Understanding Contracts: Contractor and Subcontractor in a Construction Context

In Business Tips, Business Transactions, Contract Disputes, Contracts by Carrie CookLeave a Comment

Contracting and subcontracting can exist in many arenas, but one of the most common is in construction. If you have ever watched a home renovation show or gone through the excitement of having your own home or business renovated, you have probably heard the terms contractor and subcontractor used. The question is, what is the difference and how much do you need to know about the difference?

  • Owner – The business/property owner. This is most likely your role. You would find a contractor and negotiate a contract with them, and most of your direct contact with the project would be through your contractor.
  • Contractor – the contractor is usually the party you negotiate the price for the build/renovation with. They handle the negotiation and oversee the entire project, and then they find, negotiate with, and pay the subcontractors.
  • Subcontractor – the subcontractor will negotiate a separate agreement with the contractor. A subcontractor will often be specialized in one specific area (for example, drywall, concrete, plumbing). Their contract is only with the contractor, and they will be paid through the contractor.
  • Sub-subcontractor – the subcontractor may contract out some of their work to subcontractors of their own. These people will have a contract with the subcontractor, but not with the contractor or the owner.

The contractor is responsible for oversight of the entire project from start to finish. They will have to keep a staff and manage their assigned tasks as well as contracts with the various subcontractors and suppliers. A contractor is usually “big picture”, whereas the subcontractor is usually focused on a specific area or task as agreed in their subcontract agreement. A subcontractor is usually only on the project for as long as it takes to complete their part of the project. As an owner, you would communicate with the contractor directly about how the project is going, and the contractor communicates with their subcontractors. Both contractors and subcontractors may both have employees and independent contractors working for them.

Your contract with the contractor and the contractor’s contracts with any subcontractors are generally separate contracts. This means that you and your contractor can sue each other for breach of contract, and your contractor and their subcontractor can sue each other for breach of their contract, but you and the subcontractor probably cannot sue each other for breach of contract because you do not actually have a contract with them. This is not to say you cannot pursue them for other causes of action, but unless you had a contract with the subcontractor, there was no contract for them to breach and no cause of action.

It is important to keep in mind that the contracts are basically a chain: the property owner has a contract with the contractor, the contractor has a separate contract with the subcontractor, and the subcontractor has a separate contract with any subcontractors of theirs. This means if the subcontractor breaches their contract, they are liable to the contractor for breach of contract, but not to the owner. Even if the subcontractor breaches their contract, the contractor must still find a way to fulfill their contractual obligations to the owner. 

The contractor-subcontractor structure also dictates payment structure. The contracts generally dictate that the owner pays the contractor, and the contractor pays the subcontractor, and so on down the chain. All states, including New Mexico, have a version of a Prompt Pay Act. The purpose of this Act is to limit the length of time each party can hold onto money after being paid. For example, generally speaking, in New Mexico, owners, have 21 days from when an undisputed request for payment is made. Once payment is received from the owner, a contractor may only wait seven days from when they are paid to pay out their subcontractors, and the subcontractor then only has seven days from when they are paid to pay out any workers or suppliers they contracted with. From the eighth day onward, if they fail to pay, they owe not only the amount due, but also interest. So under the statute, the undisputed request is made, the owner pays the contract within 21 days to the contractor, the contractor pays their subcontractors within 7 days, who in turn pay their subcontractors and suppliers within 7 days. 

Below are some common clauses you might expect to find in your contract or in the subcontractor agreement:

  • Payments: Obviously, the amount to be paid and the intervals when payment will be received are important. Some states allow the parties to negotiate different timelines than what is in the Prompt Pay Act, or allow the parties to extend it by a set number of days in the contract.
  • Scope of work: The agreement should lay out the entire scope of the work expected to be performed by the contractor or subcontractor. The contract should also contain provision for how the parties will handle requests for change orders should the parties find additional work needs to be done that is outside the scope.
  • Insurance and Indemnity: The contract will usually dictate how much insurance the contractor or subcontractor will need to have to cover for any worker’s compensation and liability insurance. The subcontractor agreement will often seek to indemnify the contractor for damages or injuries to the subcontractor or anyone they bring onsite.
  • Warranty: Each contract will also usually contain a warranty for the work the contractor or subcontractor does and a promise to correct said work for a set period of time after the work is completed.
  • Termination: The contract will lay out the grounds and terms for early termination.

Contracts for constructing or renovating property are usually high value and drafting them yourself is not recommended. If you plan to execute a contract as the owner, contractor, or subcontractor, it is always worth retaining an attorney upfront to negotiate, draft, or review the contract before you sign.

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