What Goes Into a Protective Subcontract?
A solid business relationship in the construction industry begins with a subcontract that establishes clear parameters between all involved parties. Before any general contractor (GC) or subcontractor (sub) moves forward with a collaborative project, each party must define their objectives and duties throughout the course of the project in addition to procedures should one of the parties not fulfill its obligations. A sound subcontract can alleviate potential problems before or if they arrive, but how do you get there?
As discussed in NACM's March 7 eNews article, "A Two-Way Ripple Effect: What Happens When a Sub's Legal Woes Divert Finances," conducting proper due diligence is the first element in creating a protective subcontract. Chris Ring, of NACM's Secured Transaction Services, said GCs must investigate whether subs are licensed in their respective states—information that is available in some states through online databases. In her article, "The Dotted Line: How to effectively manage an underperforming sub," on Construction Dive, Kim Slowey takes things one step further by noting GCs should review a sub's ability to secure a payment or performance bond.
"Bonding capacity is another indication of a sub's financial and operational health," Slowey wrote. "The fact that the sub can secure one if needed is a nod to that company's stability."
Another method of protection lies within the termination clause, Slowey noted—more specifically, the differences between Termination for Cause and Termination for Convenience—both of which can protect GCs. When the quality of a sub's work isn't up to the agreed standard or it exceeds the project's timeline, the Termination for Cause supports a GC's decision to relieve the sub. She added that impending problems can be handled with convenience terminations.
"The most significant difference between the two is what each party is entitled to—or must pay—when a termination happens," the article states.
While subs are typically responsible for fees during cause terminations, she explained, GCs may have to pay "demobilization costs and perhaps a termination fee" in a convenience termination.
Ring said parties must also be extra thorough when dealing with large contracts in order to understand how the terms and conditions pertain to them.
"If you have a contract with a subcontractor versus a contract with the general contractor, sometimes, that subcontract ties you into terms and conditions of the general contract," Ring said. "For instance, if the material supplier sends a purchase order from the subcontractor and that purchase order gives an indication and says, 'per plans and specifications,' that could mean 'per plans and specifications of the general contract.' By accepting that purchase order, you're tying yourself to terms and conditions of the contract that you're not even privy to. You have no idea what you're accepting."
—Andrew Michaels, editorial associate