Tuesday, March 30, 2010

Construction Subcontract Flow-Down

Every construction contractor and subcontractor has heard the term flow-down. A few probably feel they were washed away by flow-down. I don’t think that’s necessary and will suggest a better way.

Flow-down is what general contractors do in subcontracts. They incorporate into a subcontract all the terms of the prime contract – usually by stapling the prime contract to the subcontract. That saves a lot of typing. It also offers a (false) sense of security to general contractors. In theory, flow-down obligates the sub to do everything for the sub’s portion of the work that the general contractor has to do under the prime contract.

So if the owner has a legitimate complaint about a sub’s work, and if the prime contractor is obligated to make repairs, the sub has the same obligation. That’s perfect symmetry and should protect general contractors. Flow-down is great for general contractors. Right?

Well, not quite.

Courts don’t like flow-down for several reasons. First, it’s an adhesion contract between parties with different levels of bargaining power. Second, flow-down binds subcontractors to terms they may not have read, probably don’t understand and make no sense whatsoever in the context of a particular subcontract. Worse, the stapled prime contract may have terms completely inconsistent with the signed subcontract.

The result: Courts simply don’t enforce flow-down as general contractors expect. Instead, flow-down binds a “subcontractor only as to prime contract provisions relating to the scope, quality, character and manner of the work to be performed by the subcontractor." (2007 NY Slip Op 2981)

What does that include? Your guess is as good as mine. But I think some would insist it doesn’t go much beyond what appears on the plans and in the specs. That trashes most of the prime contract: payment, liens, delay, insurance, extra work, termination, call-backs, claims, warranty, statute of limitations, indemnification, and a host of other common trouble spots.

If you’re a general contractor, staple-based flow-down can be poison.

But don’t misunderstand. Courts aren’t saying that subcontractors can’t be bound by terms in the prime contract. They can. But those terms better be in the subcontract and over the signature of the subcontractor.

Fortunately, that’s relatively easy today. Just get a digital copy of the prime contract. Replace every occurrence of “owner” with “contractor” and every occurrence of “contractor” with “subcontractor.” That’s a real flow-down subcontract and should be enforced by every court in the land.

But read the subcontract carefully before getting a signature. Add anything that applies to subcontracts only (i.e. payment terms, release of retainage) and eliminate anything that doesn’t apply (i.e. notices and disclosures). Then make the changes required by state law. Many states have special rules for subcontracts.

If you want to see how this is done, there’s a Web site with sample prime contracts and cloned flow-down subcontracts for both commercial and residential jobs. It’s free.

If you write both prime contracts and subcontracts, Craftsman’s Construction Contract Writer makes flow-down easy. When the prime contract is done and signed, just click to turn that prime contract into a perfectly valid flow-down subcontract covering all the same issues – automatically deleting what doesn’t apply, adding what’s unique to subcontracts and accounting for any special state requirements.