Managing Onerous Subcontract Language
March 29, 2017
As underwriters we’re often faced with the dilemma of authorizing bonds for subcontractors who are willing to sign subcontract agreements with onerous language. As underwriters and agents we have an opportunity to add value to our relationships with our subcontract customers by helping to educate them as to the risks associated with some of the these onerous provisions. We can also remind them that they have options other than simply accepting the subcontract agreement “as is” and moving forward with their bid as if those provisions don’t exist. A subcontractor’s options include:
- Negotiate to achieve a more balanced allocation of risk.
- Include a larger contingency for the schedule risk that is assumed.
- Take the risk.
- Turn down the work.
Another part of the conversation is trying to educate prime contractors with onerous contract documents and bond forms that there may be consequences to their unfair contracts. One-sided provisions can be advantageous, particularly in the short term when faced with a claim or change order request, but these provisions are not necessarily in the prime contractor’s best interest in all cases. Some issues to consider:
- One-sided scheduling provisions may limit the quantity and quality of potential bidders (those who can afford to avoid the risk will pass in favor of less risky jobs).
- Fewer potential bidders mean less competition, which can result in higher prices.
- Onerous provisions invite contingencies, which raise prices.
- Subcontractors may fail financially under onerous scheduling requirements, which results in defaults, uncertainty, and, potentially, more delay.
- Exercising control over a subcontractor’s planning, manpower, and execution of work may open the prime to claims under other legal theories.
- One-sided scheduling provisions may be difficult to enforce. Judges and arbitrators may find provisions that require a subcontractor to bear risk it cannot control to be fundamentally unfair.
All that to say that a GC can create an unfair contract, but that won’t come without consequences. Convincing GC’s to create equitable contracts similar to Consensus Docs forms will be a win-win for the GC and their subs.