AI Review for Construction Subcontractor Agreements

What is a Construction Subcontractor Agreement?

A Construction Subcontractor Agreement is a contract between a general contractor and a subcontractor for the provision of construction services related to a construction project the contractor has undertaken for a land owner or developer. The agreement defines the rights and obligations of both parties.

Notably, the Construction Subcontractor Agreement should include relevant terms from the upstream Prime Agreement (a Construction Contract), Master Construction Contract, or Master Design-Build Contract between the owner and contractor. However, many flow-down clauses are written too broadly or incorporate the Prime Contract's terms wholesale, creating a conflict with the Subcontract that may require a court's involvement to resolve. Many disputes arise over which terms flow down, even in the absence of conflicting terms, usually in regard to the more general terms of a Prime Contract (e.g., dispute resolution clauses, forum selection clauses, etc.) or when the parties utilize language limiting the flow-down clause.

Unfortunately, the courts are not consistent across jurisdictions in the standards applied to resolving these issues because disputes of this nature are analyzed on a case-by-case basis. Considering the lack of uniformity, however, parties need to understand that with flow-down clauses, they may be subject to the Prime Contract's more general terms if they don't identify in the Subcontract which terms do and do not flow down.

Key Provisions in Construction Subcontractor Agreements

According to the provided document, key provisions typically found in a Construction Subcontractor Agreement and not in a Construction Agreement, Master Construction Contract, or Master Design Build Agreement include:

1. Prime Contract Flow-Down: This article addresses which rights and obligations flow down from the Prime Contract to the Subcontract and can be a significant point of negotiation (see the box to the left).
2. Sub-Subcontractors: This provision explains the requirements related to the subcontractor's use of its own subcontractors to perform the Subcontract Work per the Subcontract.
3. Payment & Performance Bonds: While the Construction Agreement also addresses payment and performance bonds (as well as completion bonds), our Subcontract also addresses surety bonds to be secured by the Subcontractor.
4. Payment: Unique to a Construction Subcontractor Agreement are "pay-when-paid" and "pay-if-paid" clauses, meaning that the subcontractor's right to payment is conditioned upon when or if the contractor is paid by the owner. Notably, the parties should be careful including pay-if-paid clauses as they are illegal in more than ten states, unenforceable in many others, and nuanced everywhere else in the United States.
5. Change Order Adjustments: In a Subcontract, the amount by which the subcontractor will be compensated for change orders may be limited to its attributable share of what the Contractor receives from the Owner under the Prime Contract for that revision.
6. Claims Procedure: The claims procedure may include language allowing the subcontractor to prosecute in the contractor's name a Claim for which the owner is or may be liable following the Prime Contract procedures for similar contractor claims against the owner. This is good for subcontractors, as they may otherwise be dependent on the contractor pursuing Claims on their behalf.
7. Multi-Party Proceedings: This article addresses the need for all relevant parties (even those not in privity of contract) to be involved in the resolution of a dispute, particularly via joinder of parties and consolidation of the proceedings.

In addition to these key provisions, a comprehensive Construction Subcontractor Agreement should also include:

8. Scope of Work: A clear and detailed description of the specific work to be performed by the subcontractor, including any drawings, specifications, or performance requirements.
9. Contract Price: The amount to be paid to the subcontractor for its work, including any provisions for progress payments, retainage, and final payment.
10. Schedule: The start and completion dates for the subcontractor's work, as well as any milestones or phasing requirements, and provisions for delays and extensions of time.
11. Insurance: Requirements for the subcontractor to maintain appropriate insurance coverage, including general liability, workers' compensation, and professional liability (if applicable).
12. Indemnification: Provisions requiring the subcontractor to indemnify and hold harmless the contractor and owner from claims arising out of the subcontractor's work.
13. Termination: Conditions under which either party may terminate the subcontract, and the consequences of termination, such as payment obligations and ownership of work product.‍
14. Disputes: Procedures for resolving disputes between the contractor and subcontractor, which may include mediation, arbitration, or litigation, and provisions for the subcontractor's involvement in disputes between the contractor and owner.

Checklist for a Good Construction Subcontractor Agreement

To ensure that your Construction Subcontractor Agreement is effective, comprehensive, and legally sound, use this checklist:

• Clearly define the scope of work, including drawings and specifications
• Specify the contract price and payment terms
• Include a detailed schedule for the subcontractor's work
• Address the flow-down of terms from the Prime Contract
• Include provisions for the use of sub-subcontractors
• Specify payment and performance bond requirements
• Carefully consider the inclusion and wording of pay-when-paid and pay-if-paid clauses
• Address change order pricing and procedures
• Include a claims procedure that allows the subcontractor to assert claims against the owner
• Address the need for multi-party proceedings in dispute resolution
• Specify insurance requirements for the subcontractor
• Include indemnification provisions
• Outline termination conditions and consequences
• Include dispute resolution procedures
• Ensure the subcontract aligns with the Prime Contract
• Have the subcontract reviewed by legal counsel and construction industry experts
• Ensure the subcontract complies with relevant laws and regulations
• Ensure the subcontract is signed by authorized representatives of both parties

AI Contract Review for Construction Subcontractor Agreements

To give you a sense for the benefits of leveraging AI legal contract review software trained by lawyers, we’ve selected some sample language our software presents to customers during a review. Keep in mind that these are static in this overview, but dynamic in our software - meaning our AI identifies the key issues and proactively surfaces alerts based on importance level and position (company, 3rd party, or neutral) and provides suggested revisions that mimic the style of the contract and align with party names and defined terms.

These samples represent less than 5% of the pre-built, pre-trained AI Contract Review solution for Construction Subcontractor Agreements. If you’d like to see more, we invite you to book a demo.

ADDITIONAL OBLIGATIONS OF SUBCONTRACTOR

For: Contractor

Alert: May be missing a provision requiring subcontractor to report any safety issues to contractor.

Guidance: In a Construction Subcontractor Agreement, it is crucial to include explicit language and guidelines outlining the subcontractor's responsibilities in managing and handling hazardous materials on site. This provision ensures that both parties understand their obligations and liabilities, promoting safe practices and compliance with applicable laws and regulations, ultimately protecting the general contractor and project owner.

In practical terms, this stipulation helps reduce the risk of accidents or mishandling of hazardous materials, fostering a safer work environment and potentially minimizing liability for the general contractor and project owner. For example, in a construction project involving asbestos removal, clear guidelines in the agreement can ensure that the subcontractor adheres to proper procedures, reducing the risk of asbestos exposure and potential legal liabilities.

Relevant laws and regulations to consider in this context include OSHA, the Resource Conservation and Recovery Act (RCRA), and any state or local regulations governing the handling and disposal of hazardous materials. Additionally, the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) imposes liability on parties responsible for releasing hazardous substances into the environment. Therefore, it is essential to include language outlining the subcontractor's responsibilities and indemnification clauses to protect the general contractor and project owner from liability arising from the subcontractor's handling of hazardous materials.

Sample Language:

ADDITIONAL OBLIGATIONS OF SUBCONTRACTOR

1. Prime Contract Flow-Down. SUBCONTRACTOR assumes all of CONTRACTOR’s obligations and responsibilities under the Prime Contract relating to the Subcontract Work. SUBCONTRACTOR shall comply with all applicable Prime Contract requirements but has no third-party rights to enforce the Prime Contract. CONTRACTOR has all remedies against SUBCONTRACTOR that Owner has against CONTRACTOR, plus additional remedies hereunder. SUBCONTRACTOR is bound to CONTRACTOR to the same extent CONTRACTOR is bound to Owner for any Prime Contract changes upon notice from CONTRACTOR.

2. Professional Services. SUBCONTRACTOR shall provide professional services only as needed to fulfill its construction responsibilities under the Subcontract Documents and as allowed by law. If the Subcontract Documents require SUBCONTRACTOR to provide design services or design certifications, CONTRACTOR will furnish the requisite performance and design criteria. SUBCONTRACTOR shall have such services performed by an appropriately licensed design professional, whose signature, seal and approval shall appear on related submittals. CONTRACTOR may rely on the adequacy, accuracy and completeness of such services and approvals if CONTRACTOR has provided the required criteria.

3. Sub-SUBCONTRACTORs. SUBCONTRACTOR shall furnish CONTRACTOR a list of proposed sub-subcontractors and suppliers for approval. For any subcontracted Subcontract Work, SUBCONTRACTOR shall execute written subcontracts obligating the sub-subcontractor to assume toward SUBCONTRACTOR all the same obligations and responsibilities SUBCONTRACTOR assumes toward CONTRACTOR under this Subcontract. SUBCONTRACTOR shall distribute the Subcontract Documents as required by its subcontractors.

4. Compliance. SUBCONTRACTOR shall comply with all applicable laws, rules, and regulations and lawful orders of public authorities (“Applicable Laws”). SUBCONTRACTOR shall obtain necessary permits and licenses for the Subcontract Work per Prime Contract requirements. If SUBCONTRACTOR performs Work knowing it violates Applicable Laws without notice to and approval from CONTRACTOR, SUBCONTRACTOR accepts responsibility for remediation costs. SUBCONTRACTOR shall notify CONTRACTOR if it becomes aware that any of CONTRACTOR’s instructions or the Subcontract Documents violate Applicable Laws, and the Parties shall execute an amendment or Change Order if and as necessary to conform the Subcontract requirements to Applicable Laws.

5. Diligence. SUBCONTRACTOR shall furnish diligent efforts, judgment and all labor, supervision, materials, equipment, permits, shop drawings, tests, field dimensions and other necessary services to properly perform the Subcontract Work so that job progress, sequence and timing conform to the Construction Schedule provided by CONTRACTOR. If SUBCONTRACTOR falls materially behind the currently approved Construction Schedule, CONTRACTOR may require SUBCONTRACTOR to prepare and submit for approval, at no cost to CONTRACTOR, a plan for finishing the Subcontract Work by the Substantial Completion Date. Failure to submit a plan meeting this requirement shall constitute grounds for termination under the terms of this Agreement.

6. Standard of Care. SUBCONTRACTOR and its personnel shall perform all services under the Subcontract Documents consistent with industry standards of care and skill in the state where the Project is located. 

7. Inconsistencies. Before performing Subcontract Work, SUBCONTRACTOR shall visually inspect the site to become familiar with conditions and identify any document discrepancies, which it shall promptly report to CONTRACTOR. SUBCONTRACTOR shall compare Subcontract Documents solely to facilitate the Subcontract Work, not find errors. SUBCONTRACTOR shall report any errors, inconsistencies or omissions to CONTRACTOR in writing within [●●] ([●●]) days. SUBCONTRACTOR shall comply with CONTRACTOR’s instructions regarding such issues but remain responsible for its own errors and omissions. If clarifications require additional cost or time, SUBCONTRACTOR may submit a Claim in accordance with this Agreement. If SUBCONTRACTOR’s failure to report discrepancies causes CONTRACTOR liability, SUBCONTRACTOR shall pay the associated costs and damages to CONTRACTOR.

8. Communications. Unless the Subcontract Documents state otherwise or there is an emergency, SUBCONTRACTOR shall direct all Project communications to CONTRACTOR.

9. Submittals. SUBCONTRACTOR shall timely submit required shop drawings, product data, samples and similar submittals in the sequence needed to avoid Project delays. Submittals shall be in electronic form, if required. SUBCONTRACTOR represents it has reviewed and coordinated submittals with Subcontract Documents and Subcontract Work requirements. CONTRACTOR may rely on the adequacy and accuracy of required certifications. Submittal approvals shall not authorize changes without a Change Order, except when express written CONTRACTOR approval is given and memorialized in a Change Order, specifying any necessary adjustments to price or time, within [●●] ([●●]) days following approval by the CONTRACTOR. SUBCONTRACTOR shall furnish progress reports as mutually agreed and evidence of payment for labor and materials when CONTRACTOR requests. CONTRACTOR and Architect may reject non-conforming Subcontract Work, with Architect’s aesthetic decisions final per the Prime Contract.

10. Safety. SUBCONTRACTOR shall take reasonable safety precautions complying with CONTRACTOR’s measures and Applicable Laws protecting persons and property, including disease prevention. <mark>SUBCONTRACTOR shall report employee injuries at the site to CONTRACTOR within [●●] ([●●]) days.</mark> Prior to bringing hazardous materials on site, SUBCONTRACTOR shall notify CONTRACTOR in writing in time for other parties to comply with Applicable Laws. If precautions cannot adequately prevent foreseeable injury or death from encountered hazards like asbestos, SUBCONTRACTOR shall immediately stop work, promptly notify CONTRACTOR in writing, and only resume work once the hazard is removed and CONTRACTOR agrees in writing. SUBCONTRACTOR shall be entitled to appropriate time and price adjustments for related demobilization and remobilization costs to the extent provided under the Prime Contract.

11. Site Conditions. SUBCONTRACTOR shall keep the Project site clean of its own waste and rubbish, but is not responsible for conditions caused by other parties. If SUBCONTRACTOR does not perform required clean-up, it shall reimburse CONTRACTOR its share of clean-up costs. SUBCONTRACTOR shall take necessary precautions to protect all on-site work from damage.

12. Plans on Site. SUBCONTRACTOR will maintain at Project site a copy of all relevant plans, addenda, Change Orders, supplemental drawings, written directives, approved submittals, inspection reports, and an updated Contract Schedule, which shall be available for review by authorized personnel at all reasonable times.

ACCEPTANCE OF WORK

For: Contractor

Alert: May be missing a clause regarding the right of the owner to accept any nonconforming work or materials.

Guidance: In a Construction Subcontractor Agreement, it is recommended to incorporate a provision for ""equitable adjustment"" to address instances where the subcontractor's work does not fully adhere to the specified requirements. This provision enables the owner to accept non-conforming work, provided that the contract price is fairly adjusted to account for the discrepancies.

This suggestion is crucial as it offers flexibility in the agreement and helps maintain a fair and balanced relationship between the owner and the subcontractor. It also provides a mechanism for resolving disputes over non-conforming work without resorting to litigation or termination of the agreement, saving time, money, and preserving a positive working relationship.

For example, if a subcontractor installs flooring material that does not meet the specified color or pattern requirements, but the owner deems the non-conforming material acceptable for use, the owner could accept the work and negotiate an equitable reduction in the contract price.

Sample Language:

ACCEPTANCE OF WORK

1. Rejected Work or Materials. Upon CONTRACTOR's written notice, SUBCONTRACTOR shall promptly remove any non-complying Subcontract Work or materials from the Project site, whether incorporated or not. At its sole cost, SUBCONTRACTOR shall promptly repair or replace rejected Subcontract Work or materials and make good all damaged Work. No correction or replacement shall be considered complete until testing and inspection is approved by Owner. After rejection notice, SUBCONTRACTOR shall halt related or dependent tasks until the issues are corrected and approved.

2. Acceptance of Nonconforming Work. <mark>Owner may choose to accept non-conforming Work rather than require removal and correction. In such cases, the Subcontract Price shall be equitably reduced, even if final payment was already made.</mark>

3. Call-Backs. On written notice from CONTRACTOR within [●●] ([●●]) days after the Substantial Completion Date, SUBCONTRACTOR shall promptly repair or replace any portion of the Subcontract Work which becomes defective due to faulty materials or workmanship.

PAYMENTS

For: Subcontractor

Alert: May be missing a clause stipulating that making the final payment will release subcontractor from liability for claims.

Guidance: In a Construction Subcontractor Agreement, it is recommended to incorporate a clause that releases the subcontractor from liability for claims upon receipt of the final payment. This provision aims to protect the hiring party's interests by ensuring that potential claims or disputes are resolved before the final payment, thus preventing future legal issues and promoting a smooth project completion.

However, there are exceptions to this concept, such as latent defects. Latent defects are concealed flaws in the work that are not discoverable through reasonable inspection at the time of completion and may not become apparent until after the final payment. Under both Federal and state laws, including California and New York, parties cannot contractually release themselves from liability for latent defects, as they are considered a breach of the implied warranty of workmanship.

The implied warranty of workmanship, which mandates that the work be performed in a good and workmanlike manner, is a fundamental concept in construction law and cannot be waived or released through contractual provisions. Therefore, while a release of claims provision can offer protection against future claims or disputes arising from the subcontractor's work, it cannot release the subcontractor from liability for latent defects.

Sample Language:

PAYMENTS

1. Subcontract Price. As full compensation for the satisfactory and complete performance Subcontract Work per the Subcontract terms, CONTRACTOR shall pay SUBCONTRACTOR in current funds [the fixed price amount of $[●●], subject to additions and deductions as provided in the Subcontract Documents/the amount equal to the quantity of units successfully completed multiplied by their applicable unit prices as set forth in the schedule of unit and alternate prices and estimated quantities, which is incorporated by reference and attached as Exhibit [●●]/the amount equal to the time and materials used to successfully complete the Subcontract Work multiplied by their applicable rates and prices as set forth in the schedule of materials and labor costs, which is incorporated by reference and attached as Exhibit [●● ]] (the “Subcontract Price”). Should the Subcontract Work not be completed as agreed, the Subcontract Price shall be modified accordingly.

2. Schedule of Values. Prior to SUBCONTRACTOR’s first application for payment, SUBCONTRACTOR shall submit a Schedule of Values to CONTRACTOR for approval, which shall allocate the entire Subcontract Price among the various portions of the Subcontracts Work, be supported by data substantiating its accuracy, and be in a form acceptable to CONTRACTOR. An updated version of the Schedule of Values shall be provided with every application for payment submitted by SUBCONTRACTOR and, unless objected to by CONTRACTOR, shall be used as a basis for their review. 

3. Progress Payments. Based on SUBCONTRACTOR’s payment applications corresponding to CONTRACTOR’s applications for payment, and certificates of payment issued by the Architect, CONTRACTOR shall timely pay progress payments to SUBCONTRACTOR as provided in this Agreement. CONTRACTOR shall pay SUBCONTRACTOR each progress payment no later than [●●] ([●●]) days after CONTRACTOR receives payment for such Subcontract Work from Owner.

4. Applications for Payment. Payment applications shall cover one calendar month ending the last day of the month, indicating Subcontract Work completion percentages as of month end. To receive payment, applications must include supporting documents referencing purchase order numbers and be submitted via email by the [●●] of the month. Each application for payment from SUBCONTRACTOR shall also include executed partial releases of mechanic’s liens in favor of CONTRACTOR and Owner in form reasonably acceptable to CONTRACTOR and as required by the Prime Contract. If SUBCONTRACTOR’s application for payment is received by CONTRACTOR after the application date fixed above, SUBCONTRACTOR’s Work covered by it shall be included by CONTRACTOR in the next application for payment submitted to Owner. 

5. Retainage. The rate of retainage shall be [●●] percent ([●●] %), which is equal to the percentage retained from CONTRACTOR’s payment by Owner for the Subcontract Work. If the Subcontract Work is satisfactory and the Subcontract Documents provide for reduction of retainage at a specified percentage of completion, SUBCONTRACTOR’s retainage shall also be reduced when the Subcontract Work has attained the same percentage of completion and the CONTRACTOR’s retainage for the Subcontract Work has been so reduced by the Owner. 

6. Substantial Completion. When SUBCONTRACTOR's Work or a portion thereof is substantially complete per the Prime Contract, CONTRACTOR shall submit a payment application upon request. Within [●●] ([●●]) days of the Architect's or Owner’s Certificate for Payment for such substantially completed Work, CONTRACTOR shall make payment to SUBCONTRACTOR to the fullest extent allowed under the Prime Contract, less deductions to cover SUBCONTRACTOR's incomplete and deficient items and other required withholdings. If the Prime Contract fully releases retainage for completed portions prior to total Project completion, payment shall be the entire unpaid Subcontract Price balance. If the Prime Contract does not allow full retainage release, payment shall reduce retainage on substantially completed Subcontract Work to the same percentage as the Work covered in the certificate.

7. Final Payment. Final payment of the entire unpaid Subcontract Price balance shall be made when the Work fully complies with the Subcontract Documents, the Architect or Owner has issued a final certificate of payment, and CONTRACTOR has been paid by Owner. If a certificate is not issued or CONTRACTOR is not timely paid for reasons that are not SUBCONTRACTOR's fault, final payment is due on demand. Before final payment, SUBCONTRACTOR shall show all payrolls, bills, and known debts connected to the Subcontract Work are paid, if required. SUBCONTRACTOR shall also submit final lien releases for itself and paid sub-tiers with lien rights. <mark>Final payment constitutes CONTRACTOR's waiver of Claims against SUBCONTRACTOR, except for: (a) unsettled liens, claims, security interests, or encumbrances arising from the contract; (b) failure of the Work to comply with the Subcontract Documents; and (c) the terms of any special warranties required under the Subcontract Documents.</mark>

8. Interest. Payments due and unpaid under this Subcontract shall bear interest from the date payment is due at such rate as the Parties may agree upon in writing or, in the absence thereof, at the legal rate prevailing from time to time at the place where the Project is located. 

9. Payment Use. SUBCONTRACTOR agrees to hold in trust payments made by CONTRACTOR for sub-subcontractors and supplies performing the Subcontract Work and furnishing the materials. Such trust obligations shall not require separate accounts, create fiduciary liabilities, or enable punitive damages.

Best Practices for Using Construction Subcontractor Agreements

To make the most of your Construction Subcontractor Agreements and ensure their effectiveness, follow these best practices:

1. Align with the Prime Contract: Ensure that the subcontract is consistent with and properly incorporates the relevant terms of the Prime Contract. Pay close attention to flow-down provisions to avoid conflicts or unintended obligations.
2. Be Specific in Scope Definition: Clearly define the subcontractor's scope of work, including any specific exclusions or interface requirements with other trades. Use detailed specifications, drawings, and performance criteria to minimize ambiguity.
3. Establish Clear Payment Terms: Specify the subcontract price, payment schedule, and any provisions for retainage, progress payments, and final payment. Be cautious with pay-if-paid and pay-when-paid clauses, considering their enforceability and potential impact on the subcontractor.
4. Manage Changes Effectively: Include clear procedures for initiating, approving, and documenting changes to the subcontractor's work. Ensure that change order pricing is fair and consistent with the Prime Contract.
5. Foster Communication and Collaboration: Encourage open and regular communication between the contractor and subcontractor. Establish protocols for submittals, approvals, and reporting. Address issues and conflicts promptly and collaboratively.
6. Plan for Dispute Resolution: Include dispute resolution procedures that are consistent with the Prime Contract and appropriate for the nature of the project. Consider multi-party proceedings and the subcontractor's role in disputes between the contractor and owner.
7. Maintain Detailed Records: Keep thorough and organized records of all subcontract documents, communications, changes, and progress reports. This documentation can be invaluable in the event of disputes or claims.

Conclusion

Construction Subcontractor Agreements are vital for defining the rights, responsibilities, and expectations of contractors and subcontractors in construction projects. By addressing key issues such as scope of work, payment terms, flow-down provisions, change orders, claims procedures, and dispute resolution, CNSs establish the framework for successful subcontractor performance and project execution.

To ensure the effectiveness of your Construction Subcontractor Agreements, it's essential to align them with the Prime Contract, tailor them to the specific project requirements, and have them reviewed by legal and industry experts. By following best practices for drafting, negotiating, and managing subcontracts, contractors and subcontractors can foster collaborative relationships, minimize disputes, and achieve successful project outcomes.

As the construction industry continues to evolve, with increasing complexity and risk, well-crafted Construction Subcontractor Agreements will remain an indispensable tool for contractors and subcontractors alike. By investing the time and effort to create comprehensive and equitable subcontracts, parties can lay the foundation for successful projects and long-term business relationships.