This week, DHI conNextions 2018 was host to over 1,500 door and hardware industry professionals who were looking to expand their business through education and networking.
The show, held May 9th to the 11th in Baltimore, featured over 30 educational sessions and for the first time ever a pre-conference workshop held all day Tuesday May 8th.
The five-hour workshop, titled Surviving and Thriving in a Subcontractors World, was designed to help door security and safety professionals navigate the transition between being only a material supplier to now a subcontractor installing access controls and the legal ramifications that come with that change.
The clauses however, translate nicely in to the commercial construction industry.
In the session, Jeremy Wyatt with the Harrison Law Group, presented attendees with five subcontract clauses that can make or break a construction project, how to spot them and how to avoid your business being hurt by them.
1. Pay if Paid Clause:
Wyatt says this clause is one of the biggest problems for construction subcontractors.
What it is: The primary functions of the pay if paid clause is to:
One: Tell the parties what the rules are, what do you build, how do you build it, who is responsible.
Two: Manage the risk of monetary loss. Subcontract manages who gets that risk.
“Every project has risk, but who bears it?” Wyatt says. “A Pay if Paid clause tells the subcontractor that they may have done the work and paid for the labor and materials, but the general contractor has no legal obligation to pay you unless they get paid first by the project owner.”
How to spot it: Wyatt says the words “As a condition precedent to payment…” will activate a pay if paid clause.
What to do: Wyatt says the best way to combat a pay if paid clause legally is to build in a pay when paid clause.
“This clause says that the general contractor will pay the subcontractor when they get paid,” Wyatt says. “This means the general contractor cannot refuse to pay the subcontractor all together.”
Subcontractors should also see that there is a good faith requirement written in the contract. This will help any lawyer ensure they can go to bat every time for every subcontractor if this language is written in the contract.
“Most General Contractors that are savvy refuse to remove the pay if paid clause, they will just get someone else to do the work, because they know how powerful it is. Know how to project yourself.” Wyatt adds.
2. Indemnity is a Shield from Legal Harm:
What it is: This clause states that one party on the contract protects another from legal harm.
“The most common clause you might see is your car insurance,” Wyatt says. “There is a promise by the insurance company to shield you from harm if there is an accident.”
This clause exists in construction where the general contractor and owners are asking the parties down stream, subcontractors, to protect them from harm. Typically in terms of claims.
How to spot it: The language “subcontractor shall indemnify, defeat and hold harmless…” will activate an indemnity clause.
A Broad-Form Indemnity Clause means there is no fault requirement, no connection to your work and no limit to liability - you have to pay all damages if there is an accident, even if that accident has nothing to do with the work you did on a project.
“A broad-form indemnity clause will pertain to all subcontractors on the jobsite. The general contractor could activate all sub-contractors to protect them from damages should an accident happen,” Wyatt says.
What to do: Shift the risk, limit to insurance and negligence only. Keep the claim within the realm of your insurance policy.
“You should have no liability from others’ acts,” Wyatt says. “If anyone else is the problem, you should not be indemnified.”
Wyatt recommends using the language in the AIA A 401 code as it limits negligence and liability.
3. Lien Release:
What it is: Wyatt says a lien release is basically a waiver of rights, conditional upon payment.
“As a subcontractor, a lien release states that you release claims up to today upon payment of the money requested. It’s a certification that there are no other claims on the project and is one of the most dangerous parts of a subcontract in terms of being paid for your work,” he says.
Lien releases are normally required on a monthly basis upon filling out a payment application to close out certain portions of a job. This typically means payment can be initiated by the general contractor, but it’s also a waiver of rights saying you have no further rights to payment.
How to spot: “Subcontractor hereby waives, forgoes, quitclaims…” will be the verbiage to spot a lien release.
What to do: To protect yourself from a lien release, carve out your claims.
“Put written exceptions on the face of the release that are clear,” Wyatt says. “If needed, courts need to know that you did not submit to the release of these claims.”
Also be sure you have the paperwork to support these claims and they have been properly applied to the subcontract requirements.
4. Liquidated Damages:
What it is: Liquidated damages are charges for late completed work and they are typically used on projects where this is a deadline.
“As a contractor, you are taking on risk for delay,” Wyatt says. “Liquidated damages are a daily toll on your project profits and a percentage of your contract could never be paid out. It could add up to thousands of dollars a day.”
How to spot: “For each day after the scheduled substantial completion date…” activates a liquidated damaged clause.
What to do: Limit the claim to your company’s own and sole fault as with a broad liquidated damaged clause, you could be required to pay for things that are unrelated to your own work.
“You should still get paid for preventable delays,” Wyatt says. The damages should only be applicable where you delay the project’s substantial completion and not applicable if there are multiple cause that delay the project.”
5. No Damages for Delay:
What it is: With a no damages for delay clause, you as the subcontractor take on risk for any delay and costs.
How to spot it: “Subcontractor shall not be enticed to additional compensations as a consequence of delay….”
What to do: Limit the clause to unforeseeable delays including demobilization/remobilizations costs.
