Master Subcontractor Agreement Explained
A master subcontractor agreement is a contract between a general contractor and a subcontractor that outlines the terms for future subcontracts to be formed between the parties for specific projects. It typically covers the general terms that will apply to subsequent work, but it does not constitute a commitment from the general contractor to provide future work to the subcontractor. This type of agreement can be a useful tool for the general contractor to efficiently procure subcontractors for a series of smaller construction projects.
A master subcontractor agreement does not include the same degree of specificity as a typical subcontract. The agreement should be written broadly enough to cover the relationship between the parties "throughout the course of the performance of all work under all plans and specifications for each project." In general , the agreement describes the responsibility of each party and the procedures to follow if a dispute arises or an event of force majeure occurs. For instance, it may specify that the subcontractor will be subject to the same terms and conditions as the subcontractor, including in the event that the subcontract is terminated for convenience.
Core Elements of a Master Subcontractor Agreement
Like the prime contract between the owner and the GC, a master subcontractor agreement addresses the various issues that the GC may encounter in the course of a project. The agreement typically includes the scope of the subcontractor’s work, the subcontractor’s and the GC’s respective obligations, payment and progress drawing provisions, the procedure for change proposals and execution of change orders, the subcontractor’s insurance obligations, indemnity provisions, and dispute resolution provisions. Another important component is the GC’s right to terminate the subcontractor in certain circumstances.
The scope of work provision frequently utilizes "functional specifications" in an attachment. "Functional specifications" consist of a detailed description of the work that is often associated with specific trade work items. The applicable specification may be modified, as appropriate, by reference to the drawings specifically called out in the project specifications. A typical scope of work will also describe the duration of the subcontractor’s work, general coordination obligations, mobilization obligations, and the master schedule requirement. The GC’s general free access to all of the subcontractor’s work sites, offices and facilities is often referenced and made an integral part of the subcontractor’s performance obligations. The scope of work provisions will typically also incorporate the applicable contract documents into the subcontract by reference.
The subcontractor’s general obligations set out in the agreement typically include the obligation to: (1) supply materials and equipment; (2) provide a suitable workforce; (3) obey the prime contact documents and the GC’s directions and standards; (4) prosecute work in accordance with the master schedule; (5) submit shop drawings for the GC’s review and approval; (6) submit progress reports and pay applications for completed works; (7) provide samples, furnish data, pay for testing and remove defective materials, and pay wages on time and comply with all applicable labor laws; (8) keep adequate records; (9) post notices and disclaimers at job site; and (10) assign labor to the project as needed.
The GC’s payment obligations to the subcontractor are typically tied to the completion of the subcontractor’s work according to the schedule, the progress of the work, and the GC’s receipt of payment from the owner. The agreement will likely require the GC to make periodic progress payments to the subcontractor that take into consideration the current costs for the subcontractor’s labor and materials on hand. The GC’s obligation to process the subcontractor’s payment applications will be conditional upon the subcontractor’s sub-subcontractors having been paid. The agreement will often permit the GC to withhold payments to the subcontractor until all claims related to the agreed upon scope of work have been resolved. To secure the subcontractor’s subcontractual obligations to the GC, the agreement typically will require the subcontractor to furnish the GC with the following: (a) a warranty to be collected from the subcontractor’s sub-subcontractors and suppliers to the subcontractor; (b) an agreement from the subcontractor providing for the assignment of the subcontractor’s rights to make warranty claims to the GC; and (c) a waiver of the subcontractor’s sub-subcontractors’ mechanic’s lien claims against the project.
The agreement provisions concerning change orders will likely require the agreement of both the GC and the subcontractor prior to the issuance of any change. These provisions will often define the GC’s right to mandate certain changes to the project. Such changes generally include a scope decrease or increase, a change in the character of the work, or a change in the sequence of the work. The agreement will likely provide that the GC will have the option of accepting the subcontractor’s price proposal and thereby treating it as a change order, or rejecting the price proposal and informing the subcontractor of its decision not to undertake the change.
The dispute resolution provision will likely require the parties to follow the institutional procedures set forth in the rules of either the AAA Construction Industry Rules or the JAMS Construction Rules, as designated in the agreement. The agreement may also designate mediation by stating that you will use the rules established by either the CCP or JAMS. The agreement will likely provide, however, that you can also rightfully file suit if you do not wish to arbitrate or mediate the dispute.
Another critical provision of the agreement deals with the GC’s right to terminate the subcontractor for cause. The grounds often include: (1) the failure to supply sufficient skilled workers or materials; (2) the failure to pay for labor or materials; (3) the failure to comply with the project schedule; (4) the subcontractor’s breach of any covenant, warranty or obligation of the agreement that materially interferes with the performance of the work; (5) an assignment by the subcontractor for the benefit of creditors; and (6) insolvency or bankruptcy of the subcontractor. The GC’s right to terminate the subcontractor for cause often entitles the GC to recover its contract balance, increased cost of performance, and profits it would have earned had the subcontractor completed the work.
The Necessity of a Master Subcontractor Agreement
A master subcontractor agreement is a crucial legal document for both prime contractors and subcontractors in the construction industry. For prime contractors, it represents more than a standard contract; it embodies a detailed risk management strategy and a solid basis for building strong relations with all their subcontractors, from the individual home builder to multi-family and commercial work general contractors/subcontractors.
With a master subcontractor agreement, it is possible to thoroughly explain the contractor’s expectations. A detailed master subcontractor agreement encourages compliance by not requiring a subcontractor to review the same standard terms and conditions each time it matches with the contractor on a new project.
It is also advantageous to use a standard form for compliance by ensuring that the terms and conditions accepting flow down to, and are included in, the sub-agreement. With a master subcontractor agreement, there is less need to spend a lot of reviewing and revising redundantly in order to reach a contract that complies with the acceptance standards for the contractor and that is acceptable to both parties.
How to Create a Master Subcontractor Agreement
The essence of a master subcontractor agreement consists of an explicit scope of work, a detailed payment and pricing structure, and a mechanism to control compliance with safety and accreditation requirements. A well-crafted master subcontractor agreement should identify the parties, generally describe the work to be performed, and provide an enumeration of the terms and conditions that will apply not only to the current project but also to all future projects which may be undertaken by the parties. Specific provisions that should be included in such agreement include: (a) explicit scope of work; (b) detailed payment provisions to include (i) price/cost; (ii) payment application procedure; (iii) timing of payments; (iv) ability to withhold payment; and (v) payment of interest; (c) operational compliance; (d) project site issues and remedies in the event of breach with respect to failure to meet the requirements of the agreement; (e) the manner in which disputes will be resolved; (f) integration of documents; (g) notice provisions; (h) disputed invoices or payments; (i) ownership of plans and specifications; (j) attorney fees; (k) insurance requirements; (l) invoicing; (m) default and remedies; (n) W-9 and benefit costs; (o) laws, jurisdiction and venue; (p) consent to surety taking over the contract; (q) authority to enter into contracts; (r) assignment and subcontracting; (s) not hiring employees and confidentiality; (t) drafting the contract in such a manner that there is no ambiguity and defining or excluding claims for consequential damages and lost profits; (u) exclusivity; (v) access/records; (w) bidding on additional work and right of first refusal type provisions; (x) mediation and arbitration provisions; (y) consent to lien by master contractor; (z) master contractor employee requirements; and (aa) extension of agreement and survival of termination.
As part of the drafting process, careful attention must be paid to the scope of work and the specific provisions of the payment structure acknowledging the rights, duties, and responsibilities for the parties as the job progresses from the preconstruction phase through to job completion. This requires not just a review of both governing documents but careful analysis of the manner in which this work is undertaken and the payment structure that will apply. The same provision that may be effective when the mechanics lien or construction bond is primarily litigated between the owner and the general contractor may be problematic, or otherwise not appropriate, when you are discussing issues between the general contractor and the subcontractor in a case where the general contractor seeks the benefit of these broad provisions. For instance, most construction contracts (including master subcontracts) have a clause whereby the contractor undertakes the duty to indemnify or hold harmless the owner. It is critical to assess what particular risk the contractor is assuming under this provision and whether that risk can be insured so that damages to the subcontractor are not left unprotected.
Master Subcontractor Agreement Legal Issues
Depending on the construction project, there may be a number of factors to consider when establishing a master subcontractor agreement. For instance, jurisdiction sometimes matters. If the work is taking place in multiple states, or on two sites in different areas, there may be a need for different master subcontractor agreements or even sub-agreements under one overarching agreement. Amendments to the original document should be planned out, so that an existing agreement does not end up getting amended multiple times. Multiple amendments could add significant time and complexity. Instead of waiting until the amendment is necessary , outline the process for adding new language to the master subcontractor agreement. The amount of time and effort saved by doing this will be disastrous otherwise. The current laws and regulations should also be included, as well as any changes or updates per state. For instance, sometimes OSHA regulations change. When this happens, contractors should make sure to outline the updated standards into the master subcontractor agreement. One example of this is the silica standard. The new silica rule has protections for workers to reduce overexposure to respirable crystalline silica. Incorporate important clauses and requirements, even if they are not part of the original contract. Contractors can do this by referring to the contract in the language of the master subcontractor agreement.
Master Subcontractor Agreement Common Issues and Solutions
Common challenges that arise with master subcontractor agreements include disputes related to scope of work, payment terms, and termination rights. The key to minimizing issues is understanding the potential pitfalls and negotiating contract terms that provide clarity in these areas.
Scope of Work
A comprehensive scope of work establishes the parameters of the project that will be outlined in the master subcontractor agreement. However, subcontractors may experience scope expansion that may entitle them to additional compensation. The resolution in this scenario typically favors the contractor, unless the expanded scope was initiated by the contractor or the contractor failed to cooperate with the subcontractor to mitigate scope creep. Baseline scheduling is key to protecting yourself in these situations as well.
Payment Terms
Payment terms are also the source of many disputes that arise when the master subcontractor agreement fails to clearly define the progress payment schedule. Subcontractors are also vulnerable to claims of defective work by general contractors that jeopardize their lien lawsuit efforts.
Termination Rights
Termination rights laid out in a master subcontractor agreement are often one-sided. General contractors usually reserve the right to terminate the subcontractor for convenience. However, termination for cause is often a very narrow remedy that places the blame on the subcontractor with little ability to rebut the allegations.
Master Subcontractor Agreement Examples and Case Studies
To provide a window into the implementation of master subcontractor agreements in real-world settings, the construction community has widely covered one of the latest iterations between Microsoft and Aconex, as well as the use of a similar document type between general contractors Turner Construction and EAD Construction. Microsoft’s standard master agreement with Aconex sets out at least a dozen key provisions that can be selected by Microsoft depending on the type of construction project. But in the end, all of those less important provisions culminate in the sub-subcontractor actually agreeing to be bound by the same provisions as the agreement that exists between Microsoft and the original contractor, and for what are usually both expected and extraordinary duties of care (since there is usually some existing infrastructure and related warranties to protect). The result is a reduced need for Microsoft to separately negotiate exceptions with dozens or hundreds of subcontractors as part of even very small projects. For example, all but the largest construction contractors will have hundreds or thousands of dollars in this overhead when it comes to these sorts of negotiations with major plumbing, electrical, IT and environmental contractors . I would urge contractors and owners of all sizes to get familiar with what the biggest construction companies, by revenue and market-share, are doing in their paper. Aconex currently shows that Turner has used its master agreement with 500 subcontractors and vendors. They do so with 90% of their contracts in North America, and 81% of their contracts around the world, all with a turn-around of just 3 minutes. It is a general project management and auditing tool for what are often huge projects. Of course, that isn’t the only way we use master agreements in construction. One subcontractor using our form of agreement recently had us help draft a separate addendum with a different subcontractor due to a change in the sub-subcontractor’s terms. We looked for efficiencies in reducing the time and risk insisted on by the subcontractor. The advantages of the master agreement approach, of course, are that you have fewer exceptions that need to be addressed with respect to the entire contract term, and so while you may have to negotiate key issues and practices with the subcontractor once, with a master agreement, you don’t have to negotiate it with the sub-subcontractor and its lawyers—or worse yet—an entirely new and independently-focused subcontractor all over again. And every sub-subcontractor has different terms that can be negotiated at any time.