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Subcontractors: Beware of flow-through clauses

If you work in the construction industry as a subcontractor, contracts are a routine part of your business. But an agreement between you and a general contractor can take many forms. In fact, there may be instances where there is no contract at all beyond the bid itself. The general contractor accepts the bid, gives the subcontractor the job, and work begins with the assumption that the parties will treat each other with fairness. Perhaps needless to say, this creates a considerable amount of risk for both parties.

Even when there is a contract, it's not uncommon for a subcontractor to skim through it without digesting the fine print. This is nearly as dangerous as having no contract at all, because the agreement may contain language that holds the contractor liable for aspects of the job that have nothing to do with his or her work on the project. One form this language can take is in a "flow-through" clause.

A flow-through clause, also known as a "flow-down," "pass-through" or "conduit" provision, stipulates that the terms and conditions of the contract between the project owner and the general contractor extend to the agreement between the contractor and subcontractor. In other words, whatever the general contractor has agreed to with the owner also applies to the subcontractor.

In most situations, these clauses are reasonable because they're limited to the scope of the subcontractor's work. For example, if a general contractor has agreed to build according to LEED certification standards, a requirement for a roofing contractor to use environmentally friendly materials makes perfect sense. The risk lies in provisions that extend beyond the work itself. For instance, the owner may require a certain type or level of insurance from the prime contractor that would also apply to the subcontractor through a flow-down clause, even if it's not specifically stated in the lower-tier contract. The same problems may arise with regards to dispute resolution terms or notice requirements. Subcontractors may be taken by surprise if problems arise midway through the project.

The best way to avoid these unpleasant surprises is to know exactly what you're signing. If your contract contains a flow-through clause, you'll want to go over the contractor-owner contract and make sure the terms and conditions are clear to you before signing your own. If you would like assistance dissecting a contract, consult an attorney who focuses on contracts and/or construction law. Such an attorney can also help you draft a contract or a bid form that is fair to both you and your general contractor.

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