General Contractor Agreement vs Subcontractor Agreement: Key Differences

General Contractor Agreement vs Subcontractor Agreement

Construction projects involve a hierarchy of contracts that flow from the property owner down to the workers who perform the physical labor. At the top of this hierarchy is the General Contractor Agreement between the owner and the general contractor. Below it are the Subcontractor Agreements between the general contractor and the various specialty trades. Although these contracts are linked, they serve different functions, allocate risk differently, and impose different obligations on the parties. Understanding these differences is critical for anyone involved in construction.

What Is a General Contractor Agreement?

A General Contractor Agreement, also called a prime contract, is the master agreement between the property owner and the general contractor. The general contractor assumes responsibility for the entire project: scheduling, coordinating trades, procuring materials, managing the budget, ensuring code compliance, and delivering the completed work to the owner. The general contractor is the single point of accountability for the owner.

The agreement defines the scope of work, project schedule, contract price, payment terms, change order procedures, warranty obligations, insurance requirements, indemnification provisions, and dispute resolution mechanisms. Standard forms from organizations like the American Institute of Architects (AIA) and ConsensusDocs are widely used, though custom agreements are also common.

What Is a Subcontractor Agreement?

A Subcontractor Agreement is the contract between the general contractor and a subcontractor who performs a specific portion of the project work. Electricians, plumbers, HVAC installers, roofers, painters, concrete workers, and dozens of other specialty trades enter into subcontractor agreements with the general contractor.

The subcontractor agreement defines the specific scope of work the subcontractor will perform, the subcontract price, payment schedule, scheduling obligations, quality standards, insurance requirements, indemnification obligations, and compliance with the terms of the prime contract. The subcontractor typically has no direct contractual relationship with the property owner.

Key Differences

Relationship Hierarchy

The construction contract hierarchy is straightforward: Owner contracts with General Contractor, who contracts with Subcontractors. The owner has privity of contract only with the general contractor. The general contractor has privity of contract with both the owner and each subcontractor. Subcontractors have privity of contract only with the general contractor, not with the owner.

This hierarchy means the owner looks solely to the general contractor for performance. If a subcontractor's work is defective, the owner holds the general contractor responsible, and the general contractor in turn holds the subcontractor responsible through the subcontract.

Scope of Work

The General Contractor Agreement covers the entire project. The general contractor is responsible for all work necessary to complete the project in accordance with the plans and specifications, whether the general contractor performs the work with its own forces or subcontracts it to others.

Each Subcontractor Agreement covers only a defined portion of the project. The electrical subcontractor installs the electrical systems. The plumbing subcontractor installs the plumbing. The scope must be precisely defined to avoid gaps where no party is responsible for a particular element of the work, or overlaps where multiple parties claim responsibility and charge for the same work.

Payment Flow

Payment flows downhill. The owner pays the general contractor according to the terms of the prime contract, typically on a monthly basis based on the percentage of work completed. The general contractor then pays each subcontractor according to the terms of the subcontract.

This creates a critical issue for subcontractors: their payment depends on the general contractor receiving payment from the owner and then flowing it through. Two common clauses address this:

• Pay-when-paid: The general contractor must pay the subcontractor within a reasonable time after receiving payment from the owner. This creates a timing mechanism but does not excuse payment if the owner defaults. Most courts treat this as setting a reasonable time for payment rather than creating a condition precedent.\n- Pay-if-paid: The general contractor's obligation to pay the subcontractor is conditioned on receiving payment from the owner. If the owner does not pay, the general contractor does not have to pay the subcontractor. Courts scrutinize these clauses carefully, and some states have declared them unenforceable as against public policy.

Mechanic's Lien Rights

Mechanic's lien laws give unpaid contractors and subcontractors the right to place a lien on the property where they performed work. Both general contractors and subcontractors have lien rights, but the procedures differ.

General contractors typically have more straightforward lien rights because they have a direct contract with the property owner. Subcontractors, who lack privity with the owner, must follow additional procedures to preserve their lien rights. Many states require subcontractors to serve a preliminary notice on the owner within a specified number of days after starting work. Failure to serve this notice can extinguish the subcontractor's lien rights entirely.

Property owners protect themselves by requiring lien waivers from the general contractor and all subcontractors before releasing each progress payment. Conditional lien waivers release lien rights only upon receipt of payment. Unconditional lien waivers release lien rights immediately.

Insurance Requirements

Both agreements require insurance, but the coverages differ. The General Contractor Agreement typically requires the general contractor to carry commercial general liability insurance, workers' compensation insurance, automobile liability insurance, umbrella or excess liability insurance, and builder's risk insurance. The general contractor must name the owner as an additional insured on its liability policies.

Subcontractor Agreements require the subcontractor to carry similar coverages but at limits that may be lower than the general contractor's. The subcontractor must name both the owner and the general contractor as additional insureds. The general contractor is responsible for verifying that all subcontractors maintain the required insurance throughout the project.

Licensing

General contractors must hold a general contractor's license in most states. Subcontractors must hold licenses specific to their trade, such as an electrical license, plumbing license, or HVAC license. The General Contractor Agreement typically requires the general contractor to verify that all subcontractors are properly licensed before allowing them on the project. Using unlicensed subcontractors can expose the general contractor to fines, project delays, and loss of its own license.

Indemnification Chains

Indemnification flows uphill. The subcontractor indemnifies the general contractor for claims arising from the subcontractor's work. The general contractor indemnifies the owner for claims arising from the general contractor's work, which includes the work of all subcontractors. This creates a chain of indemnification that allocates risk to the party closest to the work that caused the loss.

Many states have anti-indemnity statutes that prohibit a party from requiring indemnification for its own negligence. These statutes affect both the General Contractor Agreement and the Subcontractor Agreement and must be considered when drafting indemnification provisions.

Change Orders

Change orders in the General Contractor Agreement are initiated by the owner and flow down to the general contractor. Change orders in the Subcontractor Agreement are initiated by the general contractor and flow down to the subcontractor. The subcontractor typically has no right to negotiate directly with the owner.

The subcontract should include provisions for how change orders are communicated, priced, and approved. A common dispute arises when the general contractor directs the subcontractor to perform additional work without a formal change order, and the parties later disagree about whether the work was within the original scope or constitutes a compensable change.

Scheduling and Coordination

The general contractor controls the project schedule and coordinates the work of all subcontractors. The General Contractor Agreement obligates the general contractor to maintain the project schedule and complete the work by the specified date, often with liquidated damages for delay.

Subcontractor Agreements require the subcontractor to comply with the general contractor's schedule and coordinate its work with other trades. The subcontractor must mobilize and demobilize as directed by the general contractor. Delays caused by one subcontractor can ripple through the entire project, and the general contractor may back-charge the responsible subcontractor for resulting costs.

Common Mistakes

• Failing to flow down the terms of the prime contract into the subcontract, creating gaps in coverage and conflicting obligations\n- Using pay-if-paid clauses in states where they are unenforceable\n- Neglecting to verify subcontractor insurance and licensing before work begins\n- Failing to define the scope of work precisely, leading to disputes about included and excluded work\n- Omitting change order procedures, which leads to unauthorized work and payment disputes\n- Ignoring preliminary notice requirements for mechanic's lien rights

Summary

The General Contractor Agreement and the Subcontractor Agreement are complementary contracts that together govern a construction project. The General Contractor Agreement defines the overall project obligations and the relationship between the owner and the general contractor. The Subcontractor Agreement defines the specific trade obligations and the relationship between the general contractor and each subcontractor. Understanding the hierarchy, payment flow, lien rights, insurance requirements, and indemnification chains is essential for all parties to protect their interests and ensure a successful project.