It happens all the time. You hire a subcontractor, they perform work and its less than stellar, to say the least. Depending on your subcontract agreement you’re left with a few choices. First, you can pay the sub for the work, terminate them, and get a new subcontractor to correct the work. Second, you can withhold payment, notify the subcontractor and demand that it corrects the work. Third, you can withhold payment, terminate the subcontractor, and chargeback any correction or completion costs to the subcontractor.
Whenever possible, the best option is option two because it is the option that does not result in your termination of the agreement. In a breach of contract situation, whenever reasonably possible, you want to avoid being the party that terminates the agreement. This is because termination can be considered a material breach of the contract and if you terminate, you could create a “who breached first” situation. This is known as competing breaches and should be avoided because it can be unpredictable.
There should be a clause in your subcontract agreement that requires the approval of the subcontractor’s work from the general contractor and the Owner. That clause should allow you to withhold payment if the work is not approved and demand that any deficient work be corrected. A letter should be issued to the subcontractor referencing this clause in your contract and giving the subcontractor a reasonable time frame to correct the work. The letter should also inform them that the cost of any delays will be charged back to the subcontractor. Lastly, the letter should demand a response indicating whether the subcontractor intends to correct the work and state that failure to respond within the allowed time frame will be interpreted as the subcontractor terminating the agreement.
The subcontractor may argue that it is not required to perform due to nonpayment. Under this belief, the subcontractor may refuse to come to the job until it is paid. However, as explained above, a typical subcontract agreement allows payment to be withheld until deficient work is corrected. Also, both the Texas Property Code and Texas Government Code list specific steps that must be followed before a subcontractor can suspend work.
On private jobs the Texas Property Code § 28.009 (a) and (c) reads as follows:
(a) If an owner fails to pay the contractor the undisputed amount within the time limits provided by this chapter, the contractor or any subcontractor may suspend contractually required performance the 10th day after the date the contractor or subcontractor gives the owner and the owner’s lender written notice:
(1) informing the owner and lender that payment has not been received; and
(2) stating the intent of the contractor or subcontractor to suspend performance for nonpayment.
(c) A contractor or subcontractor who suspends performance as provided by this section is not:
(1) required to supply further labor, services, or materials until the person is paid the amount provided by this chapter, plus costs for demobilization and remobilization; or
(2) responsible for damages resulting from suspending work if the contractor or subcontractor has not been notified in writing before suspending performance that payment has been made or that a good faith dispute for payment exists.
As you can see, a subcontractor must give 10 days’ notice before suspending work. However, giving notice of suspension does not automatically absolve the Subcontractor from liability for damages caused by its suspension of work. A written notification of good faith payment dispute keeps the subcontractor on the hook. This means that a letter like the one referenced above will likely put the risk of suspension of the work on the Subcontractor. The Texas Government Code § 28.009 tracks similar language for public projects.
In short, if a subcontractor does defective work it is always best to give it written notice and demand it to correct its work. Give the subcontractor a reasonable time frame to correct the work and demand a written assurance that it intends to return to the project to make the corrections within the time frame. Lastly, inform the subcontractor that failure to correct the work and provide the assurances will be considered a termination of the agreement.
Nothing in this article is intended to be considered legal advice. If you have a specific problem or legal question please consult with your attorney. Kenneth Stephens can be reached at 832-930-0529 or firstname.lastname@example.org