Subcontractors and Suppliers

• Author: Carol J. Patterson - Ross J. Altman - Stephen A. Hess - Allen Overcash
• Pages: 283-318

CHAPTER

283

10

10.01 subcontractors and supplIers

A. Subcontractors versus Suppliers: What Is the Difference and Why

Does It Matter?

It is common to think of subcontractors as those entities that furnish services,

such as the installation of electrical or mechanical systems, to the project at

the project site. It is common to think of suppliers as those entities that deliver

products or goods to the project, such as electrical or mechanical equipment.

The distinction between the two is unclear and becoming fuzzier as traditional

subcontractors increasingly furnish and even design products and goods and

as more suppliers install their own products.1

1. The generally accepted distinction between a subcontractor who performs work at the job

site and a supplier who does not is not appropriate in federal government contracting, which

regards any party furnishing supplies or services for performance of a prime contract or subcon-

tract as a subcontractor. The denition of the party has important implications for the nature of

the clauses that are required to be included in its contract. Brian A. Darst, Subcontract Incorpo-

ration by Reference and Flowdown Clauses under Federal Government Construction Projects, Con-

struction Briengs, Mar. 2005, at 1, 8.

Subcontractors and

Suppliers

ALLEN L. OVERCASH

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CONSTruCTiON LAW

284

Why does the distinction between subcontractors and suppliers matter and

what principles apply to the distinction? This section addresses those issues.

Whether the entity is a subcontractor or supplier may have serious impli-

cations for that entity’s security rights. Subcontractors and suppliers are some-

times treated differently under mechanic’s lien statutes and payment bonds.

More importantly, the Uniform Commercial Code (UCC) commonly applies to

the furnishing of goods by suppliers but not to the furnishing of services by

subcontractors.

The UCC’s application to a particular transaction may affect the parties’

rights. These include the application of the statute of limitations,2 the existence

of special warranties,3 the buyer’s remedies,4 buyer’s notice requirements,5

and either party’s right to adequate assurance of performance.6

B. Subcontractors and Suppliers: Telling Them Apart

All parties are well advised to understand the nature of their transaction—

whether the transaction constitutes a subcontractor or supplier relationship.

The determination may not be easy since many transactions are mixed; that

is, the same party furnishes both services and goods as part of the same

agreement.

Some courts have applied a predominant factor test, analyzing “whether

the predominant factor . . . is the rendition of service, with goods inciden-

tally involved, or whether they are transactions of sale, with labor incidentally

2. The UCC statute of limitations may be of different length than the statute applicable to

furnishing services to construction projects. Compare

neB

. U.C.C. §2-725(1) (four years) with

neB. reV. stat

. §25-205 (ve years). Further, the ability of the parties by agreement to modify the

statutory period may be different. Section 2-725(1) of the

neB

. U.C.C. allows the parties to reduce

the period of limitation to not less than one year, but they may not extend it. Moreover, when

the statute of limitations starts to run may also differ. Compare

neB.

U.C.C. §2-725(2) (regardless

of knowledge, the cause of action accrues when the breach occurs) with

neB. reV. stat

. §25-223

(allowing extension of the statutory period if the cause of action is not discovered).

3. The UCC provides for an implied warranty of merchantability (§ 2-314) and an implied

warranty of tness for a particular purpose (§2-315), as well as other implied warranties that

may also rise from the course of dealing (§2-316) and sets forth the method of creating express

warranties (§2-313). Section 2-316 allows the parties to disclaim and exclude warranties.

4. The UCC provides buyers with certain remedies that they may exercise at various points

in any transaction. See, e.g., sections 2-711 (buyer’s remedies in general), 2-502 (buyer’s right of

recovery), 2-712 (“cover”), 2-713 (contract-market damages for non-delivery), 2-714 (breach of

warranty), 2-715 (incidental and consequential damages), 2-716 (buyer’s right to specic perfor-

mance or replevin), and 2-717 (deduction of damages from purchase price). The UCC also con-

tains specic provisions allowing parties to limit the buyer’s remedies (see § 2-719).

5. UCC §§2-607(3), 2-608(2).

6. See UCC §2-609.

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Subcontractors and Suppliers 285

involved.”7 The fact that the product furnished by the party was fabricated

off-site, moved to the project, and simply installed at the project site may be

important in determining that the transaction is a supply agreement.8

Courts examine the entire transaction to determine its nature. An import-

ant question is whether the terms of the parties’ contract more closely resem-

ble the standard provisions of a contract for services or for the sale of goods.

Therefore, the parties can shape a transaction by the provisions they insert in

their contract.9

10.02 selectIon oF subcontractors and supplIers

A. Owner Input into Selection Process

The reality of most construction projects is that the prime contractor performs

very little of the work on the project. It is generally not practical for prime

contractors to maintain a staff of people who are expert in individual trades

such as electrical work. Rather, it is more economical for the prime contractor

to hire specialized rms that have constant experience in particular trades.

The prime contractor’s function is to procure and to coordinate the services

and supplies furnished to the project by others. Sometimes the owner acquires

these items, but more often, the items are furnished by subcontractors and

suppliers who contract directly with the prime contractor.

It is logical for the prime contractor to contract with the parties perform-

ing the work since the prime contractor is responsible for coordinating the

parties’ work. However, this arrangement creates some tension, because the

satisfactory completion of the owner’s project depends largely on the work of

legal strangers over whom the owner has no direct control. Although the prime

7. Mennonite Deaconess Home and Hosp., Inc. v. Gates Eng’g Co., 219 Neb. 303, 363 N.W.2d

155 (1985).

8. See Bonebrake v. Cox, 499 F.2d 951 (8th Cir. 1974).

9. See David C. Olsen & Jeffrey S. Rosenstiel, Predicting When Construction Contracts Are

Subject to Article 2 of the UCC, 21

the cOnst. lawyer 22

(Winter 2001). According to Olsen and

Rosenstiel:

[T]he contract should address issues that are customarily found in construction con-

tracts, such as: the commencement of the work after a notice to proceed; the compli-

ance with plans and specications; the need to provide submittals for approval; the

need to prosecute the work with adequate workers; the supervision of work by the

architect or other professional; the steps that will be taken on the failure to complete

the work on time; and the respective rights of the owner and contractor on default

by the other.

Id. at 26.

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