Important Contract Clauses for Subcontractors and Suppliers | Texas Construction Law Blog 4/12/17, 03:06

Important Contract Clauses for Subcontractors and

Suppliers
By Joe Virene on June 11th, 2013

Because of time constraints and the desire to get the business, subcontractors and suppliers routinely sign
lengthy subcontracts and master service agreements without closely reading the terms and conditions. Below
are some clauses that every subcontractor and supplier should review in a contract.

1. Payment Conditions You should minimize and

narrow preconditions to receiving payment. For
example, you should strike any clause that makes your
payment contingent on your customer getting paid (aka
Pay if Paid clauses). Even more harmless preconditions
(e.g., submitting certain paper work, invoice
requirements) deserve scrutiny because you should
ensure they are practical and that you understand how to
comply with them, so there is no delay in payment.

2. Change Orders The contract should define

circumstances (especially for unforeseen events) in which
you may receive a change order providing additional time
and/or pay for work under certain circumstances. The more circumstances that allow change orders, the
better from a subcontractors point of view. Some common examples include: owner or designer change of
opinion or preference; code changes; unexpected weather conditions; change in the owners available funding;
and design error or omission.

3. Termination Most contracts differentiate between termination for cause and termination for
convenience. Naturally each party wants broad discretion to terminate the contract, but would prefer the
other party have narrow discretion to terminate the contract. It is best for all parties if cause is clearly
defined to mean certain specific events. The termination clause should also clearly identify how much money
you will be paid if the contract is terminated for convenience or for cause. The termination for cause provision
should provide a right to cure the problem before the contract may be terminated.

4. Indemnity Subcontracts or MSAs almost always require subcontractors and suppliers to indemnify the
contractor from damages arising from various claims. Such indemnities frequently shift a substantial amount
of the risk to subcontractors and suppliers. Indemnities are very complicated and there is not a one size fits

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Important Contract Clauses for Subcontractors and Suppliers | Texas Construction Law Blog 4/12/17, 03:06

all approach. But as a general rule, look for mutuality and strike one sided indemnity clauses, especially
where the subcontractor is indemnifying the contractor for its own negligence and the contractor is not
indemnifying the subcontractor for anything.

5. Warranties Subcontractors are generally required to warrant that the work performed is free of material
defects and has been performed in a workmanlike manner for some period of time after completion. As a
general rule of thumb, take care that the warranty language does not go beyond what you actually did. Also,
review the time period covered by the warranty obligation (3 months, 12 months, etc.) and what the remedy is
in the event of a defect.

6. Limitations on Liability Subcontractors and suppliers should negotiate for a broad waiver of
consequential damages (e.g., lost profits, business interruption, etc.) and punitive damages. These clauses
protect subcontractors and suppliers from unforeseeable and uncontrollable damages. In addition, consider
requesting a cap on liability (e.g. contract price, contract multiple, a fixed dollar amount, or equal to insurance
limits).

7. Flow down Many subcontracts contain clauses which impose the terms and conditions of the prime
contract on the subcontractor. If you see such a clause, then request a copy of the prime contract so you know
what you are agreeing to.

8. Arbitration Many construction contracts and Master Service Agreements require arbitration clauses.
Arbitration by itself is not disadvantageous for a subcontractor or supplier, but there are many nuanced
provisions that should be considered, such as, the scope of the clause, the procedural rules that will govern the
arbitration, the number and selection of arbitrators.

9. Lien Waivers Although in some instances, mechanics and materialmens lien waivers cannot be
enforced, subcontractors and suppliers should always strike lien waiver clauses. Waiving the right to perfect
and enforce lien and bond claims can have a ripple effect and cost a subcontractor money in the long run.

10. Choice of Law and Venue Master Service Agreements and even subcontracts may choose a law or
venue unrelated to the project. Always review governing law and venue clauses to avoid unintended
consequences and being pulled into an unfavorable jurisdiction.

Every clause in a construction contract is important and warrants your attention. Once you sign a contract,
you are obligated to follow every word of it it is important to understand your rights and obligations before
you sign on the dotted line. And in many cases, it is wise to retain counsel.

Gray Reed & McGraw LLP

Houston
1300 Post Oak Blvd, Suite 2000
Houston, TX 77056

Dallas
1601 Elm Street, Suite 4600
Dallas, TX 75201

Copyright 2017, Gray Reed & McGraw LLP. All Rights Reserved.

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