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Davis Brown Construction Law Blog

Protect Your Business from Risks Involving Your Subcontractors - June 1, 2017

General contractors and builders face a unique situation when it comes to risk management.  They are legally responsible to owners for the actions and omissions of their subcontractors. Thus, as you work on projects and hire subcontractors to perform work, you want to make sure you are taking the right steps to protect yourself and your business. Iowa’s Statute of Repose law impacts how long builders and general contractors are liable for defects. This law was updated in the 2017 legislative session and a summary of the change is available.

I recommend a multi-layer approach to risk management in regard to your subcontractor relationships:

  1. Insurance considerations
  2. Risk allocation within your contracts
  3. Loss prevention

Adequate Insurance

When developing a relationship with a subcontractor and deciding to bring them on board, you should ensure that your subcontractor agreements have robust requirements for insurance coverage and then follow through with enforcement of these contract provisions. Those insurance provisions should involve, among other things, requiring subcontractors to maintain various types of coverages (e.g., CGL, PL, worker’s compensation, automobile insurance) at minimum coverage levels and ensuring that the subcontractor policy lists you, the general contractor, as an “additional insured” on the policy through an Additional Insured Endorsement.  If your subcontractors sign a contract saying they will have insurance, also require them to provide a Certificate of Insurance, and if they can’t, they are off the job.  This might take a few extra steps and more paperwork, but in the realm of risk management, it is worth it.

Be sure to speak with your insurance broker about further specifics on the kinds and amounts of insurance coverage are needed for your subcontractors.

Risk Allocation

Your subcontractor agreements should have very specific provisions to move the liability and risk from you to the subcontractor performing the work in regard to that subcontractor’s work.

In commercial construction, this is easy, as most projects involve AIA or other project-specific subcontractor agreements. However, that is not always the case in residential construction.  In residential construction, we recommend having your attorney prepare a master/standing subcontractor agreement with various risk allocation and other general provisions to be signed once by each of your subcontractors. For each project, best practices dictate that you have an addendum/contract document with price and scope of work details.

Talk with your lawyer about what provisions are appropriate for your master/standing contracts and for your project specific contracts to ensure that the liability is apportioned among parties and is fair and appropriate, including but not limited to appropriate indemnification provisions, insurance requirement provisions, remedy provisions, equipment license provisions, flow down/conduit provisions, and others.

Loss Prevention

Loss prevention in terms of your relationship with your subcontractors can be summarized with a variety of best practices. As a best practice, when selecting subcontractors to work with, it can be tempting to go with the lowest cost bid, however, that can turn out poorly for you.  When making your selection, only utilize well-established, well-run, and well-qualified subcontractors considering price only after ensuring quality. Also, do not be afraid to end a relationship with a subcontractor, even if it is a long-term relationship, if the subcontractor’s current employees and crew are not promptly and properly performing their work.

During the project, if a dispute arises due to owner complaints, it is important to give notice to the subcontractor as soon as you receive the complaint. As you follow your loss prevention process, you should include the subcontractor and ensure they understand the importance of the process, and contact your attorney regarding possible insurance claims.  There are a few possible options that your attorney can advise you on: put the subcontractor’s insurer on notice of an owner complaint, file a claim with the insurer (if you are additional insured under the policy), and/or later demand a tender of defense from the subcontractor’s insurer based upon contractual indemnification language or your additional insured status. 

Subcontractor Safety

Finally, most general contractors do not know that there are times in which they may be liable for safety incidents and injuries sustained by employees of one of its subcontractors. As a general rule under Iowa law, general contractors are not responsible for the safety of subcontractor employees. However, there are some exceptions, including the below-described exceptions:

  • Control Exception: In some cases, courts have decided that a general contractor is liable for the subcontractor’s employees’ injuries when the general contractor has sufficient control over the manner and means of work, i.e., substantial control over day-to-day work and over means and methods of the subcontractor. General supervision, coordination and inspection of subcontractors and their work does not constitute sufficient control to trigger this exception.
  • Dangerous Conditions Known to the General Contractor. In some cases, a court has ruled that a general contractor is liable for subcontractor injuries caused by dangerous conditions that were known to the general contractor, but not known or obvious to the subcontractor.
  • Other Exceptions. Other exceptions exist under Iowa law, including where liability is allowed by contractor and where construction involves a peculiar, unreasonable risk of harm.

Protect Your Business

Using this multi-pronged approach, you can protect your business by minimizing issues with subcontractors, or if they do occur, handling the situation with a focus on the future of your business.