Chapter 11 - § 11.14 • SUBCONTRACT CLAUSES: A CHECKLIST

• Jurisdiction: Colorado

§ 11.14 • SUBCONTRACT CLAUSES: A CHECKLIST¹⁹²

One of the greatest misconceptions regarding construction subcontract agreements is that there exists a "standard" subcontract agreement. In reality, unless a contractor is using one of the forms sold by the American Institute of Architects (AIA), the Associated General Contractors of America (ConsensusDocs), or a similar organization,¹⁹³ no two subcontract agreements are alike. Further, even if a contractor elects to use an AIA, ConsensusDocs, or similar "form" subcontract agreement, these forms require the contractor to complete terms or add exhibits that can substantially transform the agreement. Moreover, standard form contracts are frequently modified by the parties.¹⁹⁴ The AIA and ConsensusDocs also have several different "standard" subcontract agreements from which to choose. Ultimately, regardless of whether the prime contractor presents its in-house subcontract agreement or a "form" subcontract agreement prepared by the AIA, ConsensusDocs, or similar organization, the subcontractor can be sure that the agreement has not been prepared from the subcontractor's perspective.

Some subcontractors may think it is an exercise in futility to carefully review the tendered subcontract agreement because they do not feel they are in a position to negotiate terms. This is often not true. And regardless of whether the subcontractor intends to attempt such a negotiation, it is important that the subcontractor at least understand the terms of the agreement, if only (1) to avoid breaching its terms and incurring unnecessary liability therefor, and (2) to properly handle contract administration.

The following is a checklist of types of contract clauses typically contained in subcontract agreements. Where possible, sample clauses from AIA or ConsensusDocs contracts have been included. The sample clauses do not represent the only place within the subcontract agreement that the highlighted issues are addressed, but merely serve as examples of the specified clauses. The checklist does not provide detailed legal analysis regarding the various clauses; it simply highlights the types of clauses in a typical subcontract agreement that should be reviewed or considered. Be careful of the ripple effect in form contracts; a change in one paragraph might have unintended impacts in other parts of the contract.

§ 11.14.1-Documents Comprising the Subcontract

In order to be aware of the terms of the subcontract agreement, the subcontractor must understand which documents are part of the agreement. Subcontract agreements almost never stand alone; they often incorporate the prime contract as well as other documents, including general conditions, specifications, and drawings.¹⁹⁵ All incorporated or referenced documents must also be reviewed to understand fully the terms of the subcontract agreement. References to other documents may occur in any section of the subcontract agreement, but preferably the subcontract agreement will have a section specifically identifying all documents that are part of the subcontract agreement.

Incorporation of Prime Contract

The prime contract is the document most frequently incorporated into (and thereby made a part of) the subcontract agreement.¹⁹⁶ As seen in the following examples, the incorporation of the prime contract often leads to the incorporation of other documents that are considered a part of the prime contract. Incorporated documents may even include documents not in existence at the time the subcontract agreement is entered into, such as subsequent modifications to the prime contract.¹⁹⁷ The subcontractor should be sure it receives and reviews every document incorporated into the subcontract agreement, and should further insist upon a process that will alert the subcontractor to the creation of these subsequently created documents, which are de facto part of the subcontract agreement.

Example:
The Subcontract Documents include this Agreement, the prime agreement, special conditions, general conditions, specifications, drawings, addenda issued and acknowledged before execution of this Agreement, amendments, laboratory testing that are Contract Documents, other documents listed in this Agreement, and modifications issued in accordance with this Agreement. ConsensusDocs 750, § 2.4 (2011, revised 2017).

See also AIA Doc. A401-2017, § 1.1.

Flow-Through Clauses

In addition to incorporating the terms of the prime contract, many subcontract agreements also provide that the subcontractor assumes any responsibilities to the prime contractor that the prime contractor has to the owner under the prime contract. In these circumstances, the subcontractor must not only understand what obligations it directly owes the prime contractor, but what obligations it consequently owes under such a flow-through clause,¹⁹⁸ and to whom - be it the prime contractor, owner, architect, or other party. The general flow-through statement often leaves uncertainty as to what in fact flows through.¹⁹⁹

Many disputes arise over this type of clause. For example, is the subcontractor bound by an arbitration clause contained in the prime contract? To be certain, subcontract agreements that do not contain flow-through or arbitration clauses will not compel arbitration.²⁰⁰ Subcontract agreements often state that in the case of conflict between the subcontract and the other incorporated documents, the subcontract agreement provisions prevail. But what about subcontracts that do not address arbitration? Though it seems to be a matter of first impression in Colorado, considering Colorado's presumption in favor of arbitration,²⁰¹ unless expressly²⁰² forbidden by a subcontract clause, a court is likely to uphold a prime contract arbitration clause incorporated into the subcontract via a flow-through clause.²⁰³ This is not to say, however, that subcontractors who are not bound by the general contract (via flow-through clause or incorporation by reference) will be forced to arbitrate.²⁰⁴

From the subcontractor's perspective, it is often better to define specifically which of the prime contract provisions apply to the subcontractor. Otherwise, the subtleties of whether a specific provision in an incorporated document applies under a flow-through clause may be left to litigation and general rules regarding contract interpretation.

Example:
To the extent the terms of the prime agreement apply to the Subcontract Work, then Constructor hereby assumes toward Subcontractor all the obligations, rights, duties, and redress that Owner under the prime agreement assumes toward Constructor. In an identical way, Subcontractor hereby assumes toward Constructor all the same obligations, rights, duties, and redress that Constructor assumes toward Owner and Design Professional under the prime contract. ConsensusDocs 750, § 3.1 (2011, revised 2017).

See also AIA Doc. A401-2017, art. 2.

Reference to Other Documents

Often, the subcontract agreement references other documents in clauses other than the specific clause listing the "contract documents." These documents should also be reviewed as they relate to the subcontract. See, e.g., AIA Doc. A401-2017, § 1.3.

Whole Agreement (Integration) Clauses

Clauses that state that a contract is "integrated" or that the written contract supersedes all prior negotiations and representations attempt to prevent the introduction of parol evidence to add to or vary the written contract.²⁰⁵ Subcontractors should be certain that any negotiated terms are reflected in the final written subcontract agreement, because, if not, the negotiated terms will not be considered part of the subcontract agreement.

Example:
The Subcontract Documents form the Subcontract for Construction. The Subcontract represents the entire and integrated agreement between the parties hereto and supersedes prior negotiations, representations, or agreements, either written or oral. An enumeration of the Subcontract Documents, other than Modifications to the Prime Contract or Modifications to this Subcontract issued subsequent to the execution of this Agreement, appears in Article 15. AIA Doc. A401-2017, § 1.2.

§ 11.14.2-Specifications

The most basic subcontract agreement generally will discuss the scope of work to be performed by the subcontractor, and the price to be paid for that work. While this may appear to be a clearly defined area of the subcontract agreement, questions can arise regarding what materials and services are included within the scope of work, what fees are to be paid by the subcontractor, and what the subcontractor will be paid for the subcontract work.

Scope of Work

When reviewing the scope of work, the subcontractor may want to answer the following questions: Who is responsible for site preparation prior to the subcontractor beginning work? Is follow-on work like grading, painting, or landscaping included within the scope of work? Does the subcontractor have the duty to prepare the site for work that will follow this subcontractor's work? Is the subcontractor responsible for providing signs and safety barricades? Will the contractor provide a staging area for the subcontractor's work? If the answers to these questions are unclear from the face of the document (as in the following example, which provides for "necessary or incidental" work and work "reasonably inferable from" the subcontract documents), the subcontractor should clarify the scope of work prior to entering into the subcontract agreement.

Example:
Constructor contracts with Subcontractor as an independent contractor to provide all labor, materials, equipment, and services necessary to complete the Subcontract Work in accordance with, and reasonably inferable from, the Subcontract Documents, and consistent with the Progress Schedule, as may change from time to time. ConsensusDocs 750, § 2.2 (2011, revised 2017).

Pricing

There are several different ways to price the subcontract work, with the three most common being: fixed...