The commercial construction industry relies on a number of mutually beneficial relationships. This is most evident is the relationship between general contractors and trade contractors. General contractors typically subcontract out work to a variety of subcontractors in order to successfully complete construction projects. In turn, trade contractors rely on general contractors to provide them with work on projects they have been awarded.
In a previous post, we discussed Tips for Avoiding & Dealing With Subcontractor Default. Today we’re flipping the script a bit and talking about how trade contractors can ensure they are finding and building relationships with the right general contractors and hopefully avoid the unscrupulous ones.
Establishing the General Contractor – Subcontractor Relationship
Do your homework. General contractors often require subcontractors to get prequalified to do work with them before being invited to submit pricing or bid on projects. General contractors typically request information on a potential subcontractor’s safety record, finances, bonding capabilities, litigation history, insurance coverage, relevant work history and experience, etc.
The sharing of this type of information should be a two-way street. It’s only fair that trade contractors be able to perform a vetting process of their own to determine that they will be working with a reputable general contractor should they be awarded a project. General contractors often have to provide this information to owners, both public and private, as either part of a prequalification process or prior to being awarded a contract.
Make sure you have a contract in place before beginning any work. You’re taking a big risk if you don’t have a contract in place and you start work on a verbal agreement or letter of intent. Have the general contractor provide the most current set of plans and specs with the subcontract. The scope of work may have changed since you submitted your bid or provided pricing. It is important that you review any changes to the plans and specs to avoid being bound to performing additional work that wasn’t included in your bid amount.
The devil is in the details. Carefully read and understand the contract before signing. There may be provisions or clauses in the contract that you aren’t comfortable with. If the general contractor is unwilling to negotiate more favorable terms it might be wise to walk away. Because the general contractor-subcontractor relationship is supposed to be mutually beneficial to both parties it also means that both parties will share some of the risks.
Risks should be allocated fairly, typically to the party best capable of managing them. Here are some clauses to watch out for in your subcontract:
Understand the Clauses in Your Subcontract
Pay-when-paid or pay-if-paid clauses. Be very careful with pay-when-paid provisions and avoid pay-if paid-clauses like the plague. Pay-when-paid means the general contractor doesn’t pay the trade contractor until the owner pays them. Pay-if-paid means that if the owner never pays the general contractor then they aren’t obligated to pay the subcontractor. Ideally, you want a payment schedule that requires you to invoice the general contractor by a specific date each month and that they will pay you within a specified number of days after receipt regardless of whether they have been paid by the owner.
Flow-down or pass-through clauses. These clauses typically incorporate by reference the terms of the general contract with the owner into the subcontract. This means the subcontractor assumes the same duties and obligations toward the general contractor that the general contractor is bound to the owner. You should never agree to a flow-down clause unless you are provided with a copy of the prime contract to review. If there are terms in the prime contract that you don’t like you should ask the general contractor to alter or remove the flow-down clause to avoid unintended consequences.
Change orders. The subcontract will generally require that any changes in work be submitted in writing. Never begin any work on a change order until you have something in writing from the person authorized to issue change orders. Remember to promptly submit claims to the general contractor for all additional costs and time extensions for the revised work.
Indemnification clauses. These clauses will hold a trade contractor liable for any negligence on the part of the general contractor or others on the jobsite that you have no control over. The subcontract should only require you to assume liability for your own negligence and not that of the general contractor or any other third party on the jobsite.
Payment bonds. Almost all public projects require that the general contractor posts a payment bond to protect the owner. Increasingly, private owners are also requiring payment bonds as well to avoid having liens filed against their property in the event the general contractor fails to pay his subcontractors and suppliers. Trade contractors should obtain a copy of the payment bond from the owner to review. If you have to file a claim, make sure you fully document it and notify the surety in writing. Familiarize yourself with any state statutes that may override the conditions in the bond contract for filing a claim.
A healthy business relationship between a general contractor and a subcontractor is built on respect and mutual respect. Both parties must work well together in order to complete projects on time and within budget. In order for this to happen, general contractors needed to communicate effectively to their subs and treat them fairly. Subcontractors, in turn, should provide the general contractor with outstanding service and quality work.
AGC Strategic Partner
AIA Innovation Partner
Excellent !
Thanks, Joseph.
Just a couple of comments:
In certain jurisdictions “pay-if-paid” clauses are not allowed and are unenforceable, even if they’re in the contract. We’re seeing more owners and lenders requiring lien waivers from both GC’s and subs, conditional waivers with the payment req, and unconditional after payment is received. It’s a little more paper work, but I believe it helps to insure that subs are getting paid when the GC gets paid.
The flow-through clause has become standard in most contracts we see these days, mainly because the prime contract with the owners requires that subs be held to the same terms and conditions as GC’s. It’s the owners that are requiring this protection of their interest in the project.
General contractors sometimes negotiate away your rights in private meetings with project owners. This is especially true in cases where the owner or the GC is in dire financial straits. Some GC’s will also negotiate resolutions to extra work pricing or claim proceeds without input from affected subs and add insult to injury by “allocating” proceeds of such issues. When treading in unfamiliar territory, it is wise to negotiate a clause giving you access to all meetings and documentation related to your work.
Thanks for the comment, John. Good tips. Choosing to sign a contract doesn’t have to be a “take it or leave it” affair. Negotiating out unfavorable clauses should be part of the process.
I am a subcontractor and a small one at that what we are running into are payments are being push out to 60 days and now 90 days. And these are big GCs. And big owners. They are running the small contractor out of business. What can we do to stop this its not fair to the small sub.
Bill, if you’ve tried working it out with the GC and can’t come to a resolution your next steps are going to depend on the contract you have with them regarding payments. If they have a payment bond you may need to contact the surety to file a claim against the bond or if it’s a private project, a mechanic’s lien against the owner’s property.
Kendall, GC’s Can just Bond off your mechanic lien in till you go to court. Then a judge makes the call if it is a good lien or not. If he decides in favor of the GC you have to pay the bonding company and the attorney fees.
I definitely think it is important to do your research. Great information, thanks for sharing!
Thanks for the comment, Laurie.
Hello,
Some great reading and comments here. If you are having issues with getting paid on time with your GC’s, the lien and bond claim process is the steps to look at. It all starts with sending a notice. The notice is a very important tool to reduce DSO and also make sure you are secured in the event you are not paid. There are many providers that can do this for you and I happen to work for one of them called NCS.
If you have interest in this, please give me a call at 800-826-5256 and ask for Pete Pozzuto. Or extension 186.
Thanks!
From a risk manger standpoint, 99.9% of the time subcontractor’s payments are withheld because they are not in compliance with the contract requirements – insurance is missing/not approved/lapsed, contracts are not signed, bonds missing, Certified Payroll reports are missing, etc. I cannot stress this point enough – READ THE CONTRACT BEFORE YOU SIGN IT. Have your insurance agent/risk manager check out the requirements before signing. Just my two cents.
I am really impressed in your blog…..and Thank you for sharing this information…It is Very interesting..Interior Designer
I want to get emails of new posts
Randy, we can add you to the list.
Informative post. I agree that we should make sure to have a contract in place before beginning any work. A written agreement is always better when it comes to big risks such as this. I’ll make sure to keep this in mind if ever I may need to hire a general contractor in the future. Thanks for sharing!
I am new to contract billing, so thankful I ran across this page thank you for your information, I do how ever have a question , Is it standard practice for GC to have their own g702 & g703 AIA’s that subs are required to bill off of? Also is it standard for GC to wait two to three months after our work has started before we get direct pay paper work from them to set up that account? Should DP amount be listed on these? Thanks in advance for your help
These are good tips for finding a good general contractor to work with.
Good content.helpful for beginners.
Where do I go to get bonded an insured so I can go an get sub work in the roofing field
Jonathan, you should look for a surety company in your area to get bonded and find an insurance company that specializes in policies for specialty trade contractors to get the coverage you need.
How do I go about that where do I go to get it started an a ballpark figure how much is it gonna cost to get the ball rolling
Jonathan, I would do an internet search for surety providers, as far as cost goes, it will depend on a number of factors and I couldn’t really give you a ballpark figure.
Appreciate it