The Cromeens Law Firm, PLLC, has helped thousands of subcontractors understand subcontracts and strengthen their business as a whole. Knowing what you should do to protect yourself starts first with understanding each part of the subcontract. This blog covers three critical topics every subcontractor needs to understand before signing the next subcontract: subcontract documents, personal guarantees, and retainage.
Remember: Whatever you sign in a subcontract will be used against you. Unfortunately, there are no set of laws or rules in place to protect you and guarantee that the subcontract is fair. In fact, most of the subcontracts are not fair; they are one-sided and do not favor the subcontractor.
In the next section, we’ll take a deeper dive into the most common documents included in a subcontract. Generally, a subcontract is made up of the following documents:
- Prime contract
- Project schedule
The Prime Contract
The prime contract is the contract between the owner and the general contractor.
Before you sign a subcontract, be sure to do all of the following:
- Request a copy of the prime contract and any change orders that have been issued.
- Review the prime contract and change orders to ensure that you are not agreeing to something more than what you agreed to in the subcontract.
- Have the general contractor assign you its rights to payment for your scope of work.
- Ask for the prime contract to be removed from your subcontract.
- Ask that all of your obligations to the general contractor only be in the subcontract—this is not an unreasonable request.
The Plans and Specifications
The plans and specifications are generally included in the contract documents. Before you sign, review them to make sure the most current plans and specifications accurately reflect the work you agreed to perform.
Normally, the subcontract will have the project schedule as an exhibit/attachment. Do not wait to look at this until after you sign the subcontract. Review the construction project schedule closely to ensure you will have enough time to complete your scope of work. Do not agree to a schedule you cannot meet.
Before you sign the subcontract, have the schedule changed to a time frame you know you can complete. Remember, there is no one out there watching your back regarding what you agree to in your subcontract. You are the only one who can do that.
The Cromeens Law Firm is here to protect you and your business. Our hope is that you never sign a subcontract that puts you out of business. Work with us to equip yourself with the ability to properly evaluate your risks and negotiate your next subcontract with greater confidence and ease.
What’s a Personal Guarantee?
Signing a personal guarantee means that if your business becomes unable to repay any debt, you, as an individual, assume personal responsibility for the balance. That means judgments can be made against your personal bank accounts and assets.
The initial subcontract that the general contractor sends over is just their first offer. The general contractor expects negotiations; it shows that you are informed and paying attention.
Although slightly different, subcontractor bonds are another form of personally guaranteeing your performance of a subcontract. When you sign personal guarantee paperwork with a bond company, the bond company then issues the general contractor a guarantee that you will complete the contract and pay everyone you hire. If you fail to perform, the bond company will pay the claim and then come after you for reimbursement. Unlike the personal guarantee that you sign in a subcontract, if the general contractor wants to recover funds from you personally, they have to sue you, and if you don’t have the funds or you file bankruptcy, they will not get any money. The bond gives the general contractor faster and guaranteed payment if you default.
Why You Should Incorporate
Being incorporated means you have filed paperwork with the Texas Secretary of State, and your company is legally recognized as one of the following entities: a corporation, a limited liability company, a limited liability partnership, a limited partnership, or a professional corporation.
Once you are incorporated, your business becomes its own entity and will need its own bank account that only business funds run through. You will become an employee of your company. It is vitally important that you keep the company’s business separate from your individual income and expenses. If you do not treat your company as a separate entity, the law won’t either. Using your company assets and accounts for personal expenses could lead to personal liability.
Personal guarantee and incorporation facts to keep in mind:
- Do not sign a personal guarantee as part of a subcontract. Do not put up your personal assets in order to work on a construction project.
- If you are not incorporated, go get incorporated. We can help you with this!
- Make sure you run your company as its own entity.
- When you sign a document for your company, make sure you use your name and title.
- If you sign a personal guarantee, you waive the protection you have because of your incorporated entity.
What Is Retainage?
Retainage is 10% of the contract amount between the owner and the general contractor on any project. Although retainage’s legal definition states nothing about subcontractors, most general contractors take 10% from the amounts due to the subcontractor throughout the project. Retainage is important for a few reasons.
First, retainage can limit the owner’s liability if properly withheld. If the owner withholds 10% of the general contract amount from the general contractor until 30 days after completion, the owner’s liability to lien claimants will only be the 10%. If the amount of the lien claimants exceeds the retainage amount, the valid lien claimants will share the 10% on a pro rata basis.
The owner’s liability can be increased to an amount larger than the 10% if you trap the funds in the owner’s hands before the funds are paid to the general contractor. If you send an intent-to-lien letter that contains the required statutory statements, the funds due to the general contractor should be held in the hands of the owner until you are paid. The sooner you send a notice of any unpaid amounts to the owner, the more likely you are to increase the owner’s liability, and the more likely you will be paid the full amount you are owed.
Second, if the owner properly withholds the 10%, the period for filing liens can be shortened. If the project is completed, an affidavit of completion is filed with the county clerk, and the owner withholds the 10%, all liens must be filed within thirty days of completion.
Retainage generally does not become due to the subcontractor until thirty days after completion and/or when the general contractor receives the retainage payment. To ensure that a subcontractor will have a valid lien on retainage, they should file their liens within thirty days of the project being completed.
As a subcontractor, you never know when the owner will pay the general contractor, so the sooner you send your notice, the more likely you will be able to trap funds in the owner’s hands. There is no penalty for sending notice of unpaid amounts early, but it will invalidate your lien if you send them late.
You should not have to risk everything just to be able to make a living. It is so important to protect the sacrifices you have made by starting and growing your company. These sacrifices, including the thousands of hours away from your family, deserve to be protected. We are here to help protect you and your business. Call us today for all of your legal needs.
Stay tuned later this month for our final installment of the breaking down the subcontract blog series.