Subcontracting Basics – It's all about managing expectations.
Every construction contract is formed by the communication of an offer by one party and an acceptance of the offer by other. The law defines an offer and acceptance as “the manifestation of willingness to enter into a bargain, so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it.”
Understanding what this concept means is just as difficult as applying it the real world. The short answer is, a construction contract is formed when the parties legitimately think they have the same expectations about how they are going to execute the project. In fact, the law of construction contracting is infatuated with the reasonable expectation of the parties primarily because the law wants to allow people to reasonably rely on the actions of others…but only in circumstances where it is reasonable and fair to rely.
In subcontracting, everyone seems to be on the same page when a written subcontract is executed. The hope is that a well drafted subcontract will lay out everyone's expectations for the project. This should include the scope of the work, the subcontract sum, the progress payments, schedules, and claims for adjustments to name a few.
Of course, being handed a well-drafted subcontract is rarely the case – nobody is perfect, no construction lawyer is perfect, no prime contractor is perfect, no design is perfect, and no project ever goes perfectly. Therefore, no subcontract is ever perfectly drafted, or iron clad.
As construction projects can go less than planned, the prime contractor's expectations for the project will easily change, and not towards yours. Construction disputes are simply a disagreement over who had the wrong expectation for how the job was supposed to go and who had the right one.
In the case of subcontractors, one of the biggest problems is that the subcontract comes with the job, and there is very little negotiating power to cut through the prime contractor's standard self-serving boilerplate.
So, as a subcontractor, how do you manage expectations when the prime contractor sets all the rules of the game you want to play?
Here are the 3 musts dos to help you manage expectations and allow you to have a better hand to play if you get into a construction dispute:
- Always make a written request for the project schedule before you sign the subcontract. Every subcontract has a provision requiring the subcontractor to comply with the prime contractor's schedule. As a subcontractor, you need to know what you are signing up for because if you fail to meet the prime contractor's deadlines, you can be responsible for the delays which can include actual expenses or liquidated damages. If you find yourself in a construction dispute, odds are the prime contractor is blaming you for being behind even though the predecessor activities are late, out of spec, or partially complete. If the subcontract sets the expectations, where does the prime contractor's boilerplate discuss the sequence being the right sequence; the activity durations being adequate; or the predecessor work being done on schedule? It generally doesn't. However, if you can prove that you, or your estimator, reviewed the baseline schedule before signing the subcontract and accepting the job, you can hold the prime contractor to keeping with its baseline schedule, and make that an expectation of the deal. In the law of construction disputes, whoever fails to meet expectations first generally loses the ability to blame the other party for failing to keep up their end of the job. On a bad project, the schedule is almost always first to go sideways, so stake your claim to it so that it is reasonable for you to rely on the schedule.
- Always send a letter incorporating your subcontract bid into the subcontract by express reference. Bidding is one of the most important aspect of successful construction contracting, an area which construction lawyers are least helpful because subcontracting bids generally go out long before a construction dispute arises. However, your bid is powerful in managing expectations to give you the edge in a possible construction dispute. Since your bid is essentially an assessment of the specific project, it will be way more precise in defining expectations than a boilerplate subcontract prepared by the prime contractor. Your bid is your version of what you are being expected to do. However, virtually every subcontract contains a clause aimed at eliminating preliminary negotiations from the construction contract. In a construction dispute, the prime contractor will attempt to explain your bid as an insignificant negotiation. Because the bid often differs from the contract documents and project specifications, you need make it part of the rule book for the project by expressly incorporating it into the subcontract. Always attach a cover letter stating that your bid is incorporated by reference. The effect will make it more than just part of the negotiations.
- Always email or fax the subcontract along with your incorporation letter to prove that your letter was sent back with the executed subcontract. In the law, it's not what you know that matters, it is what you can show. If you mail a subcontract back to the prime contractor, always send a copy that will allow you to have an electronic record of what was sent. With faxed subcontracts, the pages are numbered and it is helpful to your cause if that version ends up in the prime contractor's project file. When the incorporation letter is numbered sequentially with the subcontract and discovered in the prime contractor's job file in a construction dispute, the prime contractor will be hard pressed to explain how that letter was not part of everyone's reasonable expectations.
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