Best Practices in Holding Subcontractors to Your Agreement

NOTE: This article is intended to inform our readers about construction subcontractor-related concerns in the United States. It is in no way intended to provide legal advice or to endorse a specific course of action. For advice on your specific situation, consult your legal counsel.

So you have a contractor-subcontractor contracting agreement in place. It’s solid. You’ve vetted it, run it by your lawyers, read it over a few more times—now you’re confident that all’s well and you can take on a subcontractor without fear of something going wrong on the legal front.

But at the end of the day, that contractor-subcontractor contract agreement is just paper (or words on a computer screen). How do you ensure your subcontractor is going to stick to this agreement? And what happens if they don’t?

When subcontractors don’t live up to their end of the deal, construction firms can expect delays, costly legal battles or both. And even the most effective construction software can’t save you from a contractor-subcontractor contract agreement that isn’t getting enforced. You must have a plan in place if the worst case scenario comes true, and there are a few best practices you should employ here.

Let’s go over them.

1. Gather Information on Your Subcontractor Before Hiring

The best way to ensure your subcontractor lives up to your contractor-subcontractor contract agreement is to make sure they are capable of doing so in the first place.

Before you even enter into an agreement, do your homework on the subcontractor to make sure they’re right for the job. Require subcontractors bidding on the work to submit detailed information about their company with the bid. Early vetting will go a long way toward preventing headaches down the road.

Here’s some of the information the subcontractor should provide to you before establishing the contractor-subcontractor contract agreement:

If you get the impression that the subcontractor is insufficient in one or more of these areas, play it safe and find a different subcontractor.

Quick Tip: Use construction software to create a centralized database of information about your subcontractors so it is all easily accessible.

2. Get Subcontractor Bonding/Insurance

A good way to protect yourself should a subcontractor default is to either get a subcontractor performance bond or subcontractor default insurance.

What is a subcontractor performance bond?

A subcontractor performance bond is an agreement between three parties: you, the subcontractor and the surety. The surety prequalifies the subcontractor and assumes the risk if there is a default. The bond also ensures that the subs and suppliers of the subcontractor get paid if there is a default. This is the safer option that reduces the risk of disruption to your project.

What is subcontractor default insurance?

Subcontractor default insurance is a two-party insurance policy between you and an insurer and doesn’t include the subcontractor as a party. In this case, you would need to prequalify the subcontractor yourself. Then, if a default happens, you file a claim and manage the default yourself while continuing with the work. This option is a bit riskier than the performance bond.

In most cases you would want to go with a subcontractor performance bond. It’s safer, takes most of the financial burden off you should things go awry and it gives you a Plan B so your project isn’t delayed.

However, if you are already well-prepared with a backup plan and are experienced in dealing with defaulting subcontractors—or you only work with subcontractors you trust—you might be able to save a little money on premiums with subcontractor default insurance.

Just make sure you’re prepared to deal with the fallout.

Quick Tip: Note in your request for proposals (RFP) that you require any subcontractor to enter into a performance bond agreement as a condition for doing business with you.

3. Talk to the Subcontractor

It is not a good idea to assume bad faith at the get-go. Sometimes subcontractors aren’t adhering to contractor-subcontractor contract agreements because there was a miscommunication, they’re careless or they simply carried the one when they shouldn’t have. Start off by assuming that this was an innocent mistake so you can avoid an unnecessary confrontation.

But be ready to get to the bottom of any issues with these strategies for catching problems before they get out of hand:

Spot the red flags of an impending default. If you notice your subcontractor is having trouble paying suppliers, or that they have fewer workers than they did before, or that there is general change in demeanor, you may be looking at a situation where a subcontractor is about to default.

Talk with the subcontractor about what you can do to help. If you see some of these red flags, pull the subcontractor in for a quick meeting to point them out and ask what you can do to help. A positive approach may be all that is needed to get the subcontractor back on track.

Take a firm position if you get push-back. If it’s not an innocent mistake and your subcontractor doesn’t want to meet the subcontractor service agreement, you need to be firm. Point to the exact clause in the contract and reiterate that you expect the subcontractor to meet the requirement. If you’re still not getting through, it may be time to drop a hint that legal action could be around the corner.

Quick Tip: Schedule a meeting with the subcontractor and call it a “status update meeting” to avoid setting off your discussion with a confrontational tone at the start.

4. Take Legal Action—When Necessary

This is always a last resort, but sometimes you get to the point where it becomes necessary. If your subcontractor has stopped communicating with you, or is communicating to you that he or she can’t or won’t meet the agreement, it’s time for the nuclear option.

If you’ve drawn up a good contractor-subcontractor contract agreement, you’re in a good position. Now you need to do the unpleasant work of actually taking that legal action.

Consult with a lawyer. Even if you’re 100 percent confident in your agreement and feel that you understand it, there are always ins and outs that you haven’t thought of. Set up a quick meeting with your lawyer to talk through the process so you don’t make any mistakes.

Terminate the contract. Again, this is a last resort because it is expensive and time-consuming. You will need to rebid the remaining work, and that is almost certainly going to result in delays and cost increases.

However, if the subcontractor simply refuses or is unable to abide by the agreement, it’s best to cut your losses. Send a notice to the subcontractor that the agreement has been terminated due to a breach on their part.

Seek damages if applicable. If your agreement is good enough and the subcontractor has directly cost your firm a significant amount of money, consult with your lawyer to determine if it is worthwhile to file a lawsuit.

Quick Tip: Give your attorney a heads-up if you suspect a default is imminent. That will give him or her time to come up with a plan of legal action.

Take Steps Now to Protect Yourself From Defaulting Subcontractors

A subcontractor who is about to default is a ticking time bomb for your business. And when the bomb explodes, you’re left with a messy situation of delays and cost increases as you scramble to replace the subcontractor. No construction manager wants that, so take these simple steps to protect yourself during your next project:

• If you don’t have an attorney who specializes in agreements in the construction industry, find one and put him or her on retainer.

• Draw up good, ironclad contractor-subcontractor contract agreements before the project to protect yourself if things go south.

• Don’t ignore red flags of an impending default—meet with the contractor as soon as possible to figure out what’s going on and what you can do to help.

• Terminate the subcontractor service agreement before things can get any worse if you have lost faith that the subcontractor will meet the agreement.