Subcontracts: tips for general contractors and subcontractors

This article was originally published in the Daily Journal of Commerce on February 20, 2025.

By: Mario Nicholas

Drafting and negotiating subcontracts can be tricky for both general contractors and subcontractors. General contractors are caught in between owners and subcontractors as the ones that will be held responsible for the work performed by the subcontractor, and their subcontracts should reflect that risk. Subcontractors, on the other hand, may lack the leverage to heavily negotiate subcontracts and will want to pinpoint key risk-shifting provisions.

Here are three examples of the many issues both contractors and subcontractors should consider when reviewing their next subcontract.

Role of the prime contract

General contractors: Subcontracts often include a “flow down” clause, which generally requires the subcontractor to assume the same responsibilities to the general contractor that the general contractor assumes to the owner. General contractors should consider taking additional steps. First, review the order of precedence clause to understand how conflicts between the prime contract and subcontract will be resolved. Second, consider whether particularly important terms from the prime contract should be specifically referenced to avoid any ambiguity when incorporated into the subcontract. Finally, consider whether certain provisions, such as liquidated damage provisions, should potentially not apply to the subcontractor and therefore either need to be excluded from or modified in the subcontract.

Subcontractors: If the subcontract provides that the prime contract is incorporated by reference or other similar language, subcontractors should consider requesting a copy of the prime contract now — when negotiating the subcontract or preparing bids.

Contingent payment clauses

General contractors: Consider making the obligation to pay subcontractors conditional upon payment by the owner. These are often referred to as “pay-when-paid” and “pay-if-paid” provisions. Whether the provision is when-paid versus if-paid is critical because under the latter, if-paid, the subcontractor will be paid only if the general contractor is first paid by the owner. Under when-paid provisions, general contractors are typically required to pay subcontractors within the time period specified or a “reasonable time,” even if the owner does not pay the general contractor. Many states will enforce these type of contract provisions, but often only if the parties’ intent is clear from the specific subcontract language. If hoping to enforce a contingent payment clause, general contractors should ensure that they have taken time to carefully craft these provisions to avoid attack based on the law applicable to the subcontract. For projects in Oregon, state law will likely apply to interpretation of the subcontract and “unambiguous” language is typically required to enforce contingent payment clauses. General contractors should carefully review their contingent payment clauses before relying on out-of-state or national forms not prepared with Oregon law in mind.

Subcontractors: Awareness is key when it comes to contingent payment clauses. Who bears the risk if the owner files for bankruptcy or otherwise doesn’t pay for reasons unrelated to the work? If the general contractor is asking subcontractors to shoulder that risk, subcontractors should know this at the outset of the subcontract negotiation. Subcontractors should also not limit their review to progress and final payment language. Many subcontracts incorporate pay-when-paid or pay-if-paid language into delay and change provisions that can be easy to overlook. Regardless of whether the subcontractor seeks to delete these terms entirely, modify if-paid to when-paid provisions, or strike a balance by modifying other key risk-shifting terms of the subcontract, identifying contingent payment clauses at the outset of negotiation is a critical step.

Dispute resolution

General contractors: Multiple risks must be balanced when drafting dispute resolution provisions in subcontracts. If the owner asserts a claim against the general contractor for something done by the subcontractor, the general contractor will want to hold the subcontractor accountable. A typical land mine in this area is when the prime contract calls for litigation, but the subcontract calls for arbitration, or vice versa. If the dispute resolution provisions conflict, the general contractor may find itself stuck in two separate disputes — one in court and one in arbitration — with the potential for exponential legal fees and conflicting results. General contractors also need to protect themselves from subcontractors’ claims that may stem from actions by the owner, by the general contractor itself, or by other subcontractors or suppliers. As a result, general contractors benefit from a fluid dispute resolution provision that allows the general contractor to direct the dispute into its preferred forum based on who is asserting the claims and which parties are involved.

Subcontractors: Headwinds often arise when attempting to significantly modify dispute resolution provisions because the general contractor will likely demand consistency among its subcontracts. However, subcontractors should take the time to map out the claims process they must follow to ensure they have a viable path to recovery, including for claims that are ultimately the responsibility of the owner, prime contractor, or other subcontractors (usually through the prime). Subcontractors should also consider how to approach nonbinding, pre-dispute requirements, such as a meeting of principals or mediation. Because these steps are nonbinding, there may be more room for negotiation and, depending on the circumstances and parties involved, subcontractors may benefit from adding or striking these pre-dispute requirements.