How GCs can cope with problem subs

Nearly every prime contractor has a story about a nightmare sub. Whether it’s shoddy work or simply failing to show up to the jobsite, suboptimal partners in today’s labor and skills market are an increasingly common reality.

Trent Cotney, a partner and head of the construction practice at Tampa, Florida-based Adams and Reese, said since the COVID-19 pandemic, there has been exponential growth in the use of subcontractors on jobsites.

“A ‘problem subcontractor’ would be any person or entity who consistently causes issues that would negatively impact a construction project,” he said. “Common problems include work delays, miscommunication or non-communication, lack of proper equipment or expertise or manpower, a failure to comply with safety regulations, or payment issues and delays — all of which affect project continuity.”

To safeguard their interests and ensure project success, attorneys say contractors must understand effective strategies and contractual protections to deal with problem subs.  

“If a prime is smart, they will do their homework in advance,” Cotney said. “Know what you’re getting into and don’t do work with subs that aren’t reliable or get into trouble. It’s worth paying more to have a professional subcontractor work with you.”

Dealing with problem subs

Jeffrey Paul Lutz, a construction attorney in the Atlanta office of CM Law, noted the first line of defense for avoiding problem subs is to conduct a thorough investigation into their past work history and to make thoughtful decisions during the hiring process.

“The lowest bidder means little if hiring them will cost you more in the long run through the change order process, corrective work, dispute resolution and/or the engagement of counsel,” he said. “I advise all of my contractor clients to conduct detailed background checks, review past performance and verify references to ensure the subcontractor has a solid track record.”

The second line of defense would be to draft a clear and comprehensive subcontract that outlines the scope of work, deadlines, quality standards and penalties for non-compliance.

“A well-crafted subcontract defines expectations clearly to ensure accountability, quality and timely delivery,” Lutz said.

During the project, it is important to implement a system for ongoing oversight and quality control to ensure work meets the required standards, and address issues promptly to prevent them from escalating.

“This can be accomplished through effective communication and maintaining open and transparent communication with subcontractors to foster collaboration and quickly resolve any issues,” Lutz said. “While onsite, regular communication is critical, it is equally important to document your written directives in writing.”

GCs face untold risks when working with problem subs — most often in the context of second-rate work and financial losses. After all, GCs are responsible for the work of their subs, so they take on potentially substantial risk if their subs perform poorly.

“Problem subs who fail to meet project specifications, timelines or quality standards will likely cause delays to the project, cost impacts, potential reputational damage and potential legal disputes which last well-beyond the project’s duration,” Lutz said. “Effective risk management strategies, such as thorough vetting, clear contracts and ongoing oversight, can help mitigate these risks.”

Provisions in contracts

Mitigating disputes with problem subs boils down to well-drafted contracts and good lines of communication, lawyers say.

Chad Caplan, a partner at Albany, New York-based law firm Hinckley Allen, noted regardless of one’s due diligence during the selection process, trouble can still arise. That’s why the way subcontracts are set up and the provisions they contain can make or break a prime’s leverage even before a dispute arises.

For example subcontracts should explicitly state that “time is of the essence,” emphasizing the importance of adhering to deadlines, and should allow for reasonable amendments to project schedules and milestones to accommodate unforeseen circumstances.

“The agreement must specify that certain conditions, such as claim submissions, are strict preconditions, outlining precise timelines, procedures and necessary documentation for claims, including backup materials,” Caplan said.

Additionally, limiting liability for consequential damages and clarifying that liquidated damages are not penalties but proportionate to potential losses are crucial. Those clauses should allow liquidated damages to to be assessed relative to the fault of the subcontractor, Caplan said.

Consequences and insurance

Even then, problems can arise. Thomas Cotton, a partner with Schenck, Price, Smith & King in Florham Park, New Jersey, warned that a prime contractor should understand there are no “magic words” that will ensure 100% protection from problem subs. Still, certain provisions can help. 

For one, he points to flow-down clauses, which bind a subcontractor to the terms of the prime contract. The purpose is to guard against any gaps between what the general contractor and subs agree to do. When a gap appears, consequences should be spelled out clearly, including booting the sub from the job. 

“There should also be strong and express remedies for non-performance,” he said. “The agreement should, among other things, expressly empower the general contractor to terminate the subcontractor, with the maximum discretion to the general contractor, and further allow the general contractor to hire a replacement at the subcontractor’s expense.”

Additionally, not only should the subcontractor be required to maintain insurance levels that are adequate vis-à-vis any loss exposures, the subcontractor should also be required to add the general contractor and others as additional insureds to their policies.

“It’s imperative that subcontractors maintain specific levels of insurance coverage to protect against potential liabilities,” Lutz said. “Also, indemnification clauses protect the GC from claims arising from the subcontractor’s actions. Payment and performance bonds can also be required as another assurance that a subcontractor’s failures will not lead to an overall project failure.