The overall success of any construction project hinges largely on the general contractor’s ability to properly coordinate its subcontractors. The written subcontract governs the relationship between the general contractor and subcontractor. Therefore, the importance of a clear and comprehensive subcontract cannot be overstated. A well-written subcontract will go a long way towards ensuring the project runs smoothly by minimizing disputes between the general contractor and subcontractor.
The ten most important terms of a subcontract are:
- Scope of Work: The subcontract should carefully clearly define the scope of work to ensure both parties understand what is expected on the project. In many instances subcontractors will provide a proposal prior to entering into a subcontract. In order to minimize disputes during the project, the parties should carefully compare the scope of work in the proposal is consistent with the scope of work set forth in the subcontract.
- Schedule: The general contractor’s right to properly sequence and coordinate works should be set forth in the subcontract. The subcontract should also specify the timeframe for subcontractor to complete its scope of work. The subcontract should include a copy of the project schedule if available. The subcontract may include the subcontractor’s liability for liquidated damages which must be carefully written to ensure it is enforceable. Finally, the general contractor may protect itself with a “no damages for delay” clause which limits a subcontractor’s rights in the event of delays by general contractor or other subcontractors.
- Payment:The price, terms, and conditions of payment should be clearly identified in the subcontract. This portion of the subcontract should set forth the procedure for payment applications and identify all documents (i.e. releases) that must be submitted for the subcontractor to receive payment. Notably, the subcontract may include a “pay-when-paid” clause which makes the contractor’s duty to make payment to the subcontractor contingent upon receipt of payment from the owner. These clauses are generally valid and enforceable in Florida when properly drafted.
- Indemnification:Florida Statute 725.06 imposes limitations on indemnification clauses in construction contracts. On private projects, fairly broad indemnification is permitted if the contract contains a monetary limitation on the extent of indemnification and is part of the project specifications or bid documents.
- Default and Termination: The subcontract should address the right to default and terminate for non-performance. In order to ensure a termination clause is enforceable it should clearly define the events that constitute a default under the subcontract. The provision should also include a specific procedure for notification of default and subsequent notice of termination if the default is not cured with a specified timeframe. The subcontract may also provide alternatives to termination such as supplementation, withholding payments, and right to make direct payments.
- Changes: A well written change order clause will include a detailed procedure for submission and approval of change orders. This typically includes a requirement that the subcontractor submit a request for change order within a specified timeframe of becoming aware of the additional work. This procedure should also address the subcontractor’s responsibility to perform change order work pending approval.
- Dispute Resolution: The subcontract should address specific procedures for notification, submission, and review of claims. Most importantly, this provision should specify whether claims that are not resolved by the parties will be decided through litigation or arbitration. An arbitration clause must be carefully written to ensure that it is enforceable.
- Inspection of Work & Warranties: It is important to identify procedures for inspection of the subcontractor’s work and subcontractor’s responsibility to correct defective work. This should include written notice to subcontractor with a specified timeframe for subcontractor to remedy defective work. The subcontractor’s responsibility to correct defective should extend until expiration of the warranty period. The typical subcontract requires a 1 year warranty after final completion of the work.
- Flow Down Provisions: A flow down provision incorporates the prime contract between the owner and general contractor into the subcontract. This binds the subcontractor to the general contractor to the same extent the general contractor is bound to the owner. This becomes important for resolution of pass through claims which are submitted to the owner by general contractor. The subcontractor should request a copy of the prime contract if the subcontract contains a flow down provision.
- Insurance and Bonding: There are various types of insurance policies that are typically purchased for construction projects, including Commercial General Liability, builder’s risk, and errors and omissions. The subcontract should identify all insurance requirements for both the general contractor and subcontractor. Further, if either party is required to provide a payment or performance bond this should also be identified in the subcontract.