March 20, 2003

Subcontracting is a risk-shifting methodology which allows costs and cash flow to be controlled by general or prime contractors. Subcontracting is used not only by generals and primes but also by subcontractors who subcontract to second- and third-tier subcontractors. The agreements (contracts) that are signed by subcontractors should contain as a minimum the following:

  • Detailed scope of work

  • Payment terms

  • Provisions for changes

  • Indemnification warranties

  • Provision for temporary facilities

  • And other subcontract requirements

The subcontract agreement should not be loaded such that it becomes the legal and practical detriment to either the subcontractor or the GC/PC. Many subcontractors sign subcontract forms which are furnished them by a GC/PC and, without carefully reading the agreement in detail, have no knowledge of the serious legal implications of the subcontract clauses which give the GC/PC unnecessary legal and practical advantages. Too many subcontractors only check to see if their name, address, and the dollar amount are correct before they sign the agreement. This action may create unsuspected liabilities on the part of the subcontractor.

It is imperative that subcontractors read each subcontract agreement carefully and completely to discover the legal pitfalls within the clauses. When confronted with an unfair or one-sided contract, a subcontractor should refuse to sign it and should insist on either substituting a subcontract form with neutral terms, or modifying the GC’s subcontract in order to eliminate the oppressive and objectionable clauses, keeping in mind that a subcontractor’s bargaining position may be such that cannot influence the GC to change the objectionable contract clauses. Each situation will stand on its own unique circumstances.

In many cases, the subcontract agreements have been drafted by an attorney to protect the GC/PC, and the principals in the GC company aren’t even aware how one-sided the contract agreement really is. Once the one-sidedness is pointed out to the company principals, they may say, I don’t blame you, I wouldn’t sign that agreement either.

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