The FairBuild
Contract Negotiation Guide
For Subcontractors
10 Provisions That Cost You Money — And How to Fix Them
Kendall Hoyd, Co-founder FairBuild AI
For over 30 years I’ve been an owner or executive for a component manufacturer, framing company, a company that did flooring, cabinets and countertops, and a roofing and solar company.
When I first started, I reviewed the agreements I got from general contractors but found out the hard way that I didn’t review them carefully enough. After getting taken to the woodshed on a particularly large project, I started spending real time with agreements. It was educational but also it was time not spent running the business.
Here’s what I learned: virtually every agreement contains more than one deal-breaker and at least 10 real problems that cause catastrophic risk to accumulate in the background. The cost of not managing that risk is invisible. Until something goes wrong.
Here are some things to keep in mind:
This guide covers the 10 provisions I see often and that are most likely to cause financial damage. For each one: what it means, why it matters, the dollar impact, what to check, and the specific redline language I’d propose.
| Your customer will negotiate if you come to the table with reasoned and reasonable alternatives. |
Getting Started
If you’ve never tried to negotiate an agreement with one of your customers, but would like to start, we can help you get the process going.
Here’s how to get the ball rolling:
In all cases, I approach the GC in a non-confrontational way by letting them know that we have some concerns with some aspects of the agreement they’ve sent us, and we’d like them to look at them. In no case do I ever give them the feeling that I don’t appreciate their business or that I’m aggrieved by the contract they sent me. It’s just that we have learned to make sure we do business under contract language that doesn’t create problems for us later.
If it’s a GC where you’ve signed their agreement with no pushback in the past, you probably need to explain why you’re negotiating for better terms now. Chances are you’ve decided to work on this aspect of your business for a reason. It might be because you’ve recently had a dispute that could have turned out better, you want to set your business on a path for future growth and this is part of that, or that you’ve already grown to the point where you need better risk management.
(Your customers will find you more credible and more professional if you negotiate your agreements than if you don’t.)
What I recommend is to start with the areas that create high exposure and where you can succeed without having to get into too much legal jargon. Delivery schedule, pay-if-paid, continued performance and retainage are good examples. Bad terms on these points can and often will cost your business margin and cash flow in a real way and most GC’s will understand your concerns.
Send any questions you might have to contracthelp@fairbuild.ai. We’ll be happy to help!
01
Pay-If-Paid
⚠ HIGH RISK
WHAT IT IS
Unless you’re paid C.O.D., you are a bank. You are extending credit to the GC and the Owner and financing part of the project. Pay-if-Paid means if the Owner doesn’t pay the GC, you don’t get paid. Period. It doesn’t matter if the work was perfect. By agreeing to this clause, you are removing the GC’s financial responsibility and betting the amount of your contract on the Owner’s credit.
WHY IT MATTERS
I learned this one the hard way. Collections were two months past due on a project that had paid reliably for a year. When I called the GC, he told me the owner had stopped paying them. He also said we couldn’t pull off the job without being liable for delay costs and consequential damages. He was right — the contract said exactly that. We finished the work, hired a lawyer, filed a lien, and after about a year, recovered about 65% net of legal costs. We didn’t fail operationally. We failed contractually.
THE DOLLAR IMPACT
| If you get caught in this situation, the working capital implications can become disastrous. On the job I mentioned above, we had $180K of unpaid invoices when our work was complete. Add on top of that the amount of time and legal costs we spent collecting what we were owed, and it was a really bad situation. |
✓ REVIEW CHECKLIST
| ☐ Search for the words “contingent, conditional, condition precedent” If payment is “contingent upon” receipt from the owner, it’s Pay-if-Paid. |
| ☐ Is the Owner a reputable commercial entity or a shell LLC created for this project? You are going to be a creditor on the project, so it’s best to know who you are lending money to. |
| ☐ Is there a continued performance requirement in the agreement? (See 02 – Continued Performance). |
→ PROPOSED REDLINE LANGUAGE
| “Payment shall be due within 30 days of Subcontractor’s invoice date. Payment shall not be contingent upon Contractor’s receipt of payment from Owner or any third party. Interest at the rate of 1.5% per month shall accrue on amounts unpaid beyond the due date.
Fallback: “Payment terms are Net 30 days. If Contractor fails to pay within 45 days of invoice, Subcontractor may suspend work without facing adverse consequences until payment is made in full.
|
| Even if pay-if-paid is not legal in your state, don’t leave it to chance that you have to expend fees on a lawyer to try and prove it. Also, pay-if-paid can affect your lien rights in many states. Know the rules in the state the project is being built in.
You may have to be flexible on the payment terms. Project financing red tape can make it hard to get a check out in less than 45-50 days. |
02
Continued Performance & Suspension Rights
⚠ HIGH RISK
WHAT IT IS
Even if you negotiate Pay-if-Paid down to Pay-when-Paid, you haven’t won the war. If you don’t have a clear right to suspend work for non-payment, you could be forced to stay on the job, funding labor and materials even if you haven’t been paid in 90 days. Combine that with liquidated damages, and you’re trapped in a cash-flow nightmare.
WHY IT MATTERS
Without suspension rights, here’s what you’re agreeing to: continue working at your own expense, with no timeline for payment, while potentially accruing liability for schedule delays if you stop. That’s not a subcontract. That’s forced financing.
THE DOLLAR IMPACT
| A sub running $50K/month labor cost on a project with no suspension rights and a 90-day payment delinquency is financing $150K of the GC’s project involuntarily — at their own cost of capital. |
✓ REVIEW CHECKLIST
| ☐ Does the agreement give you an explicit right to suspend work for non-payment? |
| ☐ Is there a specific timeline (e.g., 45 days past due) that triggers your right? |
| ☐ Are you protected from liquidated damages or other adverse consequences for exercising that right? |
→ PROPOSED REDLINE LANGUAGE
| “If any properly submitted invoice remains unpaid 45 days after receipt by Contractor, Subcontractor may suspend work until all overdue amounts have been paid. Subcontractor shall not face any adverse consequences under any other provision of this agreement for this suspension, and the schedule shall be adjusted accordingly.”
Fallback: In my mind, there is no fallback on this one. For me, it’s a deal breaker. |
| Some contractors will not give on pay if paid. If that is the case, right to suspend work language is critical. In my mind, lack of it is a dealbreaker. You also need to be certain that your lien rights are protected. Pay-if-paid can preempt your lien rights in some states. This language turns your right to be paid (eventually) into a right to protect your balance sheet. |
03
Indemnification & Hold Harmless
⚠ HIGH RISK
WHAT IT IS
Indemnification clauses come in three flavors: limited-form (you cover only your own negligence), intermediate-form (you cover losses unless the GC is solely at fault), and broad-form (you cover losses even when the GC is solely at fault). Broad-form indemnity is unenforceable in most states for construction contracts, but intermediate-form is alive, well, and in most subcontracts you’ll see. If you assume your insurance will absorb the cost, you’re in for a painful surprise. Contractual liability coverage has limits, exclusions, and deductibles, and your premiums will reflect every claim.
WHY IT MATTERS
Most jobsite losses involve shared fault. Under intermediate-form indemnity, partial fault by the GC doesn’t get you off the hook. You owe the full loss unless the GC was the sole cause. And if the clause includes a duty to defend, you can be paying attorney fees on claims that have little or nothing to do with your work. Defense obligations trigger earlier and broader than indemnity obligations, and the legal bills can exceed the underlying damages.
THE DOLLAR IMPACT
| An existing utility is damaged, at least partly due to bad instructions from GC’s superintendent, and the repair cost is $200K. The GC tenders the claim to you citing the intermediate form indemnification. The contract says you’ll indemnify for “any and all claims arising out of or related to the work”. Legal fees alone will run $50K or more before you get to the merits. |
✓ REVIEW CHECKLIST
| ☐ Is the GC’s sole negligence the only situation where your indemnity doesn’t apply? |
| ☐ Does it include a duty to defend (paying the GC’s legal fees upfront)? |
| ☐ Is indemnification limited to situations where your scope of work is directly involved? |
→ PROPOSED REDLINE LANGUAGE
| “Subcontractor shall indemnify Contractor only to the extent of Subcontractor’s proportionate share of negligence or fault, as determined by a court of competent jurisdiction or by mutual agreement. Subcontractor’s duty to defend Contractor, if any, shall be limited to claims arising from Subcontractor’s proportionate share of negligence or fault, and Subcontractor shall have no obligation to defend Contractor against claims arising from Contractor’s own negligence or that of others.” |
| The indemnity that covers all but the contractor’s sole negligence, and a duty to defend that extends beyond your own negligence are too broad and most GCs know it. They may contest limiting the defense obligation to a reimbursement after the fact because they want their lawyers to get paid using your money. |
04
Retainage Terms
⚠ HIGH RISK
WHAT IT IS
Retainage is the percentage of each monthly payment withheld to ensure final performance, typically 5-10%. It is often held until “project completion”. The problem is that “project completion” usually means the entire project, not your scope.
WHY IT MATTERS
If you’re a drywall sub, and you complete your work in month 4, and the project reaches substantial completion in Month 18, your retainage cash would sit in someone else’s bank account for at least 14 months after you finished your last day on site. The interest cost of that is high (see below), but the cost of not having that cash to deploy on other projects could be disastrous.
THE DOLLAR IMPACT
| $2M subcontract × 10% retainage = $200K held. 14 months × 7% interest = ~$10,500 in carrying cost that came directly out of your margin. Multiply across every project you’re running simultaneously: a $10M/year sub with $500K average retainage exposure is losing $25-30K+ annually in carrying costs alone. |
✓ REVIEW CHECKLIST
| ☐ What percentage is retained? (Anything over 5% is aggressive; some states cap it at 5% by statute) |
| ☐ Is release tied to YOUR scope completion or overall project completion? |
| ☐ Is there a specific timeline for release? Not just “upon completion”? |
→ PROPOSED REDLINE LANGUAGE
| “Retainage shall not exceed 5% and shall be released within 30 days of Contractor’s written acceptance of Subcontractor’s completed scope, regardless of the status of the overall project.”
The importance of the retention hold period depends on where you are in the construction schedule. If your trade is near the end of the project, it’s not as big of a deal to wait until project acceptance. There’s still meaningful risk of a long delay though. |
| This is a negotiation most GCs expect. They’re used to subs pushing back on retainage terms. Cap it at 5% and tie release to your scope, not the project. They may argue your trade is riskier or that your company poses greater risk, but they still have safeguards, most notably they aren’t obligated to pay for work until they accept it. |
05
Change Order Markup
⚠ HIGH RISK
WHAT IT IS
It’s very common to see language like this: “For changes in the Work, Subcontractor shall be paid for actual costs incurred plus overhead plus profit of 15%.” If your normal markup on your bids is 15%, you are going to have a hard time making a profit.
WHY IT MATTERS
Change orders can be a substantial part of the final price and cost for a job. If that happens and the change order is marked up at half of what your bid was, even if you did everything else right, your margin on the job will drop materially.
THE DOLLAR IMPACT
| If your company does $10M revenue with 30 installers at 40% margin, they normally earn $500 job profit per day per person. On change order work priced at 15% markup, they earn $166 per day per person. If you get a change order equal to 25% of the job, Your job profit margin just went from 40% to 35%. |
✓ REVIEW CHECKLIST
| ☐ What markup percentage does the agreement specify for change orders? |
| ☐ Is it at or near your normal markup? (If not, you’re doing change order work at a discount) |
| ☐ Does the agreement allow you to dispute the markup before performing the work? |
→ PROPOSED REDLINE LANGUAGE
| “Change order work shall be priced at Subcontractor’s actual costs incurred plus overhead and profit at the rate of [X]%, where [X] reflects Subcontractor’s standard markup for similar work. Subcontractor shall not be required to perform change order work at a markup below its standard rate without separate written agreement. |
| Why put yourself in the position of hoping you don’t get a change order, or hoping the contract won’t be enforced? In the long run, your markup must match your cost structure.
GCs are often limited to a 10 or 15% markup on change orders in the prime contract with the owner, but that is around the normal margin a GC plans for on a project. Their limitation doesn’t have to be your limitation.
Over the years, I have gotten push back on this a few times, but as far as I can remember, I have always been able to get some improvement on this point |
06
Change Order Continued Performance
⚠ HIGH RISK
WHAT IT IS
Change order leverage is fully in the hands of the GC when your agreement says: “Subcontractor shall continue the Work and maintain the Progress Schedule during any dispute mitigation or resolution procedure.” You can be handed a change order and required to do the work with no agreement on price.
WHY IT MATTERS
Even if you have the right to suspend work for non-payment of in-scope work, the change order falls outside that protection because the price is disputed. It’s unlikely the GC will give you the right to stop work over a change order price — because then you’d have all the leverage.
THE DOLLAR IMPACT
| An unapproved $200K change order at disputed pricing, performed under continued-performance obligations, with a 60-day resolution timeline = $200K of your cash deployed with no certainty on margin or recovery timeline. |
✓ REVIEW CHECKLIST
| ☐ Does the agreement require you to perform change order work before price is agreed? |
| ☐ Is there a mechanism for interim payment (T&M) during price disputes? |
| ☐ Is there a deemed-approval timeline for submitted costs? |
→ PROPOSED REDLINE LANGUAGE
| “In the event of a dispute regarding the pricing of any change order, Subcontractor shall perform the work on a time and materials basis at the following rates until final pricing is agreed: labor at $[]/hour per trade classification, materials at cost plus []%, and equipment at [___]/hour. Contractor shall pay Subcontractor for disputed change order work at these rates in the regular monthly payment cycle, regardless of whether final change order pricing has been approved.”
Deemed-approval clause: “Time and materials costs submitted by Subcontractor for change order work shall be deemed approved if not disputed by Contractor in writing within seven (7) business days of submission. Any disputed costs must be identified with specificity. Undisputed portions shall be paid in the next regular payment cycle.” |
| Change orders are a tricky area all around and you have to be careful both before and after you sign the subcontract. The key is getting the payment mechanism established upfront, and making sure you’re not waiting indefinitely for “approval” from the project superintendent or PM. Follow change order procedure as spelled out in the contract, including rigorous documentation of additional costs to have the best chance at getting paid. |
07
Schedule Control
⚠ HIGH RISK
WHAT IT IS
Virtually every subcontract says the schedule may be revised by the GC at any time, and you agree to comply “without additional compensation.” This gives the GC complete control of your delivery or installation schedule with no financial consequence to them.
WHY IT MATTERS
The start date for your scope moves out a month because the project is running behind. Then you get a revised schedule compressing your four-week duration to two weeks. Now you’re responsible for overtime, expediting, and other unplanned costs. If you can’t compress by 50%, you could face liquidated damages.
THE DOLLAR IMPACT
| A $500K scope planned for 12 weeks with a 14-person crew at $30/hr and 30% margin ($150K profit). The GC compresses your schedule to 8 weeks. Same crew, same scope — but now you’re running 273 overtime hours per week at 1.5x rate. That’s $4,100/week in excess labor cost, $32,800 total over the compressed duration. Your profit drops from $150K (30%) to $117,200 (23.4%). A 7-point margin hit even if you performed according to plan. |
✓ REVIEW CHECKLIST
| ☐ Does the agreement give the GC unilateral schedule control? |
| ☐ Are you entitled to additional compensation for schedule changes not caused by you? |
| ☐ Is there a mutual-agreement requirement for schedule modifications? |
→ PROPOSED REDLINE LANGUAGE
| “The Subcontractor shall have the right to review and approve the work schedule prior to commencement of its work and arrive at a mutually agreed-to schedule. The Contractor shall provide the Subcontractor with reasonable advance written notice of any proposed changes to the schedule that may affect the Subcontractor’s work which must be agreed to by the Subcontractor in writing by both Contractor and Subcontractor, with reasonable compensation adjustment as warranted. The Subcontractor shall not be liable for delays or disruptions caused by factors beyond its reasonable control, including changes to the schedule not agreed to in writing by the Subcontractor.”
Fallback (minimum) “Changes to the schedule in place as of the effective date of this agreement shall be made only by mutual agreement of Contractor and Subcontractor.” |
| I have gotten pushback on mutual agreement for schedule changes from the GC very few times over the last 30 years. It’s not only highly advisable but also an area where you can commonly get accommodation. If not, consider carefully whether you really want the job. |
08
Price Duration & Escalation
Short duration projects: LOW RISK
Long duration projects: HIGH RISK
WHAT IT IS
Most agreements either say nothing about price adjustments (your indefinite price commitment is a given) or explicitly state “no price increases for the duration of the project.” Either way, there is no mechanism for an increase if your direct costs skyrocket. This is a minor risk on short projects that have already started. It’s an extreme risk on long projects and projects that haven’t started yet.
WHY IT MATTERS
“But we gave a fixed price bid, isn’t that what we signed up for?” If everything goes to plan, sure. But if financing or permitting delays the project by 3 months, or weather pushes your start date back 60 days, your costs can change dramatically. In 2021, we saw costs jump 50% in that timeframe. That doesn’t just hurt, it wipes out your entire margin, maybe your company if the project is large enough.
THE DOLLAR IMPACT
| A $1M subcontract with 25% material content ($250K). A 90-day delay coincides with a 20% commodity spike. Your material cost just increased $50K. On a 30% margin job, that’s a 5-point hit — and you have no contractual right to recover it. |
✓ REVIEW CHECKLIST
| ☐ Is the contract silent on price adjustments? (Silence = no adjustment mechanism) |
| ☐ Is there an explicit “no price increase” clause? |
| ☐ Is there any provision for delays not caused by you that affect your costs? |
→ PROPOSED REDLINE LANGUAGE
| “In the event that the start of Subcontractor’s work is delayed more than 60 days from the date of this agreement due to causes not attributable to Subcontractor, Subcontractor shall have the right to adjust pricing to reflect documented increases in material and labor costs.”
For longer term projects, you may want a price escalation clause even if there is no delay. Consider your ability to survive in the event material prices move against you and whether you want to roll the dice. |
| My rule of thumb: if the contract is silent on price duration, I always try to add an adjustment mechanism for delays over 60 days. If the GC won’t budge, I pivot to negotiating upfront payment to buy out and store materials early. This is generally relevant only on projects that have more than a few weeks duration and/or start more than a few weeks from the contract signing date |
09
Lien Waiver Requirements
⚠ MODERATE RISK
WHAT IT IS
GCs require lien waivers with each pay application. Unconditional waivers release your lien rights immediately, even before you’ve received the payment. Conditional waivers release your rights only when the check clears.
WHY IT MATTERS
Some GCs require unconditional waivers submitted alongside your invoice, before you’ve been paid. You’re waiving the single most powerful collection mechanism you have before the money has actually hit your account. If the check bounces, gets delayed, or never arrives, you’ve surrendered your leverage.
THE DOLLAR IMPACT
| Your lien rights are often worth more than the legal remedies available through litigation. Waiving them prematurely on a progress payment means your collection position goes from a secured claim on the property to an unsecured breach-of-contract claim against the GC. The entire amount of your claim is at significant risk. |
✓ REVIEW CHECKLIST
| ☐ Are you being asked for unconditional waivers before receiving payment? |
| ☐ Does your state have statutory waiver forms? (CA, TX, and others do — use them) |
| ☐ Does the waiver amount match the payment amount, not the total contract value? |
→ PROPOSED REDLINE LANGUAGE
| “Subcontractor shall provide a conditional lien waiver with each payment application. Unconditional lien waivers shall be provided only upon confirmed receipt of payment for the corresponding billing period.” If for some reason, the GC insists on unconditional waivers, then you must insist on adding: “Unconditional lien waivers shall not be required until five (5) business days after Subcontractor’s confirmed receipt of payment for the corresponding billing period.” |
| Two rules: (1) Never sign an unconditional waiver until payment has cleared your account. (2) Make sure the waiver amount matches the payment amount. Any GC who pushes back on a conditional waiver tied to actual receipt of payment is telling you something about how they intend to manage the process.
These aren’t aggressive negotiating positions. They’re basic financial controls. In the end the credit support for the financing you are providing (costs incurred up front, payment later) relies on lien rights. Make sure they are not compromised! |
10
Flow-Down / Incorporation by Reference
⚠ MODERATE RISK
WHAT IT IS
Flow-down clauses bind you to all terms of the prime contract between the GC and owner. It’s a document you may never have seen. The language looks boilerplate: “Subcontractor agrees to be bound by all terms and conditions of the Prime Contract, to the extent applicable to Subcontractor’s work.”
WHY IT MATTERS
The prime contract may include liquidated damages of thousands of dollars per day for schedule delays, insurance requirements exceeding your coverage, warranty periods of 3-5 years, dispute resolution in a jurisdiction 2,000 miles from your office, performance bond requirements and more. You’ve agreed to all of it without reading any of it.
THE DOLLAR IMPACT
| You might have a $50K subcontract and be exposed to $10K/day liquidated damages for being late due to the flow down of liquidated damages. Come in a week late and you get paid nothing. |
✓ REVIEW CHECKLIST
| ☐ Does the subcontract refer to the prime contract? Have you requested a copy? |
| ☐ Have you identified every prime contract provision that flows down to your scope? |
| ☐ Are external documents (specs, schedules, safety plans) incorporated by reference without being attached? |
→ PROPOSED REDLINE LANGUAGE
| “The terms and conditions applicable to Subcontractor’s work shall be limited to those expressly set forth in this Agreement and the plans and specifications identified herein. No other documents, including but not limited to the Prime Contract between Contractor and Owner, shall be incorporated by reference or otherwise binding upon Subcontractor.”
Fallback “Only those provisions of the Prime Contract that directly relate to Subcontractor’s scope of work shall apply to Subcontractor. Contractor shall identify in writing all such provisions prior to execution of this Agreement. Any Prime Contract provision not specifically identified shall not be binding upon Subcontractor.”
Last fallback: Compare requirements that apply to you in the prime contract to those that apply to you in your subcontract. |
| This is one that’s easy to skip over, because worst-case scenarios seem rare. They are, but they tend to be big hitters when they occur. |
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