A Primer on Construction Subcontracts in Massachusetts

Construction subcontracts establish the legal relationship between subcontractors and prime contractors. Most subcontracts should mirror the terms and conditions outlined in the agreement between the owner and the general contractor (the “Prime Contract”) or, at a minimum, be consistent with and provide an explanation when the terms do not mirror the Prime Contract. To ensure a fair agreement, subcontractors need to pay attention to the contract terms and obligations that flow down from the Prime Contract. Flow down occurs when a Prime Contract states that certain clauses must be repeated or carried forward in a subcontract, usually involving terms such as indemnification, insurance, payment terms, dispute resolution, liquidated and consequential damages, and termination rights.

Despite the concept of flow down, subcontractors should have the opportunity to negotiate a contract that protects their interests and aligns with industry standards. Often when a subcontractor contacts us with a question, they will admit that they have not read the prime contract. This usually occurs because the subcontractor was hired long after the Prime Contract was negotiated and signed. Nevertheless, it is essential for subcontractors to carefully review and understand the prime agreement before entering into a subcontract.

One of the most important clauses in construction subcontracts is the clause for indemnification. Indemnification is a legal concept that shifts the responsibility for certain liabilities or losses from one party to another. In the context of construction subcontracts, subcontractors often agree to indemnify and hold harmless the contractor from claims, damages or losses arising out of their work. This means that if a subcontractor’s actions or negligence results in injury or damage, they are obligated to compensate the contractor for any costs incurred as a result. Indemnification provisions help protect contractors from potential legal and financial risks associated with the subcontractor’s work. It is crucial for subcontractors to carefully review and understand the indemnification clause in their subcontracts before agreeing to the terms. They should ensure that the scope of indemnification is fair and reasonable. It is also advisable for subcontractors to consult with their insurance agents to confirm they are covered for the areas of indemnification.

Projects valued at over $3 million are subject to the Massachusetts Prompt Pay Act, which is a state law that aims to ensure timely payment in the construction industry. It sets forth specific timelines for payment and establishes penalties for delayed payments.

Also, in Massachusetts, there is a distinction between pay-if-paid clauses and pay-when-paid clauses in construction contracts. A pay-if-paid clause is a contractual provision that shifts the risk of non-payment from the contractor to the subcontractor. It essentially states that the subcontractor will only be paid if the contractor receives payment from the owner or client. In this case, if the contractor does not get paid by the owner for any reason, the subcontractor may not be entitled to payment. On the other hand, a pay-when-paid clause does not shift the risk of non-payment to the subcontractor. Instead, it establishes a timeframe (albeit unknown), stating that the subcontractor will be paid within a certain timeframe after the contractor receives payment from the owner. In Massachusetts, pay-if-paid clauses are generally disfavored by the courts, as they are seen as overly burdensome to subcontractors. On the other hand, pay-when-paid clauses are more commonly upheld, as they are viewed as establishing a reasonable timeframe for payment rather than completely shifting the risk. It is important to note that the enforceability of these clauses can depend on various factors, the specific language used, the circumstances of the project and the overall fairness of the contractual provisions.