3 Steps to Ensure Subcontractor Performance
Although a construction contractor can never be certain that its subcontractor will perform timely and satisfactorily, the contractor can take certain steps to help assure that outcome. Here are those steps:
Prequalify the Subcontractor
The time to ensure that a subcontractor will likely perform and complete its obligations satisfactorily begins prior to the time that the parties enter into the subcontract. Prequalifying the subcontractor helps to minimize risk and assure that the subcontractor has the necessary experience and ability to perform the job timely, safely and efficiently.
In prequalifying a subcontractor, the contractor should provide the potential subcontractor with all relevant information regarding the nature, scope and timing of the project, and then request information regarding the experience and capabilities of the subcontractor necessary to meet the project requirements. Such information may include whether the subcontractor has: experience performing similar work; adequate resources to complete the work, including sufficient manpower, equipment and financial resources; a record of prior litigation or legal issues, including regulatory violations; safety and health plans; quality control and quality assurance plans; adequate insurance and bonding coverage; and references that may be checked.
The contractor also may consider utilizing any prequalification analysis undertaken by a surety in qualifying the subcontractor for a surety bond. Criteria applied by a surety in determining a subcontractor’s eligibility for a bond include the subcontractor’s financial status, prior and current project experience, equipment, manpower and safety record. A surety’s assessment of subcontractor risk may help to complement the contractor’s independent efforts to prequalify a subcontractor and bolster the contractor’s determination that a subcontractor is capable of performing and completing the job in accordance with the requirements of the subcontract.
Subcontractor Obligations and Responsibilities
Typically, the construction subcontract contains a detailed scope of work to be performed by the subcontractor, made up of specific inclusions that are individually described. But the subcontractor’s performance shouldn’t be limited to those discrete items. Instead, to mitigate against the risk that performance issues caused by the subcontractor become the responsibility of the prime contractor, the subcontract should contain a “flow down” provision that obligates the subcontractor to comply with the terms contained in the prime contract between the general contractor and the owner, and to be bound by the strictest requirement or standard in the event that the prime contract and the subcontract conflict.
The subcontract should therefore provide, for example, that “with respect to the subcontract work, the rights and obligations of the subcontractor to the contractor are identical to the rights and obligations of the contractor to the owner, and the rights and obligations of the contractor to the subcontractor are identical to the rights and obligations of the owner to the contractor, and if there is a conflict between the terms of the prime contract and the subcontract, the most stringent requirement or highest standard prevails if it is a requirement of the subcontractor’s performance and, otherwise, this subcontract prevails.”
Similarly, to further bind the subcontractor to the obligations of the prime contract, the subcontract should contain an “incorporation by reference” provision, which incorporates into the subcontract all of the documents that make up the “contract documents,” including general conditions, supplemental conditions, design requirements and specifications.
In addition, the subcontract should clearly describe appropriate reporting requirements to be met by the subcontractor to assure the work is progressing satisfactorily, whether set forth expressly in the subcontract or contained in a separate written quality assurance/quality control (QA/QC) plan incorporated by reference. Those requirements should: obligate the subcontractor to attend regularly scheduled pre-construction meetings, progress meetings and milestone reviews with the contractor; timely submit all required shop drawings and process all submittals; submit periodic written progress reports; regularly log all QA/QC inspections and test results that pertain to its work; and promptly communicate any occurrence that might impact the work schedule.
To further guard against untimely performance or nonperformance by the subcontractor, the subcontract should include provisions that require continued work by the subcontractor in the event that the parties disagree on any performance term or condition, and that allow substituted performance by others, including the prime contractor and surety. The subcontract should provide, for example, that if the parties disagree on whether certain work is required, the subcontractor shall, nevertheless, perform the disputed work as directed by the contractor in writing.
The subcontract should also provide that, in the event of defective performance or nonperformance by the subcontractor, the contractor shall be entitled to cure or take over and complete the work and charge the entire cost and expense, including attorney’s fees, of that cure to the subcontractor and deduct that amount from any sums due to the subcontractor. To further safeguard the contractor’s interest in achieving timely and complete performance of the subcontractor’s obligations, the subcontract should also contain an indemnity provision under which the subcontractor agrees to indemnify the contractor against any loss in any way connected with the subcontractor’s or any sub-subcontractor’s performance or nonperformance.
Requiring that subcontractors are properly insured will provide another degree of security that may help avoid delays in the work and default altogether. The subcontract should, therefore, require that the subcontractor procure and maintain applicable insurance policies, including worker’s compensation, commercial general liability, automobile, and umbrella or excess liability policies naming the contractor as an additional insured. Because an insurer stands in the shoes of its insured in the event the insurer is able to bring a subrogation claim — which would allow the insurer to pass risk back to project participants, including the contractor — it can’t bring such a claim if that claim has been waived by the insured. The subcontract, therefore, should include a provision by which the subcontractor waives all rights against the contractor for injuries caused by risks covered by the subcontractor’s insurance policies.
Finally, a performance bond provides further security that the subcontractor’s work will be fully, if not timely, performed. A performance bond is a contract under which a surety agrees, up to a dollar limit, to protect the interest of another party, typically the owner, in the performance of a third party, typically the contractor or subcontractor. In a performance bond, the surety agrees that if the work is not completed in accordance with the contract, the surety will make good on the difference, either financially or by substituted performance. The subcontract should, therefore, require that the subcontractor furnish to the contractor, either prior to or during construction, a performance bond in the amount of the subcontract price, written by a surety approved by the contractor.
Dispute Resolution Steps/Remedies
Due to their inherent complexity, large commercial construction projects are susceptible to disagreements and associated claims regarding the subcontractor’s performance. In the interests of progressing the subcontractor’s work or at least minimizing hindrances to that work, the subcontract should provide for an efficient mechanism to resolve subcontractor claims with minimal impact on ongoing work.
The subcontract should contain terms that require the subcontractor to provide to the contractor timely notice of any claim arising from acts or omissions of the owner, with sufficient documentary substantiation, so that the claim can be presented promptly to the owner for resolution, recovery for which should be limited to the amount received by the contractor from the owner, consistent with a “pay if paid” provision in the subcontract. Again, the subcontract should provide that the subcontractor shall continue to perform its work despite the submission of any such claim.
In those cases where the contractor has lost confidence in the subcontractor or for some other reason wishes to terminate the relationship, the subcontract should provide that the contractor may terminate the subcontract without cause upon written notice, and that the subcontractor preserve and protect tools, construction equipment and facilities on site and, if requested, turn them over to the contractor. The subcontract should further provide that the subcontractor’s failure to comply with the terms of the termination notice will entitle the contractor to bring an action for damages, to withhold any payment then or thereafter due to the subcontractor until the contractor’s damages are fully known, and/or to obtain immediate injunctive relief.