By: Margery Newman
Subcontractors are often required to sign contracts with onerous clauses. Frequently, they are not even aware of the potential risk involved in the contracts they sign. Below are some of the more onerous clauses provided by the American Subcontractors Association. We discuss language to be wary of and how it impacts subcontractors.
“The organization of the specifications into divisions is solely for administrative purposes. Each subcontractor shall be responsible for work customarily accomplished by its trade, regardless of the division in which the work is specified.”
COMMENT: The normal practice of a trade contractor is to identify the work set forth within the specification division of that trade. Related specifications in other divisions should be cross-referenced, not left to the trade contractor to review every specification division.
“The installed equipment shall operate in full compliance with all existing codes, regulations and industry standards applicable to the work.”
COMMENT: The trade contractor builds according to the plans and specifications provided to it. The design is supplied to the subcontractor and it is the subcontractor’s responsibility to comply only with those specific requirements.
“The subcontractor agrees that equipment installed will be in perfect alignment and that its work will be in absolute compliance with all subcontract documents.”
COMMENT: Work is to be performed in “good and workmanlike” condition. Avoid laudatory words such as “perfect,” “strict,” absolute,” etc.
“The subcontractor shall protect its work and shall be liable for any loss or damage to any work in place and to any of the subcontractor’s material and equipment on the jobsite.”
COMMENT: Trade contractors should not be liable to protect their work from damage by others. The damage could be caused by careless workers or uncoordinated work.
“Warranty shall extend for the duration specified and shall commence upon final completion of all project work as demonstrated by final payment from the owner.”
COMMENT: This clause could extend the start of the warranty period long after the subcontractor’s work is completed.
“The Subcontractor agrees to perform overtime work to the extent directed by the contractor. The Subcontractor shall be entitled to additional payment only for the overtime premium cost of labor plus required payroll taxes and employee benefits on the premium portion of labor.”
COMMENT: Overtime usually entails significant loss of productivity. Work could also be expedited by increasing crew size rather than working overtime.
“Subcontractor agrees to reimburse contractor for any OSHA or other government fines or penalties imposed on contractor related to the subcontractor’s work.”
COMMENT: OSHA and other government agency fines are matters to be addressed by the party cited. Prime contractors frequently have more repeat citations, which may subject and indemnity the subcontractor to higher levels of fines and penalties.
“The Subcontractor shall commence its work when directed by the contractor and the subcontractor shall achieve final completion of its work no later than _______, 20__, it being agreed that time is of the essence in this subcontract. The subcontractor recognizes the contractor’s exclusive right to modify the schedule or sequence of work from time-to-time without extension of time or additional compensation.”
COMMENT: This clause results in the lower tier subcontractors having to absorb all of the costs incurred due to acceleration and disruption of its work.
“The subcontractor agrees that no claim for additional payment or extension of time shall be valid unless written notice is received by the contractor within 10 calendar days following the date on which the occurrence originated for which such additional payment or time extension is claimed.”
COMMENT: Frequently, a jobsite problem is not recognized immediately. Claims frequently arise from the cumulative impact of several delays or disruptions.
“At the completion of the work or the project, contractor may review all change orders previously issued to re-examine the ultimate appropriateness of same. Where contractor determines that a particular change order concerned work which was neither extra nor additional work under a proper interpretation of this agreement or the prime contract, then contractor may offset or recoup the amount of the change order and re-adjust the subcontract amount accordingly.”
COMMENT: No executed change order should be subject to re-evaluation at the end of a job.
“The subcontractor agrees that the subcontract amount is a fixed price not subject to adjustment because of contractor directed change in the scheduling or sequencing of the subcontractor work, except for demonstrated additional subcontractor costs due solely to the contractor’s gross negligence or willful misconduct.”
COMMENT: This clause transfers all risks of delay and disruption caused by others to the subcontractor. Additionally, the contractor directed change in the scheduling may be due to ordinary negligence but this still impacts the subcontractor.
“Subcontractor shall indemnify contractor, owner, architect and anyone working for any of them.”
COMMENT: Broad hold harmless clauses cover not only the owner, but the design professional and their sub-consultants. Consider indemnification as a two way obligation between just the contractor and the subcontractor.
“The workers’ compensation policy shall contain a waiver of subrogation in favor of the owner and the contractor.”
COMMENT: Waiver of subrogation is a right of the insurance company, not the insured. Therefore, the insurer must be made aware of this clause and agree to it. A waiver of subrogation without the knowledge and consent of the insurer could limit insurance coverage.
“The contractor may elect to direct the subcontractor to furnish performance and payment bonds at any time during progress of the project. Payment for any such bond shall be paid for the amount actually paid by the subcontractor to its surety for such bonds.”
COMMENT: It is extremely difficult, if not impossible, to obtain a surety bond after the start of a project. Asking for a bond after the job begins is a clarion call to the bonding company that there is a problem on the job.
“Regardless of the site of the project, the laws of the State of Alaska shall govern the interpretation of any contract-related issues, and any hearings or dispute resolution meetings shall be held in the State of Alaska.”
COMMENT: Litigating or arbitrating out of state adds travel costs and uncertainty regarding lien and contract rights. It is best to litigate or arbitrate in the locality of the project.
There are, of course, other problematic contract clauses that impact subcontractors. Therefore, it is important for subcontractors to not only read their agreements, but to understand the liability they are assuming.