement that discharges a duty or obligation owed to one party and operates to extinguish a claim, and can be an absolute bar to any right of action on the released matter. What that means is that signing a release or waiver could very well lose any right of payment for claims included in the release or waiver. For waivers requested with pay apps, subcontractors can include language to make the waiver contingent on receipt of payment. For change orders, know whether the release releases current or future claims and delete or modify that language to make sure the subcontractor is not signing a broad general release of potential claims for payment. Every situation is unique but it’s important that subcontractors be aware of releases and waivers that they are asked (or demanded) to sign.
Conclusion
Construction contracting, especially for subcontractors, is a high-risk business. General contractors and owners generally attempt to put all the risk and potential liability on subcontractors. Subcontractors should not accept contracts “as-is” and should always push back on unfavorable, burdensome terms. This is especially the case for the killer contract clauses listed above. If a subcontractor is going to perform quality work, it should be paid for its work. Don’t let a prime contractor or owner dictate otherwise.
About the Author:
Benjamin S. Lowenthal is an associate with Atlanta-based construction law firm Hendrick, Phillips, Salzman & Siegel. Ben’s practice includes representing specialty trade subcontractors in a variety of construction-related matters, including disputes involving delays, nonpayment, mechanic’s liens, defective work, and other breach of contract claims. In addition, Ben’s work includes preparing, reviewing, and negotiating construction contracts on behalf of subcontractors. For more information, contact the author at (404) 522-1410, bsl@hpsslaw.com or visit www.hpsslaw.com.
