Subcontractor Construction Terms 101

There is no shortage of paperwork in the construction industry. Each of the documents included in a project is important. However, none cover quite as much ground for subcontractors as the subcontractor contract. Your contract contains all the details of the project and is designed to protect both contractors and subcontractors. It’s important to review your subcontractor agreement thoroughly before you sign. Yet, if you’re unfamiliar with the construction terms in your contract, you might be signing off on something you don’t actually agree with.  These are some of the most important subcontractor construction terms you should know before reading your contract.

Licensing

Federal, state, and local laws exist to ensure that buildings are structurally safe. Additionally, they ensure proper procedures are followed for safe electricity and plumbing. The general contractor takes on the responsibility for many things. Particularly, that all professionals on the project are licensed and registered pursuant to state and local laws. The best way for a GC to avoid potential lawsuits regarding licensing is to insert a clause into the subcontractor agreement. By signing the contract, the subcontractor states that they are licensed. They may also agree to defend the contractor and others for legal action arising out of licensing issues.

Scope of Work

The scope of work is one of the construction terms that describes the services you are required to provide for the agreed-upon payment. The parameters of work should be as specific as possible and include assumptions and exclusions to avoid disputes in the future. The scope of work should state exactly what tasks are to be performed with due dates, deadlines, and additional requirements. As a subcontractor, it’s crucial to examine the scope of work for catch-all language that could lead to more work than expected. For example, a contract that states the subcontractor will complete all tasks “reasonably inferrable” from project plans. This leaves the amount of work open to interpretation.

Contractor construction engineer meeting together on architect table at construction site for a contract signing

Payment Terms

Next, the payment terms of your contract state when and how the contractor is responsible for paying you. Failing to understand the payment terms in a subcontractor contract can mean you get paid late. Even worse, you may not get paid at all under certain circumstances. Payment terms in your contract should include:

  • The timing and format for submitting pay apps
  • When the contractor is required to make the payment after pay app submission
  • The total amount to be paid for the scope of work specified in the contract

It’s important to examine the payment terms of the contract for “pay if paid” provisions. These clauses state that subcontractors will only be paid after the GC receives payment from the owner.

Change Orders

Facing unexpected changes during a construction project is common. However, it means that additional work or materials may be needed. The contract should clearly state that subcontractors are only expected to perform change work after certain requirements are met. This includes a change order signed by the GC. Finally, the owner may also be required to sign the change order.

Force Majeure

This less familiar term has suddenly become relatable in light of the way the pandemic affected businesses across the globe. Force majeure means any event that cannot be reasonably anticipated or controlled. A force majeure clause in a contract permits a party to delay performance or to be excused from performance. This can only happen upon the occurrence of a “force majeure event” that renders performance commercially impracticable, illegal, or impossible. An explanation of such events should be specific and may include:

  • Fires
  • Floods
  • Hurricanes
  • War
  • Riots
  • Strikes
  • Pandemics
  • Government actions and restrictions
  • Acts of God

Indemnity

This legal construction term usually goes hand in hand with the word defense. A defense and indemnification clause is an agreement to defend the GC and others against claims or lawsuits. These lawsuits are related to damage arising out of the subcontractor’s negligence or intentional acts. The clause is designed to protect the GC against liability due to misrepresentation or poor workmanship performed by subcontractors.

Liquidation

Since subcontractors are not hired directly by the owner of the project, any subcontractor claims must be passed to the owner through the general contractor. Clauses that describe liquidation damages guard against damages that the owner or a contractor. For example, business might suffer if a project is delayed beyond the completion date set forth in the contract. To avoid potential disputes, the subcontractor contract should specify that you are only responsible for liquidation damages that are related specifically to your scope of work. Otherwise, broad change order forms or payment claims can leave subcontractors open to excess liability.

Flow-Through

This construction term describes the responsibility a GC takes on in relation to the work of subcontractors. A GC contract with the owner holds the contractor responsible for all services completed on the project. These responsibilities are passed along to subcontractors hired for the project. Therefore, it’s important for subcontractors to understand how the contractor’s agreement affects the scope of their portion of the project.

Termination

Every contract should clearly state the construction terms that govern when the subcontractor can be terminated or terminate the project. Many contracts allow the contractor to terminate the subcontract for convenience. If this is the case, the contract should also clearly state that the subcontractor receives payment for services completed and reasonable compensation for costs of termination (like demobilization, overhead, and loss of profit). Other important things to note within termination clauses include:

  • Specific terms required for termination from both parties
  • Payment terms for termination
  •  Prior written notice will be provided before termination
  • How “failure to perform” is determined and who makes the determination

A carefully designed contract can eliminate the potential for disputes before a project begins. While construction contracts are fluid documents that describe many working parts of a complete project, the right provisions can protect all parties involved. It’s not just important to have the right tools when handling your agreements, but also to understand common construction terms, and what each document means. Keep your documents accurate and easy when you use Flashtract’s subcontractor software, starting at $99/mo. 

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