William Underwood | ConsensusDocs
“Ha ha! You fool! You fell victim to one of the classic blunders – the most famous of which is ‘never get involved in a land war in Asia’ – but only slightly less well-known is this: ‘Never go in against a Sicilian when death is on the line.’”
Vizzini forgot to include “never fight a two-front war with your owner and a subcontractor” on his list of classic blunders, but it certainly belongs there. This article examines practical tips and tricks for general contractors to avoid the classic blunder of a two-front war, including recommended contract provisions and sound project documentation practices.
Admittedly, general contractors face a wide array of obligations on a project. And perhaps one of the most delicate balancing acts is managing relationships with the owner and your subcontractors. But far too often general contractors find themselves in the difficult position of fighting a two-front war against one (or more) of their subcontractors and the project owner.
But this does not always have to be the case—there are ways for general contractors to reduce the risk of finding themselves in a two-front war. And every project does not have to devolve in a circular firing squad with you in the middle. That said, this article comes with the caveat that a general contractor cannot avoid a two-front war in every instance, nor does this article examine every imaginable way to reduce the risk of a two-front war (see e.g. https://www.consensusdocs.org/pass-through-subcontractor-claims-liquidating-agreements-and-avoiding-a-two-front-war/). But this article will provide an overview of several key tools that can be used to minimize the risk of falling into a classic blunder.
What’s good for the goose is good for the gander: Flow down your obligations.
One practical way to reduce the risk of a two-front war is to flow down the obligations outlined in the prime contract to your subcontractors. And then require your subcontractors to flow those same obligations on down the line to their sub-subcontractors. In doing so, your obligations to your subcontractors will closely mirror your obligations to the owner. This—at least in theory—puts everyone in more or less the same boat, which in turn provides a better incentive for everyone to row in the same direction.
An easy way to accomplish this task is to incorporate the prime contract into your subcontracts. This can be done through a flow down clause, similar to the one found in Section 3.1 of the ConsensusDocs 750 Subcontract. Or it can be accomplished through a “back-to-back” arrangement, in which the prime contract terms are essentially copied right into the subcontract. That said, either method can sometimes lead to practical conflicts in contract terms or a confusing overall framework of overlapping contract documents. So if you cannot simply incorporate the prime contract wholesale, there are still key terms that should be passed on to the subcontractor.
Liquidated damages provisions are an obvious example of an important item to include in a subcontract if a corresponding liability exists in the prime contract. In other words, if you are liable to the owner for liquidated damages, then your subcontractors should be equally liable to you for these same damages in the event they delay the project. However, it is important to not limit yourself strictly to just liquidated damages in the event of a delay—your subcontractor should be liable to you for all delay damages (e.g. extended general conditions), including, but not limited to, liquidated damages. So careful contract drafting in this regard is important, as you do not want to inadvertently limit liability. Again, this places everyone on the same footing regarding potential liability for liquidated damages. And you will not be forced to battle over conflicting delay damages.
Payment terms are another prime example of a key flow down obligation. For example, if the owner does not have to pay you for 30 days after receipt of an invoice, try to avoid separately tying yourself to a different—and potentially shorter—payment obligation to your subcontractor. Otherwise, you run the risk of owing a subcontractor for work that you have not been paid for yet.
And this includes not only the simple time for payment (e.g. 30 days), but also pay-if-paid and pay-when-paid obligations (a different topic for a different day). If permitted in your jurisdiction, pay-if-paid and pay-when-paid provisions can be an effective way to avoid the risk of funding an owner’s project while you wait on payment. But of course, your payment provisions must comply with all applicable laws (including any pay-if-paid or pay-when-paid provisions that you might consider adding), so it is important to understand the legal requirements when drafting your contracts. But the simple fact is that you want your payment obligations to your subcontractors aligned with your payment rights in relation to the owner. And you want to avoid bearing the risk of non-payment by the owner (again, understanding your jurisdiction’s laws is important). That way, if there is a dispute, everyone will remain in roughly the same financial position.
You should also flow down other liability limitations as well, like no-damage-for-delay clauses or consequential damage waivers. For example, Section 5.4 of the ConsesusDocs 750 Subcontract contains a mutual consequential damages waiver. The goal is to avoid liability for one set of damages to the owner while having separate (and potentially greater) liabilities to your subcontractors. Again, this maintains the alignment of everyone’s obligations.
As noted above, it may not be possible to flow down the entirety of the prime contract. But it is important to create as much alignment as possible between your contractual obligations to the owner and the subcontractor’s contractual obligations to you. This increases your chances of maintaining cohesive interests and corresponding obligations. And doing so will reduce the risk of a two-front war in which an owner is claiming one thing under one set of contractual obligations while a subcontractor is claiming another under a different set of contractual obligations.
Color inside the lines: Carefully define the subcontractor’s scope of work.
It is important to diligently and specifically delineate each subcontractors’ respective scope of work on the project. And this is something that generally cannot be effectively accomplished through a blanket flow down of the prime agreement—the prime contract covers all of the work, but each subcontractor will likely only have a piece of that work. Thus, one size usually does not fit all when it comes to subcontractor scopes of the work.
Having a clearly defined scope of work will help avoid disputes down the road regarding what each subcontractor should be doing. So be as specific as possible when defining the work. And expressly cross-reference the specifications from the prime contract. Further, involve as many technical project team members as needed during both the contract drafting process and the subsequent project execution process to ensure that the scope of work is properly defined, fully captured by the subcontractor, and then executed. Doing so will not only provide a good foundation for your risk mitigation efforts, but it will also help you manage communications across all of the parties, including the owner and your subcontractors. And as outlined below, good project documentation is a key tool in avoiding two-front wars.
So be specific when outlining each subcontractor’s scope of work. This will help avoid confusion, aid in the correct allocation of risk, and keep everyone on the same page; all of which are important to avoiding a two-front war.
Clint Eastwood never loaded another man’s gun: Carefully manage your project correspondence.
An entire article could be devoted solely to good project documentation practices. But there are a few simple things to keep in mind when balancing owner and subcontractor interests. As a basic staring point, do not load someone else’s gun. Be mindful of definitively and aggressively placing all blame on one party for a project issue, particularly when you may not have all the facts or are otherwise in an evolving situation. For example, if a subcontractor is delayed in advancing its work, it might be satisfying to write a letter or draft an email entirely blaming the subcontractor for the delay. But if disputes arises, the owner will seize upon this writing as proof your subcontractor—and therefore, you—are the sole cause of delay. In reality, the owner might have failed to provide timely RFI responses, which in turn delayed the subcontractor. So be careful of unqualified, definitive positions before the full story is known. Otherwise, you may find yourself backtracking later to try to get to the truth—which is often a very uncomfortable position.
To that end, it is wise to adopt a thoughtful and deliberate approach when documenting the overall project as a whole, not just when sending actual notices or claim letters. So try to avoid knee-jerk emails or unnecessary comments in meeting minutes or daily reports, particularly when all of the facts may not be known. It is also helpful to maintain the flow down position—relay that the owner claims (for example) that the project is delayed, or conversely that the subcontractor claims (for example) that it has been delayed. In other words, do not unnecessarily or prematurely adopt one position or another as communications flow back and forth. Otherwise, you run the very real risk of loading the other side’s gun. And it usually ends up pointed at you.
Overall, maintain a fact-based (“just the facts, ma’am”), reasoned approach to documenting the project and be extremely cautious of taking sides before all of the facts are known. Although this balancing act can be tedious, it can pay dividends in the long run by keeping you out of a two-front war.
Don’t be a potted plant: Stay actively engaged with the owner and your subs.
Few things can be more conducive to a two-front war than a passive general contractor. It is important to remain active in the management of the project (and this advice obviously applies to more than just avoiding two-front wars). This includes active, diligent communication and facing any project issued head-on. Do not hide things from the owner or your subcontractors. If there is an issue, address it. The longer items go on unresolved, the more likely they are to fester into a full bore dispute. An ounce of prevention is worth a pound of cure. So stay active, identify issues, maintain open communication with all parties, and seek timely resolution when appropriate.
Every two-front war cannot be avoided every time. But there are certainly practical ways to reduce and minimize this risk. And adopting some of these approaches can help you avoid a classic blunder (that did not quite make Vizzini’s list).