Subcontractors and Suppliers

• Author: Allen L. Overcash
• Pages: 247-277

Subco ntrac tors  and S uppl iers 247

10.01    subCo ntr aCtor s a nD  sup plie rs

A. Subcon tractors versus Suppliers : What I s the Difference

and W hy Does It Mat ter?

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 Incorpora-

tion by Reference and Flowdown Clauses under Federal Government Construction Projects, CON-

STRUCTION BRIEFINGS, March 2005, at 1, 8.

10

Subcontractors

and Suppliers

ALL EN L. OVERCASH

C H A P T E R

247

248 CO N S T R UC T I O N L AW

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. Sub contractor s and Suppliers : Te lling Them Apart

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

whether it constitutes a subcontractor or supplier relationship. This may not

be an easy determination 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

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

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 nondelivery), 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. See UCC §§ 2-607(3), 2-608(2).

6. See UCC § 2-609.

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

155 (1985).