June 13, 2019

By: Shoshana E. Rothman, Partner, Smith, Currie & Hancock LLP

The contract is king in the construction industry, and although many contract forms are similar, disputes arise over the variances in specific contract terms. It is therefore critical to the success of the project to understand the contract terms, how the differences in those terms may affect payment, and proactively implement procedures to avoid costly endings.

Here are five common types of contract clauses that vary by contract and substantially affect how the contractor gets paid.

  1. Flow Down Clauses: These clauses require a subcontractor to be bound to the contractor in the same way and to the same extent that the contractor is bound to the owner by the prime contract. These clauses will state that all provisions in the prime contract related to the rights and liabilities to the owner are incorporated into the subcontract, which could exponentially expand a subcontractor’s obligations, and conditions for payment. Often, liquidated damages, claims, or dispute provisions clauses are flowed down through this clause. A subcontractor should always read the prime contract, and when possible, attempt to limit the extent to which the subcontractor is bound to the prime contract terms that are beyond its control. The ConsensusDocs 750 Standard Subcontract which is endorsed by AGC contains a flowdown clause at section 3.1.
  2. Pay-if-Paid Clauses: Shift the risk of nonpayment by the owner to the subcontractor by conditioning the contractor’s duty to pay its subcontractors upon receipt of payment from the owner. These clauses are often identified by the words “if” or that payment by the owner is a “condition precedent” to payment to the subcontractor. If the owner does not pay the contractor, through no fault of the subcontractor, then the contractor is relieved from the obligation to pay its subcontractor. Some jurisdictions do not enforce these provisions, but many do. An alternative to the harshness of this clause, and a more balanced payment term, is a “pay-when-paid” clause, requiring payment to subcontractors within a reasonable time, even if the owner never makes payment. The ConsensusDocs 750 Subcontract contains a pay-when-paid clause at section 8.2.5. and the AGC contract documents guidebook has commentary on this issue.
  3. Changes, Extra Work, and Claims: Many contracts have similar, but slightly different, notice requirements for changes, extra work, and claims. Contractors must strictly comply with those terms to obtain payment for that work. Performance of field directives or interim directives without strict compliance with the contract’s notice terms is a common practice, but make it difficult to recover those costs if a formal dispute arises. Care should be taken to comply with the notice requirements if work orders are given and performed in the field, or to document the refusal of the field staff or project management team to comply with the notice obligations.
  4. Lien Waivers: There are two types of lien waivers: conditional or unconditional, and the wording shapes the payment obligations. Conditional waivers only require the release of rights if the contractor is paid. Unconditional lien waivers require a release before payment, and operate even if payment is never made. In either case, contractors should preserve all claims by specifically excluding from the release all claims or change orders that have not been paid. Subcontractors should also ensure that the contract or any flow down clauses do not eliminate the right to file a lien for nonpayment on a private project. The ConsensusDocs 750 explicitly requires unconditional lien waivers at section 8.8.
  5. Dispute Resolution: Care should be taken to ensure that the location of any mediation, arbitration, or litigation is convenient, and the type of dispute resolution does not hinge on a unilateral decision by only one party. Some contracts require the contracting party to pay all expenses or attorneys’ fees of the contractor or owner, regardless of the cause or outcome of the dispute, which could lead to the contractor having to pay all costs, even if that contractor prevails in the dispute. Those latter terms are inherently unfair.

Contractors should be wary of additional clauses that could skew their rights and liabilities. Spending a few hours at the start of any project to thoroughly read and understand the contract, or outsourcing that assessment to an experienced construction attorney, will likely save time, money, and professional relationships during the life of the project.

The views expressed in this article are not necessarily those of ConsensusDocs. Readers should not take or refrain from taking any action based on any information without first seeking legal advice.