General Contractors: Beyond the Box
A general contractor or "GC" assumes responsibility for construction of the entire project. The GC will subcontract to others those portions of the work that the GC is not equipped to perform as, for example, HVAC (heating, ventilation, air conditioning), plumbing, electrical work, and fire protection. This subcontracting arrangement creates three risks for the owner:
1. removal of the owner from the process of selecting the subcontractors,
2. mechanic's liens against the property because of the GC's failure to pay subcontractors, and
3. work stoppages because of the GC's failure to pay subcontractors.
The form of contract produced by the American Institute of Architects [for example, A101-2007 and A201-2007 (general conditions)] does not address risks 2 and 3. So below are some adaptable suggestions on how to treat them, plus provisions for an early completion bonus to the GC and a late completion credit to the owner.
A bond covering performance of the contract by the GC and payment of its obligations will reduce the risk of the GC's failure to pay its subcontractors. But in the absence of a bond, the owner must make a thorough check of the GC's credit worthiness and performance record, and should inquire of bonding companies whether they would issue a payment and performance bond for the GC and the cost thereof. Also, the owner should consider a shareholder guarantee.
With regard to the suggestions under items (A) and (B) below (selection of subcontractors and owner's right to pay subcontractors), GCs under a fixed-price contract may be reluctant to disclose their fee arrangements with the subcontractors. That reluctance, though, should easily be overcome by the fact that the owner has agreed to - and is satisfied with - the price it will pay the GC for the entire job, and so the owner is not concerned with the GC's profit: The owner's only concern is the reasonable protection of its interests.
A. Selection of Subcontractors1
NOTE: The models below should be assessed in context of the transaction and the GC's practices and timing in obtaining bids from subcontractors. Model 2 is cost neutral to the GC and cost blind to the owner.
For portions of the work that Contractor will subcontract for [specify trades, for example: Masonry, Electrical, Plumbing, HVAC, Fire Protection, Finished Cabinetry, etc.], Contractor will, in addition to its own selections, obtain bids from subcontractors that Owner requests. Contractor will consult with Owner on which bid to select for each of those trades, but Contractor will, in its sole and absolute discretion, determine the subcontractor that it will engage.
For portions of the work that Contractor will contract for [specify trades, for example: Masonry, Electrical, Plumbing, HVAC, Fire Protection, Finished Cabinetry, etc.], Contractor will, in addition to its own selections, obtain bids from subcontractors that Owner requests. Contractor will contract with the subcontractor that both Contractor and Owner approve. But without limiting the foregoing requirement that both Contractor and Owner must approve the subcontractor, if Contractor contracts with a subcontractor that Owner prefers but which is not the subcontractor that Contractor, in good faith, would have selected, then Contractor will furnish Owner with the final bid of the subcontractor that Contractor would have selected; and Contractor's fee will be (i) increased by the amount by which the bid of the subcontractor selected exceeds the bid of the subcontractor that Contractor would have selected, or, as the case may be, (ii) decreased by the amount by which the bid of the subcontractor that Contractor would have selected exceeds the bid of the subcontractor selected.
B. Owner's Right to Pay Subcontractors
In the event of a claim by a subcontractor that it has not been paid in respect of a progress payment that Owner has made to Contractor, the amount approved in that progress payment for that subcontractor, Owner may elect - and Contractor will honor that election - to pay all subcontractors directly against an authorization and certification from Contractor of the amount to be paid to each. In the case of any such election, Contractor will furnish Owner with copies of the subcontracts with all subcontractors.
C. Continuation of Work Notwithstanding a Dispute
In the event of any dispute involving payment or any other matter under any of the Contract Documents, Contractor will, without prejudice to the rights and obligations of Contractor and Owner, continue to perform the Work diligently in accordance with the Contract Documents. Time is of the essence.
Each subcontract will contain a clause to the following effect: "In the event of any dispute involving payment or any other matter under this subcontract, the trade contractor will, without prejudice to the rights and obligations of the trade contractor and general contractor, continue to perform its work diligently in accordance with the Contract Documents. Time is of the essence. The Owner is a third-party beneficiary of the foregoing commitment.
D. Bonus/Credit: Early and Late Completion
NOTE: The dates in the model below are solely for purposes of example, and there are 15 days of grace between the expiration of the bonus period and the beginning of the credit period.
If Substantial Completion of the Work (as defined in Section ___), as confirmed by issuance of a Certificate of Occupancy, is achieved on or before April 17, 2017 [a Monday], Contractor will receive an incentive payment in the amount of $ X . If, however, Substantial Completion of the Work, as confirmed by issuance of a Certificate of Occupancy, is not achieved on or before April 17, 2017 [Monday] but is achieved on or before April 28, 2017 [a Friday], Contractor will receive an incentive payment equal to $ X less $ Y [10% of X ] for each business day after April 16, 2017 that such substantial completion is not achieved.
If Substantial Completion of the Work (as defined in Section ___), as confirmed by issuance of a Certificate of Occupancy, is achieved on or after May 15, 2017 [a Monday], Contractor will pay Owner for late completion the product of (A) $ Y , and (B) one (1) plus the number of business days after May 15, 2017 that such substantial completion is not achieved; but the amount of the late completion payment will not exceed $ X . The payment under this paragraph will be credited against amounts owing by Owner to Contractor to the extent of those amounts.
The dates of April 16, 2017, April 17, 2017, April 28, 2017, and May 15, 2017 in the preceding two paragraphs are not subject to change, but if the Scheduled Completion Date of the Work (as specified in Section ___) is postponed due to force majeure, or changes in the Work, or any other cause specified in the Contract Documents postponing the Scheduled Completion Date of the Work, then Contractor may terminate the foregoing provisions for an incentive payment and late completion payment by giving Owner written notice of such termination within seven (7) business days after the length of the postponement has been determined as provided in the Contract Documents.