Construction Insight: Managing Subcontractor Risk

April 27, 2022 – America’s labor shortage is far from over and many construction firms are having a hard time finding qualified talent to fill their subcontracting needs. Faced with intensifying project demand, it is no surprise contractors may feel a loss of bargaining power when negotiating with subcontractors. But, while the industry is booming so are the risks.

Managing subcontractor risk remains one of the central challenges contractors must face, regardless of labor trends. With that, here are five tips for mitigating this risk in subcontracts:

Define the scope of work. Set expectations by detailing the exact nature of the subcontractor’s work, specifying any exclusions and mirroring the contractor’s obligations to the owner to the greatest extent possible.
Define payment terms and conditions. Clearly define payment terms and consider including express language establishing when the subcontractor is entitled to payment, for example, after the contractor receives payment from the owner.
Obtain lien releases and claim waivers. As condition of payment, include a lien release and a requirement that subcontractors provide a waiver and release of all claims in connection with the work performed to date.
Add comprehensive indemnity. Include an indemnification provision that indemnifies the contractor from liability for claims against the contractor arising from the work of subcontractors, including claims brought by third parties.
Broadly limit liability. Limit liability for any damage suffered by the subcontractor and include a thorough waiver of any consequential damages, for example, lost business opportunities, contract claims, or tort liability.

Labor shortages do not change the fact that a contractor remains responsible to the owner for all work done on a project, so now is not the time to overlook important details in subcontracts. Experienced construction counsel can help you navigate this risk and address possible issues that may arise during the construction process.

Ulmer’s Construction Practice Group is made up of experienced attorneys who have been operating in the construction industry for decades. Our time-tested team has handled almost every kind of legal issue that arises in the construction industry and can help you anticipate and manage risk in construction projects. Please reach out to our attorneys if you have any questions.

The information provided in this insight speaks only to the information and guidance we have available as of the date of publication and is subject to change. We will continue to follow further issued guidance and regulations and endeavor to post those updates via our website. Please continue to follow these updates at ulmer.com. This insight was created by Ulmer & Berne LLP, and is not intended as a substitute for professional legal advice. Receipt of this insight, by itself, does not create an attorney client relationship. For any questions, or for further information, please contact Jason P. Conte at jconte@ulmer.com.