Navigating Commercial Construction Subcontracts in Texas: Key Clauses Every Subcontractor Should Know
As a Texas attorney Certified in Construction Law by the Texas Board of Legal Specialization, I spend a significant amount of my time reviewing, drafting, and litigating commercial construction subcontracts. Texas is experiencing a massive commercial construction boom, but a booming market doesn’t mean you can afford to sign on the dotted line without reading the fine print.
General contractors (GCs) draft subcontracts to protect their interests, effectively transferring as much risk down the chain as possible. If you are a subcontractor, understanding the language in your agreements is the difference between a profitable job and a company-ending lawsuit.
Here are the key clauses in a commercial subcontract you need to be acutely aware of under Texas law.
- Scope of Work and “Flow-Down” Clauses
The most fundamental part of your subcontract is what you are actually hired to do. A poorly defined Scope of Work (SOW) is an invitation for scope creep and unpaid change orders.
Furthermore, you must look out for flow-down (or pass-through) clauses. These clauses state that the subcontractor assumes toward the GC all the same obligations, rights, and duties that the GC assumes toward the Owner in the prime contract.
What to look for: If there is a Flow-Down Clause (and there will be), then be sure to review the Prime Contract. You cannot agree to terms you haven’t seen. Ensure your SOW specifically excludes items you are not bidding on, and clearly outline the process for approving change orders before the extra work begins.
- Contingent Payment Clauses: Pay-If-Paid vs. Pay-When-Paid
These clauses dictate when you get paid, and the distinction between the two is vital.
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- Pay-When-Paid: This acts as a timing mechanism. The GC gets a reasonable amount of time to pay you after receiving funds from the owner. Even if the owner never pays the GC, the GC is still eventually liable to pay you.
- Pay-If-Paid: This is a risk-shifting mechanism. It states that the GC’s receipt of payment from the Owner is a condition precedent to paying you. If the owner goes bankrupt or refuses to pay, you do not get paid.
The Texas Nuance: Pay-if-Paid clauses are enforceable in Texas, but Texas Business & Commerce Code Chapter 56 provides some limited relief. The statute provides “safe harbors” for subcontractors to object to these clauses if the owner’s failure to pay is due to the owner’s insolvency, or if the subcontractor provides written notice objecting to the enforceability of the clause.
- Broad Form Indemnification
Indemnification clauses require you to defend and hold the GC and Owner harmless from liabilities, damages, and claims arising out of your work. GCs will often try to slip in “broad form” indemnity, where they ask you to indemnify them even if the damage was caused by the GC’s own negligence.
The Texas Nuance: Fortunately, Texas has a strong Anti-Indemnity Statute (Texas Insurance Code Chapter 151). For most commercial construction contracts, any provision attempting to require a subcontractor to indemnify a GC or Owner for their own negligence (whether sole or concurrent) is void and unenforceable. However, there are exceptions (such as claims for bodily injury to the subcontractor’s own employees), so the exact phrasing still requires careful legal review.
- Retainage Requirements
Retainage is the withholding of a portion of the contract price (typically 10%) until the project is substantially complete. The contract should clearly specify the retainage percentage and the conditions for its release.
The Texas Nuance: Texas Property Code Chapter 53 requires owners to withhold 10% statutory retainage. As a subcontractor, you must be incredibly diligent about your notice deadlines. To secure your mechanic’s lien rights on that retainage, you must send proper statutory notices, often before the retainage is even due to be paid. Do not let a contract clause override your statutory timeline to file a lien.
- Dispute Resolution, Venue, and Choice of Law
If a project goes south, how and where will the dispute be resolved?
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- Arbitration vs. Litigation: Subcontracts often mandate binding arbitration. Arbitration can be faster and more private, but it is also expensive and generally cannot be appealed.
- Venue: Out-of-state GCs will often try to insert a clause requiring that any lawsuit or arbitration take place in their home state (e.g., New York or California) and under that state’s laws.
The Texas Nuance: If you are working on a project located in Texas, Texas Business & Commerce Code Chapter 272 is your best friend. It voids any provision in a construction contract that requires the contract to be subject to the laws of another state, or requires litigation/arbitration to occur in another state. If the dirt is in Texas, the dispute stays in Texas.
Protecting your bottom line starts before you ever mobilize to the site. Taking the time to negotiate these clauses upfront saves immense time, money, and stress on the back end.
A quick legal review now can save you from a company-ending lawsuit later. If you are unsure about the language in a subcontract you’ve just been handed, don’t risk it. Contact us today to speak with Mr. Jacob D. Thomas, a Texas attorney Certified in Construction Law by the Texas Board of Legal Specialization at Saunders | Walsh, to ensure your rights are protected before you sign on the dotted line.
Disclaimer: This blog post is for educational and informational purposes only and does not constitute legal advice. Every contract is unique. Reading a blog post does not create an attorney-client relationship. Always consult with a qualified, Board Certified construction attorney regarding your specific legal matters.