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Subcontractors: ensure that flow-down contract provisions protect your rights.

As a subcontractor, you regularly sign contract documents that contain "flow-down" provisions, i.e., terms in the subcontract agreement that promise the prime contractor that you will provide to it everything that it is obligated to provide to the owner for your work. For example, if the prime contractor has agreed to give the owner the right to audit records of time and materials, then the contractor must ensure that its subcontractors are contractually required to provide it with all the same records that it is required to produce for the owner. That sounds reasonable, but have you ever considered some of the detrimental obligations flow-down provisions might pass along to your company? Some could be catastrophic.

In a real-life example described in the American Subcontractors Association's (ASA) white paper, "What Is 'In' the Contract: Flow-Down Issues," a court determined that flow-down provisions passed a no-damage-for-delay clause from the owner's contract with the prime contractor to the prime contractor's agreement with the sub-contractor. The result was that the subcontractor could not recover against a general contractor that caused a two-year project delay. Now that's a potent flow-down provision.

The point is that while flow-down provisions are essential to the smooth running of projects, such clauses need to be limited. For example, the flow-down provision in the subcontract agreement needs to be limited in scope to your work, or else you would be responsible for everything the general contractor has promised to the owner! Other risks are less obvious, however, such as:

Obligations that are stated in documents "incorporated by reference" but which you do not have in your possession. Hold harm. less and insurance terms passed along to you that unreasonably expand your liabilities. "Precedence clauses" providing that, in conflicts between documents, the terms placing the greatest burden or risk on you shall control, no matter which contract document includes any particular term. Design responsibilities passed along to you by a design-builder.

And these are only a few of the potential pitfalls subcontractors and suppliers face.

ASA's white paper offers a number of ideas for ensuring that flow-down provisions in subcontract agreements do not have unintended negative consequences. These include: obtaining copies of all documents referenced in proposed subcontract agreements and purchase orders; ensuring that the terms in the subcontract form negotiated by you and the prime contractor take precedence over any inconsistent terms in the other contract documents; eliminating flow-down of design responsibilities; and ensuring that not just the obligations, but also the rights and remedies, of the prime contractor "flow down" and are available to you.

Source: American Subcontractors Association

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Title Annotation:Selected topic
Publication:Business Credit
Geographic Code:1USA
Date:Sep 1, 2004
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