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Critical Issues in Subcontracts

Timothy R. Hughes, Esq.
Hughes & Associates, P.L.L.C.

Subcontractors are often bound to extremely harsh contractual terms. It is critical to examine your subcontracts carefully and clearly understand what you are agreeing to do. What follows are some pointers regarding contractual issues that can create serious problems.

1. Ensure A Clearly Defined Scope of Work

The quickest and surest way into litigation is a poorly defined scope of work. If the parties fail to have a clear and mutual understanding of what a subcontractor is hired to do, this situation invites disputes. Perhaps my viewpoint is skewed in that I see many cases that are in litigation. Nevertheless, I am continually surprised at how many of my cases have significant gaps or vague areas in definition of scope of work.

This problem seems particularly true in mechanical, electrical, and plumbing disciplines. Often, drawings are depicted in a very schematic fashion. This lack of clear definition of the precise scope of work in the drawings can lead to substantial disagreements as to how much work the subcontractor is expected to perform. The essence of a good contract is one that is simple, clear and well defined. If there are vague points in the scope of work, you must approach the project bidding from a worst case scenario on exactly how much work you will be required to perform.

2. Understand the Scheduling Requirements

As with poorly defined scopes of work, it is truly impossible to properly price a job unless you understand the schedule and what it will take for you to complete your efforts on time. Time means money in all businesses, but on construction projects the translation is literal. In addition, there is no more complex case to litigate than a complicated delay claim. The cases are heavily fact intensive and require extensive and expensive expert witness analysis. Avoid these expenses if possible by understanding the schedule requirements before you start work.

As with scope of work issues, electrical trades are notoriously subject to delay related issues. Electrical contractors often face conflicting code decisions. For example, the drawings are reviewed and approved. Field inspectors often change requirements for fire alarms, alarm panel annunciation, and wiring in the field. These field directions can lead to extensive changes in the scope of work and delays.

Further, electrical contractors are often competing for limited above ceiling space with other trades. The above ceiling space is often a schematic wasteland of conflicts. These conflicts amongst trades lead naturally and necessarily to increased construction costs and delays.

On a final note, general contractors are including form scheduling clauses that are more and more harsh. Many general contractors include clauses that attempt to shift responsibility for all delays downstream to the subcontractors. Depending on your state’s law, there may be some arguments against these harsh clauses on your project; however, such arguments usually only arise on the context of litigation. It is better to attempt to reduce those risks in advance of performance.

3. Be Careful of Incorporated Standards and Terms

From my recent experience, compliance with incorporated standards is a growing exposure area for electrical contractors. It has become common for architects and engineers to incorporate extensive industry standards and codes by reference into specifications. For example, for electrical contractors, you can probably expect for specifications to incorporate by reference code requirements from the National Electric Code.

The potential rub occurs where there is something omitted from the drawings and specifications that is arguably inferable from the NEC standards. If you are contractually bound to install all elements required for “code compliance”, you may be liable for all additional work that was left out of the drawings. Further, conflicts can and do occur between the base specifications, applicable codes, and the incorporated standards of performance. You may be held liable to perform the most restrictive, expensive, and time consuming requirements of performance.

4. Beware of Broad Form Indemnification Clauses

Indemnification clauses are likely the most dangerous contractual terms found in an agreement. A broad form indemnification clause can potentially make you liable for damages that were primarily caused by a subcontractor. Indeed, in some states, a broad form indemnification clause can even make you liable to indemnify the general contractor where the general contractor was solely responsible for the claimed damages!

The main point here is you need to closely analyze your contracts. Hiring a lawyer for even a quick review of the contract is generally a very good idea. If you are facing an indemnification clause, it is far better for you to understand the risks you are signing on to at the beginning of a job instead of learning at the end of litigation.

On a final note, indemnification clauses can create additional liability risks beyond the types of claims covered. Specifically, you can be held liable for a variety of additional damages that may not be recoverable for other types of claims, such as attorney fees and litigation expenses. Your insurance carrier may have additional arguments for why it is not obligated to defend and indemnification claims. Given all these factors, indemnification claims are particularly dangerous and such clauses warrant very close scrutiny prior to signing a contract.


Conclusion

Understanding the terms of the deal you are signing is critical to reducing risk. You may be able to negotiate more favorable terms. You will have a better understanding of what your risks are and can handle a project accordingly. To avoid this process and simply fly blind into the project can place you or your business in serious jeopardy in the event of litigation.