Before You Sign: The 5 Subcontract Clauses Worth Reading Twice

Most subcontracts run 30 to 40 pages. Some are longer. When one lands on your desk two days before mobilization, it can be hard to get through it in detail. But whether or not you have time to read every page, these are the five clauses worth understanding before you sign.

1. Indemnification

The indemnification clause determines who pays when something goes wrong on the project and a third party suffers injury or property damage. On its face, that sounds straightforward. In practice, it is one of the most dangerous provisions in the contract.

The key distinction is between limited form and broad form indemnification. A limited form clause requires the subcontractor to indemnify the GC and owner only to the extent of the subcontractor's own negligence. That is a proportionate allocation.

A broad form clause requires the subcontractor to indemnify them even for their own negligence. That means if the GC's superintendent makes a decision that injures a worker on the subcontractor's crew, the subcontractor could still be responsible for the defense and the judgment. Some states, including Kentucky, have anti-indemnity statutes that limit or void broad form indemnification in construction contracts. But not every state does, and the analysis varies by jurisdiction. If the work is in an unfamiliar state, this is the first clause to flag.

Indemnity clauses can also extend beyond the typical personal injury and property damage scenario. Some are drafted broadly enough to cover any claim arising on the project, effectively creating a fee-shifting mechanism for disputes between the contracting parties.

What to look for: Does the clause limit the obligation to the subcontractor's own negligence, or does it sweep in the "sole or concurrent negligence" of the indemnitee? If the latter, push back or price the risk. For a deeper explanation of indemnity provisions and negotiation approaches, see the Risk Allocation and Indemnity section of the Field Guide.

2. Payment Terms and Conditions

Getting paid is the whole point. But the payment clause is rarely as simple as a dollar amount and a due date. It is usually layered with conditions that can delay or reduce what the subcontractor actually collects.

Pay-if-paid versus pay-when-paid is the threshold question. A pay-when-paid clause means the GC will pay the subcontractor when it gets paid, but its obligation to pay still exists regardless. A pay-if-paid clause means the GC's obligation to pay is conditioned on actually receiving payment from the owner. If the owner goes bankrupt, the subcontractor may have no contractual right to payment from the GC at all. Courts in many states disfavor pay-if-paid clauses and require very specific language to enforce them, but they are enforceable where the drafter gets the language right.

Beyond that threshold, look at retainage terms, the process for submitting pay applications, what triggers the right to withhold payment, and how long the GC has to pay after receiving an invoice. A 90-day payment cycle with 10% retainage held until final completion of the entire project can create serious cash flow problems, especially for trade contractors funding labor and materials upfront.

What to look for: Pay-if-paid language, retainage percentage and release conditions, invoice submission deadlines, and any provision allowing the GC to withhold payment for disputes unrelated to the subcontractor's work. For a full breakdown of contingent payment clauses, see the Payment and Payment Terms section of the Field Guide.

3. Scope and Change Order Process

Scope disputes are the most common source of conflict on a project. The subcontract defines what the subcontractor agreed to do. The change order clause defines what happens when someone asks for more.

A well-drafted scope exhibit is specific enough to draw a clear line between base contract work and additional work. A poorly drafted one uses broad language like "all work reasonably inferable from the contract documents" or incorporates the prime contract drawings and specifications by reference without identifying which sections actually apply to the subcontractor's trade. When the line between base scope and extra work is blurry, the subcontractor ends up performing additional work without compensation because there is no way to prove it was outside the original agreement.

The change order process matters just as much. Many subcontracts require written authorization before extra work is performed, and state that any work performed without prior written approval will not be compensated. Trade contractors routinely ignore this requirement because the GC's superintendent directed the work verbally. When the invoice gets rejected, the subcontract is the document that controls.

What to look for: How the scope is defined (specific sections or broad incorporation), whether the change order process requires written pre-approval, and what happens if work is performed that is later disputed as being within the original scope.

4. Liquidated Damages

Liquidated damages clauses set a fixed dollar amount per day that the contractor or subcontractor owes if the project finishes late. They exist in most prime contracts, and they almost always flow down to subcontractors. The instinct is to treat them as a penalty to be avoided. That instinct is understandable but often wrong.

A liquidated damages clause with a reasonable daily rate is frequently better than the alternative. Without one, a delayed owner can pursue actual damages for late completion, which might include lost revenue, extended financing costs, and other consequential losses that dwarf the subcontract value. A known daily rate is predictable. An open-ended claim for the owner's lost profits is not. The LD clause puts a number on the risk. That number can be priced.

The critical questions are rate, cap, and remedy. The daily rate needs to bear a reasonable relationship to the anticipated harm from delay. The cap matters when the daily rate is high enough that a plausible delay could consume the entire fee. A subcontractor earning a $500,000 fee on a project with $10,000 per day in LDs faces total fee erosion after 50 days. That is not a remote scenario on a complex project. In that situation, a cap tied to the fee or a percentage of contract value is essential.

Remedy is the piece most trade contractors miss. If the subcontract says liquidated damages are the owner's "sole and exclusive remedy" for delay, exposure is capped at the LD amount. If it says LDs are "in addition to" other remedies, the subcontractor could owe the liquidated amount plus actual damages on top of it. That is the worst of both worlds. The sole remedy language is what makes an LD clause protective rather than just punitive.

What to look for: The daily rate relative to the fee, whether there is a cap on total LD exposure, whether LDs are the sole and exclusive remedy for delay, and whether the clause is paired with a mutual waiver of consequential damages. For a full explanation of liquidated damages evaluation and negotiation, see the Liquidated Damages and Delay Exposure section of the Field Guide.

5. Flow-Down Clauses and Reciprocal Rights

The flow-down clause is the one most subcontractors gloss over, and it may be the most consequential provision in the entire agreement. A typical flow-down reads: "Subcontractor assumes toward Contractor all obligations and responsibilities that Contractor assumes toward Owner under the Prime Contract." In one sentence, the subcontractor inherits every obligation in a document it may have never read.

That includes the owner's scheduling requirements, liquidated damages provisions, notice deadlines, insurance specifications, safety protocols, and warranty obligations. If the prime contract requires 48-hour written notice of any claim or the claim is waived, that deadline applies to the subcontractor even if the subcontract says nothing about it.

The deeper problem is that flow-down clauses almost never work both ways. The GC's obligations flow down to the subcontractor, but the owner's obligations to the GC rarely flow down as benefits. The prime contract might give the GC a right to time extensions for weather delays, force majeure, or owner-caused disruptions. Unless the subcontract expressly provides the same rights, the subcontractor does not have them. The GC gets relief from the owner. The subcontractor gets nothing from the GC.

This asymmetry is where subcontractors lose real money. The fix is straightforward in concept but requires attention during negotiation: if the GC is flowing obligations down, corresponding rights and remedies should flow down as well. If the GC receives a time extension from the owner, the subcontractor should receive the same extension. If the prime contract caps the GC's liquidated damages exposure, the subcontract should reflect a proportional cap.

At a minimum, ask for a copy of the prime contract before signing. If the GC will not provide it, the subcontractor is being asked to assume obligations under a document it cannot see. That is not a legal problem. It is a business problem. Risk that cannot be read cannot be priced.

What to look for: Whether the flow-down is one-directional (obligations only) or reciprocal (obligations and corresponding rights), whether the prime contract is available for review, and whether the subcontract preserves the right to time extensions, equitable adjustments, and other relief that the GC receives from the owner.

The Bottom Line

The biggest challenge for subcontractors is often not comprehension but time. The subcontract shows up late, the GC needs it back tomorrow, and there is no realistic way to get a lawyer involved on that timeline at a cost that makes sense for the project. Simon Law reviews subcontracts for trade contractors on a flat-fee basis with defined turnaround times, including expedited options. For more on each of these topics, see the Subcontract Provisions section of the Field Guide.

This article is for informational purposes only and does not constitute legal advice. No attorney-client relationship is formed by reading this content. If you have questions about a specific contract, consult with qualified construction counsel. THIS IS AN ADVERTISEMENT.