Guidelines and Precautions for Subcontractors While Signing Subcontracts: Balancing Business and Risk
Executive Summary
Subcontractors are vital players in construction projects, delivering specialized works and services. Yet, in the rush to secure new opportunities, many expose themselves to hidden risks buried in subcontract agreements.
Key risks include “back-to-back” liability with the main contract, unclear payment terms, vague variation procedures, disproportionate liability obligations, strict termination clauses, and limited access to fair dispute resolution.
This article provides practical guidelines for Subcontractors to balance commercial opportunity with contractual protection, ensuring growth without jeopardizing survival.
In today’s construction industry, Subcontractors play a crucial role in delivering specialized works and services. Yet, many Subcontractors find themselves exposed to serious contractual risks—often because the excitement of securing new business outweighs the caution needed when signing agreements.
While commercial survival pushes Subcontractors to accept terms quickly, experience shows that failing to balance business benefits with contractual risks can have lasting consequences.
Key Guidelines and Precautions
1. Understand “Back-to-Back” Risk
Most subcontracts are drafted to mirror the main contract between the employer and main contractor. This “back-to-back” approach means Subcontractors inherit liabilities (delays, liquidated damages, variations) without enjoying the same rights or negotiation power. Subcontractors must check whether key clauses—such as payment timelines, approval procedures, or extension of time rights—are fairly aligned.
2. Clarity on Payment Terms
Delayed payments are one of the most common risks Subcontractors face. Ensure that:
- Payment is not solely conditional on the employer paying the main contractor.
- Timeframes for certification and payment are clearly defined.
- Rights to suspend work or claim interest in case of non-payment are explicitly mentioned.
3. Variation and Scope of Work
Subcontractors often encounter changes in work scope. The contract should specify how variations will be instructed, valued, and approved. Without clear provisions, Subcontractors may end up executing additional work without compensation.
4. Liability and Insurance
Check limits of liability. Subcontractors should avoid unlimited liability for events beyond their control. Insurance requirements should be practical and proportionate to the scope of work.
5. Delays and Termination
Most subcontracts pass on the same strict delay and termination clauses from the main contract. Subcontractors must:
- Ensure they have realistic extension of time provisions.
- Clarify what happens if delays are caused by the main contractor or employer.
- Negotiate fair termination clauses to avoid sudden stoppages without compensation.
6. Dispute Resolution
Many subcontracts either exclude Subcontractors from the main dispute resolution process or impose costly arbitration. Subcontractors should ensure there is a clear, affordable, and accessible mechanism to resolve disputes quickly.
Striking the Balance: Business vs. Risk
Securing new work is vital for Subcontractors, but “business at any cost” is a dangerous strategy. Subcontracts must be approached as a balance between opportunity and risk. By carefully reviewing terms, and negotiating where possible, Subcontractors can protect their interests while still building long-term relationships with main Contractors.
At Conslex Contract Solutions LLC, we have seen countless cases where small adjustments in subcontract wording saved companies from significant losses. A contract is not just paperwork; it is your shield against unforeseen challenges. If you’d like expert support in reviewing or negotiating subcontract agreements, contact us at info@conslex.com.