With construction projects ramping up and tradespeople booked solid during the summer, it’s tempting for subcontractors to focus solely on delivering high-quality work and staying on schedule. But in the rush to get the job done, it can be easy to overlook protecting yourself legally; an oversight that can carry hefty financial and legal consequences.
At our firm, we’ve seen subcontractors blindsided by passthrough liability claims – lawsuits that name a subcontractor even when the work they performed wasn’t the cause of the issue. These claims often arise after a project wraps up, leaving tradespeople stunned to find themselves pulled into legal disputes over issues they may have had nothing to do with.
Here’s a hypothetical example that is representative of clients we’ve represented. He was hired to frame a spec home for a general contractor he’d never worked with before. The work went smoothly, and he moved on to the next project. Months later, after the home was sold, the buyer discovered a defect that was unrelated to the framing and sued the general contractor (GC). Instead of the dispute staying between the homeowner and the GC, our client was pulled into the lawsuit through a passthrough claim. He had no contract in place that could limit his liability, so he now faced tens of thousands in legal fees to defend himself, despite knowing his work was solid.
Unfortunately, this scenario is something we’ve seen happen with multiple clients, and it’s one that can spiral into a nightmare pretty quickly because of legal fees. For example, it’s possible to spend upwards of $70,000 in legal fees out of court just to prove no fault. Mediation costs can easily hit the $50,000 mark, but if the case goes to trial, costs could exceed $150,000. All this, just this to dispute alleged damages that in many instances may be substantially less than the cost of litigation.
These outcomes are frustrating and, more importantly, they’re unsustainable. Many subcontractors operate on thin profit margins and clunky cash flow, so a single unexpected lawsuit can wipe out years of hard-earned gains, not to mention create intense stress and pull business owners away from their day-to-day operations.
That’s why it’s essential to address legal risk before the work begins, and the number one way to protect yourself is to insist on a solid contract for every job, even if you are familiar with the (GC). A handshake deal or verbal agreement, no matter how trusted the relationship, won’t protect you in court.
Key Parts of a Rock-Solid Subcontractor Contract
At a minimum, your contract should define your scope of work clearly so that you’re not held responsible for elements of the build you didn’t touch. It should also include a strong indemnification clause: language that shields you from having to defend claims that should be the GC’s responsibility.
Another contract component to include is a requirement for mediation before litigation. Trials are time-consuming and expensive, after all. Mediation is significantly faster and less costly, often resulting in resolutions that don’t require anyone to admit fault. By requiring mediation in your contracts, you give yourself a better chance of resolving disputes without draining your business financially.
Contracts can also include limitations on liability. Without those, subcontractors can be forced to pay legal fees that are wildly disproportionate to any actual damages. Setting caps on exposure or specifying that legal fees must be tied to proven damages can prevent situations where you’re spending six figures defending a $10,000 claim, for example.
The Important Role of Risk Mitigation
Beyond contracts, risk mitigation should be part of your daily operations.
- Make sure you have the right insurance; not just general liability, but also professional liability if your trade calls for it.
- Maintain detailed project records: scope, communications, photos, timelines, and inspections. These records can be invaluable in proving that you met your responsibilities and help resolve disputes faster.
- Stay up to date on changes in local and state construction laws. Legal environments shift, and your risk profile can change with them.
Of course, all of this hinges on working with legal counsel who understands the construction industry! Not every attorney knows how to navigate the realities of subcontractor relationships, change orders, or passthrough claims. Spend a few hours with a lawyer who specializes in this space, and you’ll be better equipped to avoid costly mistakes down the road.
If you’re a subcontractor heading into your busiest stretch of the year, take a moment to make sure you’re protected. Legal risk may not be visible on the job site, but once a lawsuit hits, it may become the only thing you can focus on. But with the right legal tools in place, you can stay out of the courtroom and focus on your craft and your clients.
Need help reviewing your contracts or navigating a current dispute? Our team has experience with the specific challenges subcontractors face in regard to passthrough liability. Contact us today to schedule a consultation and protect your business before the next job begins.