*As published in the April/May 2024 issue of Build Houston Magazine
It never hurts to stop and take a minute to read what you are signing. This is especially true when entering into a contract with a new customer, vendor or on a new project. Your company (and your attorney) will thank you later.
Subcontractors and suppliers routinely sign lengthy contracts and master agreements without closely reading the terms and conditions to get deals done quickly. Below are five key clauses every subcontractor and supplier should be aware of.
1. Payment Conditions – Minimize and narrow clauses that make payment conditioned on something. For example, strike any clause that makes your payment contingent on your customer getting paid (aka “Pay if Paid” clauses). Even seemingly harmless conditions (e.g., submitting certain paperwork, invoice requirements) deserve scrutiny because you should ensure they are practical and that you understand how to comply with them, so there is no delay in payment. In reviewing payment terms to a contract, you should lower hurdles to your ability to get paid for your work.
2. Liquidated Damages/Consequential Damages – General contractors (GCs) often agree to liquidated damages in their contracts with the owner. Liquidated damages typically assess a daily charge each day the project goes on longer than it is supposed to. GCs may try to pass those costs down. If your subcontract incorporates the GC's prime contract, review that contract or at least ask if they agreed to liquidated damages. If they do, then you may also be on the hook for them. Limit your exposure by only agreeing to liquidated damages to the extent caused by your fault. Also try capping the amount of those liquidated damages. The same is true for consequential damages. Subcontractors and suppliers should try to negotiate for a broad waiver of consequential damages (e.g., lost profits, business interruption, etc.) and punitive damages to protect against unforeseeable and uncontrollable damages.
3. Termination – Most contracts differentiate between termination for cause and termination for convenience. Naturally each party wants broad discretion to terminate the contract but would prefer the other party have narrow discretion to terminate the contract. The termination clause should clearly identify how much money you will be paid if the contract is terminated for convenience or for cause. If you are terminated for convenience, try to get your expenses to stop work, plus your anticipated profit on the job. The termination for cause provision should provide a right to cure the problem before the contract may be terminated.
4. Indemnity – Subcontracts or Master Service Agreements almost always require subcontractors and suppliers to indemnify the contractor from damages arising from various claims. Such indemnities frequently shift a substantial amount of the risk to subcontractors and suppliers. Indemnities are very complicated and there is not a one size fits all approach. But generally, look for mutuality (you indemnify GC for “x” and GC indemnifies you for “y”). If you have to agree to a one-sided indemnity clause, make sure you only agree to indemnify the GC to the extent of your own negligence – strike clauses indemnifying the GC for its own negligence.
5. Warranties – Subcontractors are generally required to warrant that the work performed is free of material defects and has been performed in a workmanlike manner for some period of time after completion. Generally, take care that the warranty language does not go beyond what you actually performed. Also, review the time period covered by the warranty obligation (3 months, 12 months, etc.) and what the remedy is in the event of a defect.
It is always important to understand your rights and obligations before you sign on the dotted line. Enlisting experienced construction law attorneys to help your company understand and navigate these contractual provisions can protect your rights, help ensure payment and give your company a clear picture of its obligations.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.