The Red Flags in a Commercial Contract a Sub Should Catch

Why this matters

A commercial subcontract is written by the general contractor's lawyer to protect the general contractor. Every risk they can push downhill lands on the sub who signs without reading. The scope pages tell you what to build; the boilerplate tells you whether you will get paid, who eats a delay, and what happens when something goes wrong. Learn to spot the handful of clauses that decide those outcomes, and you negotiate them before you sign instead of discovering them when the check is short.

Read the payment clauses first

Two phrases decide when, and whether, you get paid.

• Pay-when-paid means the GC pays you within a reasonable time after they are paid by the owner. It shifts timing to you but not the ultimate risk; you still get paid eventually.
• Pay-if-paid makes the owner's payment a condition precedent to yours: if the owner never pays the GC, the GC never owes you. That moves the risk of owner insolvency onto your shoulders. Many states restrict or void pay-if-paid clauses as against public policy, so its enforceability depends on your state, but never sign assuming a court will save you.

Retainage is the other one to find. Retainage is a percentage of each progress payment the GC holds back until the work is complete and accepted, commonly in the range of five to ten percent, though the exact figure and the release trigger are set by the contract. The trap is not the percentage; it is a release tied to final acceptance of the whole project, which can hold your money long after your scope is done and passed. Push for release of your retainage at completion of your work, not the entire job.

The delay and damages traps

• No-damage-for-delay bars you from recovering added cost when someone else's delay stretches your schedule. If the GC hands you the site late and you burn crew waiting, this clause says you eat it. Ask to carve out delays caused by the GC or owner.
• Liquidated damages set a fixed charge for every day you finish late, whether or not the delay was your fault. Read how completion is defined and whether delays outside your control stop the clock. An uncapped daily charge on a scope you do not fully control is a landmine.

The one-sided risk shifts

• Broad indemnity can require you to cover the GC's losses even when the GC was partly or wholly at fault. Many states limit how far this can reach, especially for the other party's sole negligence, but the drafting will push as far as the law allows. Look for language limiting your indemnity to losses caused by your own work.
• Flow-down (incorporation by reference) binds you to every term of the prime contract between the GC and the owner, even though you were never shown it. You cannot accept terms you have not read. Ask for a copy of the prime contract before you sign.
• Termination for convenience lets the GC end your contract without you doing anything wrong. Check exactly what you are owed on termination: work performed, material ordered, and demobilization, at minimum.

The invoice landmines

• Back-charge clauses let the GC deduct costs from your payment for cleanup, damage, or fixing another trade's problem. The danger is a unilateral, undocumented deduction. Require written notice and a chance to cure before any back-charge hits your check.
• Lien waivers come in two flavors. A conditional waiver releases your lien rights only once payment actually clears; an unconditional waiver releases them the moment you sign. Never sign an unconditional waiver before the money is in your account.
• Conditions of payment can bury a stall: notarized affidavits, updated insurance certificates, or lien releases from your own suppliers, all due before the GC will process your pay application. Know the exact package so a missing form does not park your invoice.

Field key: clause, why it bites, what to ask for

What to do with a red flag

Spotting a clause is not the same as refusing the job. You have three moves: negotiate it out, price the risk into your bid if it cannot be removed, or walk when the risk is bigger than the work is worth. Redlining a subcontract is normal and expected on commercial work. The sub who never asks is the sub who absorbs every one of these.

References

• ConsensusDocs and AIA standard subcontract forms
• State statutes on pay-if-paid enforceability, anti-indemnity limits, and retainage release
• Trade-standard practice for subcontract review and redlining
• See related: A GC Wants You to Start Before the Contract Is Signed; Documenting Commercial Work to Survive a Payment Dispute