Subcontractor Remedies for Contractor Default
Contractors and subcontractors alike dread contract defaults because they add time, money, and stress to a project. Contractors have standard remedies that they can take advantage of when a subcontractor defaults, but what protections does a subcontractor have if the contractor defaults?
Subcontractors can and should include provisions and remedies that protect them if a contractor defaults. In this article, we’ll look into some standard provisions that you should consider including in every contract.
Nonpayment
Construction is a complicated game of careful leveraging, and even the original contractor is not immune from liquidity issues. Your contract should address what happens if the contractor is behind on or has stopped making payments to you for any reason other than your work. For example, you may want to include language about the frequency of payments you expect on a project and remedies for if you do not receive said payment.
Possible language for such a provision may be:
Subcontractor shall be paid monthly progress payments on or before the 15th of every month for the value of work completed plus the amount of materials and equipment suitably stored on or off site. Final payment shall be due 30 days after the work described in the Proposal is substantially completed. No provision of this agreement shall serve to void the Subcontractor’s entitlement to payment for properly performed work or suitably stored materials or to require the Subcontractor to continue performance if timely payments are not made to Subcontractor for suitably performed work or stored materials or to void Subcontractor’s right to file a lien or claim on its behalf in the event that the payment to Subcontractor is not timely made.
You should also try to negotiate away any pay-if-paid clause to ensure that you receive timely payment even if the property owner has not paid the original contractor.
Clauses that allow you to stop work
If you’re in a situation where you’re no longer being paid for your work on a project for reasons other than your work, you’ll appreciate having a clause that allows you to stop work.
Possible language for such a clause may be:
Should Subcontractor’s payment be delayed because (a) Customer fails to receive timely payment of amounts certified and approved, or (b) Customer fails to make timely payment after itself receiving payment for Subcontractor’s work, or (c) because Customer’s payments are not received by Customer for reasons not the fault of or directly related to Subcontractor’s work, then Subcontractor may suspend work after giving at least seven (7) days written notice to Customer of the intent to suspend and the date of intended suspension. Should Subcontractor’s work be thereafter suspended for at least twenty-one (21) days, Subcontractor may terminate this subcontract upon written notice of termination to Customer.
You may even consider adding a stipulation that the unpaid balance will accrue interest and that allows for collection costs, including reasonable attorney’s fees, to be paid by the contractor.
Remedies for delay
When projects are delayed, it’s possible for the prices for materials or labor to rise before work resumes. Including a contract provision that allows the subcontractor to make equitable adjustments to the contract price, including labor, equipment, materials, or any other cost, can prevent your company from losing money or operating at undesirable profit margins.
Delays may be the result of anything from labor unrest to natural disasters. A reasonable contract will also include a provision that, should the delay exceed 90 days, the subcontractor is entitled to terminate the subcontract.
Possible language for such a provision may be:
Subcontractor shall be entitled to equitable adjustments of the contract price, including but not limited to any increased costs of labor, supervision, equipment or materials, and reasonable overhead and profit, for any modification of the project schedule differing from the bid schedule, and for any other delays, acceleration, out-of-sequence work and schedule changes beyond its reasonable control, including but not limited to those caused by labor unrest, fires, floods, acts of nature or government, wars, embargos, vendor priorities and allocations, transportation delays, suspension of work for non-payment or as ordered by Customer, or other delays caused by Customer or others. Should work be delayed by any of the aforementioned causes for a period exceeding ninety (90) days, Subcontractor shall be entitled to terminate the subcontract. Subcontractor change proposals must be processed in not more than (thirty) 30 days or as otherwise indicated on the change proposal.
Resolution of disputes
Many contracts include a clause about how the parties will resolve disputes. Stipulating that any disputes begin with mediation is a smart way to postpone and possibly avoid expensive litigation. To avoid unnecessary delays in beginning and concluding mediation, consider including specified timelines in the clause. For example, stipulate that mediation must convene within 30 days of any party filing a demand for mediation and that the matter should be resolved within 15 days thereafter.
In the event that mediation fails to reach a suitable resolution, the provision should state that the matter may then proceed to litigation filed in the appropriate state or federal court.
Possible language for such a clause may be:
The parties will endeavor to resolve all claims, disputes, and matters arising out of or relating to this Agreement by mediation, as a condition precedent to any other dispute resolution procedure. The mediation shall be convened within thirty (30) days of any party filing a demand for mediation with the other party and shall be concluded no more than fifteen (15) days thereafter. If the matter is unresolved after submission of the matter to mediation, the parties shall submit the matter to the binding dispute resolution procedure selected herein (check one):
• Arbitration using the current Construction Industry Arbitration Rules of the American Arbitration Association or the Parties may mutually agree to select another set of arbitration rules. The administration of the arbitration shall be as mutually agreed by the Parties.
• Litigation by filing an appropriate action in state or federal court.
Preserving lien rights
Mechanic and materialmen’s liens are an essential tool that helps subcontractors collect money, so subcontractors should take all steps necessary to preserve their lien and bond rights. When you sign a lien waiver in exchange for payment by the contractor, be sure that your contract stipulates that you still retain the right to file a lien for any unbilled changes or claims which have not yet become known to you, the subcontractor.
Possible language for such a provision may be:
Subcontractor will only issue waivers of lien or bond rights that exclude any waiver of lien or bond rights securing payment of retainage, unbilled changes, and claims which have been asserted in writing or which have not yet become known to Subcontractor, and any such waivers shall either apply only through the date of work covered by Subcontractor’s last payment application that has been paid in full, or shall be conditional upon receipt of funds to Subcontractor’s account. Notwithstanding any provision to the contrary, Subcontractor may take all steps reasonably necessary to preserve and enforce its lien and bond rights.
Request legal description in contract
Should you need to file a lien, you’ll need the legal description of the property. One easy way to achieve this is to require that it be included in your contract.
Possible language for such a provision may be:
The claimant may request in writing, the request to be sent in the manner as provided in paragraph 5 of this subsection, that the original contractor provide to the claimant the name and last-known address of an owner of the property. Failure of the original contractor to provide the claimant with the information requested within five (5) days from the date of receipt of the request shall render the pre-lien notice requirement to the owner of the property unenforceable.
If you have a great mechanic lien system in place, then including this provision in all of your contracts will be automatic.
Use contracts to protect your interests
A great contract should serve the interests of both parties. If you’re concerned that you’re at a disadvantage in any of your contracts, get in touch to start developing a set of standard provisions that put you on even footing with contractors.
