Ask the Experts: Making Sense of Construction Subcontracts with Maegan Spivey
In this conversation, one of our contract experts at Document Crunch, Maegan Spivey, shares her insights regarding subcontracts and how to best navigate their intricacies.
Maegan Spivey is a seasoned Contracts Specialist at Document Crunch, having reviewed hundreds of contracts in her prior careers as a general contractor, subcontractor and consultant. We asked her to explain subcontracts and how to best navigate them. Let’s dive in!
What is a construction subcontract? How is it different from a prime contract?
At a high level, I like to think of it in a couple of ways: The prime contract is effectively what generates the project as a whole. The prime contract sets the project's foundation between the owner and the general contractor, then the general contractor utilizes subcontracts to distribute work to trade partners, managing overall project risk and obligations.
While you may have the occasional one-off projects that are managed entirely through one main contract (think self-perform work), in general, the prime contract is going to outline the work of the project with anywhere from a couple to a hundred subcontracts sitting underneath it.
The Prime Contract sits at the top and elements “flow down” to downstream entities on the project. Credit: Contracts for Contractors
Does that make some subcontracts more important during a project than others? How can you tell what’s most important?
All work is part of the completed whole, so they’re all important. If you visualize the prime contract as mouth of the river overarching the entire project, subcontracts sit downstream, splitting as it goes and dividing work among various subcontractors. While each subcontract contributes to the project's entirety, certain factors may translate to a little more negotiating power. Urgency, specialty scopes, labor constraints and project manager preferences can influence a subcontractor's bargaining power.
Urgency – If a scope has long lead times for materials, a GC will need to get them under contract faster to avoid delays.
Specialty scope - If a project calls for a specialty trade with a very niche expertise, this may give that contractor more negotiating power because it’s hard to find somebody else to do that type of work.
Labor constraints - These may have an outsized importance because a sub might have a corner on the market for labor in a certain area and have more bargaining power.
Past Experience - There could be a situation where the project manager favors a trade partner because they knocked it out of the park on a prior project. If a GC PM has wiggle room, they don’t want the headache that comes with an inexperienced sub, especially on a critical path scope. They want a professional they trust and know, which may give the trade partner a little more leeway when discussing the contract terms.
Those just begin to look at some of the complex dynamics between the different stages and trades on a project.
💡 Key Insight: Every sub should be able to ask for reasonable changes, even if they don’t have as much bargaining power as other subs.
Are all subcontracts unique and have a scope entirely to themselves, or do they overlap?
Every subcontract intertwines with various project stakeholders, impacting and being impacted by others. Unplanned (and uncomfortable) overlapping can occur when scopes are unclear or when schedules accelerate. Managing these contract flows becomes essential for a seamless project, so the workflow doesn't overlap in a way that prevents work from being done on the project effectively.
There can be a grey area where scope doesn’t obviously fall into a single trade, and other subs are picking up the adjacent work. I’ll use an example - Sometimes a sub can pick up "extras" when it could be adjacent to their scope, like having a siding sub pick up installation on an exterior decorative project. The importance there is that the scope is very clearly defined in the contract and the price reflects the extra work. Anyone who has taken on additional work outside their usual scope for a project should keep their contract open and available for reference to make sure extra, unpaid work doesn’t creep in unknowingly as the project goes on. It’s easy to forget where the line is when you’ve moved it for a customer. Just like when you don’t park at your usual spot at the grocery store!
As for overlap, there is always some concurrent work going on, but what to watch for is when a trade partner needs other subs to complete work before starting their work so the trade partner can complete the work in a way that’s most profitable for them.
There’s also the uncomfortable overlap when schedules get accelerated and sometimes trades get stacked up on top of each other. Think about four grown adults trying to perform work on different tasks in an apartment bathroom! Where you may have agreed to an accelerated schedule is something you can look for in your contract.
💡 Key Insight: A subcontract’s impact extends beyond its individual scope. Be mindful of the potential for unpaid extras and overlap.
How do you make terms favorable as a subcontractor? Any tips on negotiating/redlining?
So much of negotiation starts with the relationship that you have with your customer, especially on the subcontractor side. If you have a working history where you’ve done good work, and if you’ve built up trust, then you’ll likely have more grace in negotiating. However, it can also go the other way, where you have a pre-negotiated contract you use as the base for the next project, but it keeps getting tweaked and modified by your customer each time so you keep having to give more away for each project. These are the “slow leakers.” You don’t want to stomp on the good grace of a great relationship, but you also don’t want to keep giving away more and more in the other direction.
💡 Key Insight: Watch out for the slow-leak contracts.
It’s also worthwhile to narrow your focus down to your top 3-5 must haves if you don’t think you’re going to get many changes.
Some general tips:
Never take the request for risk personally. Asking things like, “How could you ask us to take this risk on?” won’t be productive since you’re likely not negotiating with the person who created the contract.
It's always reasonable to ask for a change but ensure that the number of changes and specific changes you ask for reflect your business. Don’t waste your time or your customers’ time.
Make sure to leave comments with your changes to explain why. With more information, sometimes there’s a way to get what you both want, but the other side needs to understand the reason you’re asking. When I would review sub redlines on the GC side, what made things move slower was that I could not understand why they wanted a change, or if they didn’t offer an alternative language. Especially for redlines that cover multiple issues, make it clear for the other side why you’re making the suggested change you are.
💡 Key Insight: Empower yourself to ask for what you need to run your business smoothly and profitably and don’t be afraid to negotiate your contracts!
Any final thoughts?
While strong relationships are the backbone of the construction industry, it’s the contract that ultimately shapes the path forward and will be the last thing standing if any issues occur. Remember, you’re in the driver’s seat and there are resources available to help you navigate the complexities of your contracts.
See how Document Crunch saves construction pros time and money by quickly identifying contract risks and making the negotiation process easier. Schedule a demo today!
Maegan brings a wealth of expertise in the world of construction contracts and shares her invaluable insights and updates on LinkedIn. She also recommends the book Contract Redlining Etiquette by Nada Alnajafi and the author’s LinkedIn for tips on redlining etiquette.