It's never good when general contractors default on a contract. Not only does it cost the owner time and money, but subcontractors also suffer.
“When a subcontractor's customer has been terminated for default, generally the subcontractor hasn't been paid in a little while,” says Brian Cubbage, senior director of GR/contracts counsel for the American Subcontractors Association (ASA).
And something called an assignment clause could compound this subcontractor's troubles. An assignment clause generally assigns the subcontract to the owner in the event that the general contractor is terminated for default. So the subcontractor would still be obligated to complete the work. However, that obligation isn't necessarily a two-way street if the contract does not address the owner's payment obligation.
“The contractor that has been terminated for default may not have applied payments received from the owner to pay the subcontractors, as it was supposed to,” Cubbage says. “The owner may feel they've already paid for the work the subcontractor's done, or there may be some other reason why the owner doesn't want to make good on what's been lost.”
To help subcontractors protect themselves from a financial loss due to poorly worded assignment clauses, ASA recently published a white paper on the topic, entitled “Assignment of Subcontracts,” which is free for its members. The paper explains the common assignment clauses and provides tips for subcontractors to reduce their risks of losing payment disputes.
Cubbage offers the following tips for subcontractors to prevent loss due to a defaulting general contractor:
Make contract language clear. Get language in the contract that says an assignment of the subcontract also entails a take-over of all the obligations that the general contractor had to the subcontractor. That way, “they don't just get the rights, they also get the responsibilities when [the owner] takes a subcontract assignment,” Cubbage says.
Make them ask permission. “What our bid proposal form says, and what a lot of our members try to do is get a term in the subcontract that says it shall not be assigned without consent, so the subcontractor has to consent to any assignment of the subcontract to anybody else,” Cubbage says. That way, a subcontractor could refuse consent on a project that had problems, because, Cubbage adds, “If the project owner didn't pick a general contractor very well the first time, they often still won't get it right the second time.”
Avoid bad general contractors. That's easier said than done, but there are resources available to help. Cubbage says ASA has chapters around the country that hold Business Practices Interchanges (BTI) where individuals can show up and ask questions. “And other subcontractors in the room will answer factual questions like, ‘We were paid an average of this many days after the date of our invoice.’ Information like that that's just purely factual, verifiable information,” Cubbage says.
