10 Red Flags in Subcontractor Contracts That Cost You Money
Every year, subcontractors lose billions to contract clauses they didn't understand when they signed. Here are the 10 most dangerous red flags and how to protect yourself.
Red Flag #1: Pay-If-Paid Clauses
What it looks like:
"Payment is conditioned upon Contractor's receipt of payment from Owner."
Why it's dangerous: You only get paid if the owner pays the GC. If the owner goes bankrupt, you get nothing.
What to negotiate: Convert to pay-when-paid with a 45-day maximum: "Payment within 45 days regardless of owner payment status."
Red Flag #2: Broad Form Indemnification
What it looks like:
"Subcontractor shall indemnify Contractor regardless of fault, including Contractor's own negligence."
Why it's dangerous: You're liable for accidents you didn't cause. One slip-and-fall caused by the GC could bankrupt you.
State protection: Over 40 states void these clauses. In Texas, cite Insurance Code §151.102. In California, cite Civil Code §2782.
Red Flag #3: No-Damage-For-Delay
What it looks like:
"Subcontractor waives all claims for delay damages. Time extension shall be the sole remedy."
Why it's dangerous: If the GC delays you 3 months, you can't recover your crew standby costs, equipment rental, or extended overhead.
Average loss: $23,000 per delay incident.
Red Flag #4: High Retainage (10%+)
What it looks like:
"Retainage of 10% shall be held until final completion of the entire project."
Why it's dangerous: On a $500K contract, $50,000 is held hostage until the last punch list item on a project you finished months ago.
Industry standard: 5% is standard. Several states cap retainage at 5% by law.
Red Flag #5: Short Change Order Notice (3-7 days)
What it looks like:
"Written notice of any claim must be submitted within 3 days or claim is waived."
Why it's dangerous: In fast-paced construction, you might not realize you have a claim until the notice window closes.
What to negotiate: 14 days minimum, 21 days preferred (matches AIA A201).
Red Flag #6: Termination for Convenience
What it looks like:
"Contractor may terminate this Agreement at any time for convenience."
Why it's dangerous: The GC can fire you mid-project with no reason and potentially limited compensation.
What to negotiate: Add payment for completed work, ordered materials, and 10% of unperformed work as lost profit.
Red Flag #7: Unconditional Lien Waivers Before Payment
What it looks like:
"Subcontractor shall provide unconditional lien waiver with each pay application."
Why it's dangerous: You give up your lien rights before the check clears. If the GC goes bankrupt, you're an unsecured creditor.
What to negotiate: Conditional waiver with application, unconditional only after payment clears.
Red Flag #8: Flow-Down to Prime Contract
What it looks like:
"Subcontractor is bound by all terms of the Prime Contract, incorporated herein by reference."
Why it's dangerous: You're bound to a document you may have never seen, with obligations designed for a general contractor.
What to negotiate: Request a copy of all flow-down provisions before signing.
Red Flag #9: Excessive Liquidated Damages
What it looks like:
"Liquidated damages of $5,000 per day for any delay."
Why it's dangerous: A 2-week delay costs $70,000. Weather delays, material shortages, and GC-caused delays can all trigger this.
What to negotiate: Cap on total LDs, exclusions for excusable delays.
Red Flag #10: Extended Warranty (2+ years)
What it looks like:
"Subcontractor warrants all work for five (5) years from substantial completion."
Why it's dangerous: You're on the hook for callbacks years after your profit is spent. Your crews have moved on, documentation is lost.
Industry standard: 1 year for workmanship, manufacturer warranty for materials.
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How to Protect Yourself
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