Keeping Out of Trouble with Subcontractor Contracts

by C. Jaye Berger

General contractors seldom pay enough attention to the details of their agreements with subcontractors, and that can spell trouble for both parties if project problems arise.

General contractors spend a great deal of time negotiating all the fine points of contracts with their clients, yet when it comes to their contracts with subcontractors, there is often little or no formality. There is almost never a "real" contract with all the terms spelled out.

Occasionally there is a purchase order with very few details in it. I have seen many projects where there was just a phone call made to show up with some workers.

As an attorney working with general contractors, I see every day that the ramifications of this for both the contractor and the subcontractor can be enormous, especially when someone is injured on the project or there are mechanic's liens for unpaid work.

Does this scenario sound familiar? A general contractor signs a contract with a client and hires several subcontractors to do the work. As per the contract, the contractor provides evidence of general liability and workers compensation insurance, naming various parties as additional insureds, such as the owner, or in the case of a renovation of an existing building, the property manager.

Most contracts with owners require general contractors to pass insurance provisions down to subcontractors, but many contractors do not actually do so. If the owner-contractor agreement stipulates that subcontractors should obtain equivalent amounts and types of insurance, then the contractor must require such provisions in all of its subcontractor contracts. If it doesn't, and an accident occurs, the contractor might find that the subcontractor does not have insurance coverage in place or that the subcontractor's existing policies are not "triggered" because there was nothing in the contract about this subject.

Even when the required insurance is in place, other problems can arise. Imagine if, unbeknownst to the general contractor, the subcontractor agrees to do some work directly for the client through a verbal request - without a written contract outlining the scope of work and without a new permit, under the assumption that the added work falls under the original permit.

If the subcontractor does not provide its own certificate of insurance for such extra work, the general contractor can be at risk because its own insurance policy would still be in the owner's file. If there is an accident, a workers' compensation insurance carrier may look to the general contractor's general liability policy for coverage. That raises the risk of drawing the general contractor into any resulting lawsuit.

Other sticky situations can arise if not all parties deal honestly with such matters. For instance, the client that enlisted the subcontractor for extra work could later claim that the general contractor was on notice of the task. It is easy to picture how this scenario could leave an insurer unclear about who was responsible for certain work tasks and who was supervising, directing, and controlling it. A contractor-subcontractor contract should clearly outline the subcontractor's scope of work to preserve the contractual relationships.

In addition, subcontractors can file their own mechanic's liens. If the general contractor and the subcontractor do not have a clear agreement between them, the likelihood of a fee dispute increases, and the client can be pulled into the middle of the situation. It is bad for the contractor's business relationship with the client, and the contractor will inevitably incur legal expenses in sorting this out.

In one recent case in New York, a general contractor hired a subcontractor to do work for a fixed price. Right before it started, the subcontractor realized the work would cost more than planned and asked for more money, but the general contractor held firm.

The subcontractor went ahead and did the work, but billed the general contractor for the higher amount. When the subcontractor was not paid, it filed a mechanic's lien - prompting the owner to insist that the contractor take care of the problem and remove the lien from the title. By not having the subcontractor agree to a set price in a contract, all the contractor did was delay the inevitable dispute.

It is clear that general contractors and subcontractors need to have contracts between them to avoid these kinds of problems. They need to spend more time consulting with their counsel, carefully negotiating the terms of their agreements, and following through on final contracts to ensure they can avoid these common problems.