September 2018
by Masaki James Yamada, Ahlers Cressman & Sleight, PLLC
Congratulations, you have the winning bid! Now what? Do the work and get paid, right? Unfortunately, as all of us familiar with construction know, it is not that simple. (This can be especially true on public works projects.) Complying with your subcontract, which includes doing the work, will get you paid. However, contracts can sometimes be daunting. They are difficult to understand, can be an inch thick, and contain hundreds of provisions. While there is no shortcut to reviewing your entire subcontract, this article points out some of the top subcontract provisions—in no particular order—to which you should pay very close attention.
- Contract Documents (Incorporation Clauses)
It is absolutely critical to have copies and understand the contents of all “Contract Documents” because they are all considered a part of your contract. You will likely be bound to all documents incorporated by reference. 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 differently.
- Scope of Work
The scope of work clause is probably the least written about and likely the most important provision in a well-crafted construction agreement. Most construction disputes arise out of some type of disagreement as to what is and what is not in the project’s scope of work. A properly written scope of work provision will preclude disputes and ensure a clear understanding as to which party is responsible for what work and who bears which risks on the job. “Scope gaps” in items such as the adequacy and completeness of design documents, coordination responsibilities which arise during construction, and responsibility for correcting incomplete/deficient designs can all lead to disputes, which could be avoided with a well-drafted scope of work provision.
- Price and Payment (‘Paid-If-Paid’ vs. ‘Paid-When-Paid’)
In theory, a project owner and contractor are limited only by their own creativity in determining how and when the contractor will be compensated for its work. However, nearly all projects are priced under some variation or combination of a small number of models: lump sum, cost or cost-plus, and unit pricing. Choosing the right price model for the project can affect how much you profit. The timing of payment is also important. Most subcontracts contain provisions that the subcontractor will not receive payment until the owner pays the GC. These payment provisions typically take two forms (1) “paid- if-paid” or (2) “paid-when-paid.” Generally, paid-if-paid means a subcontractor does not get paid unless and until the GC is paid, whereas paid-when-paid provision only allows the GC to delay payment to the subcontractor for some period of time while it seeks the delayed payment from the owner.
- Schedule
On most, if not all projects (again, especially public works projects), completing your work timely is just as important as completing the work correctly. A GC’s schedule should be attached to a subcontract because it will serve as the baseline schedule. For subcontractors, be sure to compare the contract schedule to the bid schedule and seek any necessary cost increases due to a changed schedule. Also, watch for provisions that describe “Substantial Completion” as “Final Completion.”
- Changes, Claims, and Notice
Generally, a claim notice provision and/or change order provision provides the required steps a contractor must take in order to make a “claim” for additional compensation or time for completion. In Washington State, these claim notice provisions are strictly enforced by the courts. If a claim is not made pursuant to the contract, additional compensation/time is not awarded and, thereby, waived. This is true, in many instances, even when you performed the additional work. See Mike M. Johnson v. County of Spokane, 150 Wn.2d 375, 400, 78 P.3d 161 (2003).
- Differing Site Conditions
The purpose of a differing site condition provision is to allocate the risk of unknown/unforeseen conditions between the parties based on their respective duties regarding construction. Contracts that allocate the risk of the owner result in (1) no windfalls or disasters for the contractor, and (2) more accurate bidding, without inflation for risks that may not happen. Subcontractors should be very wary of “shared risk” clauses contained in the differing site condition provisions.
- Indemnification (and Insurance)
Indemnity clauses require one party to take on the obligation to cover the loss or damage that has been or might be incurred by another party. 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. (Note: In Washington State, an indemnitor cannot indemnify an indemnitee for the indemnitee’s own negligence). If you do not have this in your contract, you could be held responsible for property damage or bodily injury caused by the negligence of others on the project (owner, GC, architect, consultant, other subcontractors) or others not even connected with your work. Well-written insurance clauses should accompany these indemnification clauses, so that you are not completely reliant on the indemnitor’s financial ability to indemnify you.
- Damages
Damages mean the type of money that is recoverable for a breach of contract (or tort liability). Generally, damages in your public works contract will come in three categories: (1) actual damages; (2) liquidated damages; and, (3) consequential damages. Actual losses are the real and proven injury suffered as a result of the breach of contract. Examples of consequential damages include most losses of profits, business, use, financing, reputation, and bonding capacity. As a powerful mechanism to control contract risk, increase predictability, and reduce the cost and complexity of potential disputes, we frequently recommend that our clients’ contracts include a mutual waiver of consequential damages. At its most basic level, a liquidated damages provision is an agreement to forgo potential disputes about actual damages in the event of a breach, instead stipulating in advance to a reasonable estimate of the probable damages. Both a sword and a shield, a well-crafted liquidated damages clause can significantly simplify one of the most common sources of construction disputes—delay—and, in some cases, even keep disputes from boiling over into litigation or arbitration.
- Termination
There are generally two types of termination provisions: (1) termination for convenience; and, (2) termination for cause. An example of a termination for convenience provision is as follows:
“The Contractor shall have the right at any time, and for any reason, including convenience, to terminate this Subcontract and require the Subcontractor to cease work.”
This is obviously favorable to a GC and unfavorable for subcontractors. In the alternative, subcontractors should request that in the event of any termination, which is not justified by default, the subcontractor shall be entitled to payment for all costs incurred by the subcontractor for which the subcontractor has not received payment, plus reasonable overhead, expenses, and profit on unperformed work.
- 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 are by no means exhaustive, but it does offer a brief overview of some of the more important provisions to which you should pay close attention. It is recommended that you consult your attorney about any questions you may have about your subcontract.
Masaki James Yamada is a partner at Ahlers Cressman & Sleight PLLC. His practice focuses on matters involving complex construction claims, construction contracts, construction L&I issues, construction defects, and related insurance matters. His practice also includes commercial real estate and communications law (i.e. cell towers). Yamada regularly represents general contractors, subcontractors, developers, business and property owners, and design professionals. He can be reached at (206) 529-3015 or masaki.yamada@acslawyers.com.
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