It has been said that general contractors are mere “brokers of construction services.” No matter the construction delivery method, subcontractors will inevitably perform a signification portion of the construction project. Subcontract agreements between the subcontractor and prime contractor govern the subcontractor’s work. Typically, the prime contractor provides the subcontractor with a form contract. Often subcontractors do not take the time to negotiate these contracts. However, it is important that subcontractors are aware of the implications of the pass-through provision often found in subcontract forms.
The pass-through provision (also known as the flow-down or conduit provision) incorporates the prime contractor’s contract with the owner into the subcontract. This provision is a powerful risk-shifting tool. Many subcontractors believe such pass-through provisions are limited to the portion of the prime contract covering the work that the subcontractor will perform. For example, a subcontractor may think that the pass-through provision only applies to portions of the prime contract governing the scope, quality, manner, and character of the subcontract work. Unfortunately for subcontractors, most pass-through provisions are extremely broad, and they incorporate all provisions of the prime contractor’s contract into the subcontract. These may include indemnity, insurance, payment, warranties, termination, and dispute resolution provisions.
In fact, a recent Ohio Supreme Court case resulted in a broad interpretation of the pass-through provision for a project gone-bad. The subcontractors in this case continued to perform construction not knowing that the lenders had pulled funding for the project. The subcontractors filed liens on the property, and in the same week, the lenders filed a complaint for foreclosure. The subcontractors argued that their mechanics’ liens had higher priority than the lender’s lien. The prime contract had a provision subordinating all mechanics’ liens to any lender lien. Unfortunately, the subcontract had a broad pass-through provision. The court held that the subcontract pass-through provision imposed this subordination clause on the subcontractors.
Ideally, a subcontractor would not sign a subcontract with a pass-through provision. And some subcontractors may have the negotiation power to simply refuse to sign subcontracts with pass-through provisions. In reality, the prime contractor often has the superior bargaining power, and this is not an option for the subcontractor. If such a provision cannot be negotiated out, then subcontractors should attempt to narrow the pass-through provision to the scope of the work they will be performing under the subcontract. At the very least, if a subcontactor is subject to a broad pass-through provision, the subcontractor should obtain, and thoroughly review, the prime contract. This ensures that the subcontractor knows what it is promising. And it also gives the subcontractors an opportunity to reject the job if too onerous of a provision is in the prime contract. Taking the time to review the prime contract or having an attorney perform the review may save both time and money in the future.
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