The Dotted Line:
When a subcontractor doesn’t perform according to the terms of its contract, it can often can turn a general contractor’s or owner’s experience of a great project from dream to nightmare.
In the execution of many construction projects, subs provide the bulk of the labor and materials. The entire job can be impacted if any one sub fails to meet the schedule or provides a substandard product — whether it’s the utilities contractor that can’t provide enough workers to complete its scope of work or the drywall company that leaves a mile-long punch list of cosmetic repairs.
Fortunately, general contractors can help keep a bad situation from getting worse through a well-worded subcontract and sound procedures.
Start with proper vetting
General contractors, said that you should check with their state licensing agencies to confirm their subs’ licensure status. Some states, such as Florida, make it easy by offering a searchable public database that reveals if the licensing board has ever taken action against the sub.
Because it is important to get a sense of a sub’s performance history and ability to financially carry its portion of the project, many general contractors require potential subs to submit qualification packages that include financial data and other background information.
Bonding capacity is another indication of a sub’s financial and operational health. Even if there is no payment or performance bond required for the project, the fact that the sub can secure one if needed is a nod to that company’s stability.
The best questionnaire or application, however, won’t be as effective as possible if there is not adequate follow-through with the sub’s supplier and customer references.
Build in protection through subcontracts
Subcontracts, though, are typically the final word on a general contractor’s and sub’s obligations to each other, and there are ways general contractors can protect themselves through this agreement. Of course, what’s in the best interest of the general contractor is not always in the best interest of the sub, so each must review the contract with their own position in mind.
For instance, there are two basic types of terminations written into a subcontract — Termination for Cause, or default, and Termination for Convenience. For-cause terminations typically occur when a subcontractor fails to meet quality or schedule expectations, but convenience terminations can be for most any reason.
The most significant difference between the two is what each party is entitled to — or must pay — when a termination happens.
A Termination for Cause provision could have a subcontractor pay for any cost overruns incurred during completion of its scope of work, less what it is owed at the point of leaving the project. Subcontractors could also owe liquidated damages, a predetermined amount beyond project-related costs that covers certain breaches set forth in the contract. Liquidated damages, for example, might include a late fee imposed for every day the sub fails to meet the schedule.
By: Kaira Morales