Question 1

What is AIA A401 and when should it be used?

Accepted Answer

AIA A401-2017 is the American Institute of Architects' standard form subcontract between a general contractor and a subcontractor, designed to pair with AIA A201-2017 General Conditions and AIA A101 / A102 / A103 owner-contractor agreements. A401 flows down the general conditions to the sub, including notice provisions, change-order procedures, payment terms, dispute resolution, and termination rights. It should be used whenever the prime contract is on an AIA form — which is the majority of commercial private construction in the U.S. A401 is favored because it is known to lenders, insurers, bonding companies, and courts; using a non-AIA template can trigger bond rider issues. A401 does not fit federal prime contracts (which require FAR flow-down) or heavy-civil projects (where ConsensusDocs or owner-drafted forms are more common).

Question 2

How do lien waivers work on a construction subcontract?

Accepted Answer

A lien waiver is a document in which the sub (and its lower-tier subs and suppliers) gives up the right to file a mechanic's lien in exchange for payment. The subcontract should require a conditional progress lien waiver before each progress payment (signed at invoice but effective only upon payment clearing the bank), and a final unconditional lien waiver before releasing retainage. Several states require statutory-form waivers: California Civil Code §§ 8132 (conditional progress), 8134 (unconditional progress), 8136 (conditional final), and 8138 (unconditional final); Texas Property Code Chapter 53; Florida Statutes § 713.20. Using the wrong state's form or modifying the language voids the waiver. The prime should also require lower-tier waivers from all suppliers and sub-subs that have lien rights before issuing any payment to the sub.

Question 3

What is progress billing on an AIA G702/G703 schedule of values?

Accepted Answer

Progress billing is the standard payment method on construction subcontracts: the sub submits an application for payment monthly (or at agreed milestones) listing the percentage of each line item completed, the cumulative amount earned, retainage withheld (typically 5-10%), and the amount due this period. AIA Document G702 is the summary application; G703 is the continuation sheet breaking down each scheduled line item. The architect certifies the amount due, the prime bills the owner, and upon receiving owner payment the prime pays the sub (typically within 7-10 days). The schedule of values must be front-loaded carefully — putting too much value in early line items invites owner scrutiny and can trigger schedule-of-values rejections by the architect. Stored-materials billing (materials on-site but not yet installed) requires inventory verification and bailment agreements in most jurisdictions.

Question 4

What insurance should a construction sub carry?

Accepted Answer

Minimum coverage on commercial construction subs: commercial general liability (CGL) of $1M per occurrence / $2M aggregate (higher on large projects, $5M+ on wrap-ups); auto liability of $1M combined single limit; workers' compensation (statutory) and employer's liability of $1M; professional liability (E&O) if the sub provides design-build or design-assist services; excess/umbrella liability of $5M for higher-risk trades (demolition, structural, crane). On federal projects, add cyber liability if the sub has access to CUI (Controlled Unclassified Information) under DFARS 252.204-7012. The prime and owner must be named as additional insureds on a primary, non-contributory basis using ISO endorsements CG 20 10 (ongoing operations) and CG 20 37 (completed operations). Include waiver of subrogation in the sub's favor on workers' comp so the sub's carrier cannot sue the prime for reimbursement.

Question 5

What is builder's risk insurance and who provides it?

Accepted Answer

Builder's risk (course-of-construction) insurance covers physical loss or damage to the project itself during construction — fire, wind, theft of materials, water damage. It typically covers the building, fixtures, and materials stored on-site or in transit, up to the total project value. Builder's risk is normally provided by the owner as part of the financing package, but on some projects the prime contractor purchases it. The policy should name the owner, prime, and all subs as loss payees, include a waiver of subrogation, and cover all risks of physical loss (special-form coverage, not named-peril). The subcontract should specify who provides builder's risk, require the sub to cooperate with any claim, and address deductible responsibility (typically 1-5% of the loss, allocated by fault).

Question 6

When do OCIP and CCIP wrap-up policies apply?

Accepted Answer

Owner-Controlled Insurance Programs (OCIP) and Contractor-Controlled Insurance Programs (CCIP) are single master insurance programs covering the owner, prime contractor, and enrolled subcontractors on a large project. They typically apply to projects over $50-100 million in construction value. Wrap-ups provide CGL, workers' compensation, and excess liability covering all on-site operations. The subcontract should specify whether the project is wrap-enrolled; if yes, the sub's bid should reflect the insurance credit (the sub does not need its own CGL/WC for this project), the sub's policies apply only to off-site operations and completed operations after substantial completion, and the sub must comply with the wrap-up manual (safety, claims, enrollment, audit). Exclusions from wrap-up (typically professional liability, auto, tools and equipment) must still be carried by the sub.

Question 7

How should change orders be handled?

Accepted Answer

All scope, time, or price changes must be authorized in writing through a formal change order (CO) before the work is performed. The subcontract should: require written authorization from the prime's designated representative (typically the project manager or superintendent); specify how pricing is determined — lump sum, unit price from Exhibit B schedule of unit prices, or time-and-material with markup (typically 15-20% on T&M); require time-impact analysis for any schedule extension claim; establish a 30-day notice deadline for claims or waiver; and incorporate the owner-contractor change-order process per AIA A201 § 7 on AIA projects. Directed change orders (where the prime orders the sub to proceed before pricing is agreed) are a frequent source of dispute; the subcontract should require the sub to proceed on directed changes but preserve its right to price adjustment, documented with daily reports and cost backup.

Question 8

What is pay-when-paid vs pay-if-paid and which applies?

Accepted Answer

Pay-when-paid is a timing provision: the prime pays the sub within N days after the prime receives payment from the owner. The sub still has a contractual right to payment even if the owner never pays; the prime just gets to delay payment until owner pays. Pay-if-paid is a condition-precedent provision: owner payment is a condition of the prime's obligation to pay the sub at all — if the owner never pays, the sub never gets paid. Pay-if-paid shifts owner-insolvency risk from the prime to the sub. Enforceability varies: California (Wm. R. Clarke Corp. v. Safeco), New York (West-Fair Electric), and North Carolina refuse to enforce pay-if-paid on public-policy grounds or construe ambiguous language as pay-when-paid timing. Other states enforce it if the language is clearly drafted as a condition precedent. Federal prime contracts under the Prompt Payment Act (31 U.S.C. § 3905) override pay-if-paid — payment within 7 days is mandatory.

Question 9

What licensing is required for construction subs?

Accepted Answer

State contractor licensing varies widely. California Business & Professions Code § 7031 requires a specific trade classification (C-10 electrical, C-36 plumbing, C-8 concrete, etc.) and bars unlicensed contractors from suing to collect or enforcing liens. Nevada, Arizona, and Florida have similar strict licensing statutes. Other states (Colorado, Wyoming, Massachusetts) do not have a state contractor license but have municipal licensing. Federal projects require SAM.gov registration, Davis-Bacon compliance for projects over $2,000, Service Contract Act compliance for services over $2,500, and EEO/AAP programs for contracts over $10,000. Small-business set-aside contracts require SBA certification as small, 8(a), HUBZone, WOSB, SDVOSB, or DBE. The subcontract should require the sub to represent license/certification status, maintain it through project completion, and indemnify the prime for damages from unlicensed or uncertified work.

Question 10

How does subcontractor default insurance work?

Accepted Answer

Subcontractor default insurance (SDI, often sold as SubGuard) is an insurance product purchased by the prime contractor that covers losses caused by subcontractor default — the prime's excess cost to complete the sub's work, plus consequential delay damages, up to the policy limit (typically $20M-$50M per project). SDI replaces traditional payment and performance bonds in many large commercial projects. Unlike a bond where the surety investigates and may challenge a claim, SDI pays the prime directly and subrogates against the defaulting sub. The subcontract on an SDI-covered project should require the sub to enroll in the SDI program, pay its pro-rata share of the premium, cooperate with any investigation of default, and accept that SDI replaces any bond requirement. SDI typically requires the sub to be pre-qualified by the carrier before enrollment.

Question 11

What are flow-down obligations?

Accepted Answer

Flow-down is the contractual mechanism that pushes the prime contract's material terms down to the sub. On federal projects, FAR 52.244-6 mandates flow-down of specific clauses (Davis-Bacon, Service Contract Act, EEO, disability, small business subcontracting) to every subcontract above various dollar thresholds. On AIA projects, AIA A401 § 1.3 incorporates the AIA A201 General Conditions by reference and binds the sub to the same obligations the prime owes the owner. Flow-down ensures the sub cannot claim ignorance of notice deadlines, quality standards, warranty obligations, or dispute procedures — these all flow through. The subcontract should list the specific flow-down clauses (on federal work, name each FAR clause by number), attach the prime contract as an exhibit, and require the sub to certify it has read and accepts the flow-down terms. Ambiguous flow-down language is interpreted in favor of the sub, so the drafter must be explicit.

Question 12

What dispute resolution applies to construction subs?

Accepted Answer

Construction subcontracts typically require mandatory mediation as a condition precedent to arbitration or litigation, followed by binding arbitration under AAA Construction Industry Rules or JAMS Streamlined Arbitration Rules. On AIA projects, AIA A401 § 6 and A201 § 15 set out the architect-as-initial-decider process followed by mediation and arbitration. Large commercial projects increasingly use dispute resolution boards (DRBs) for real-time resolution of claims during construction. Choice-of-law and venue clauses matter: most construction subcontracts specify the law of the state where the project is located and venue in the project county. Prevailing-party attorneys' fees clauses are enforceable in most states and incentivize early resolution. Jury-trial waivers are enforceable in most commercial contexts. For federal disputes, the Contract Disputes Act sets out a specific certification and claim process that subs must follow through the prime.

Construction Subcontractor Agreement Template

What Is a Construction Subcontractor Agreement?

When to Use a Construction Subcontractor Agreement

Key Provisions

Scope of work

Progress billing

Insurance

Lien waivers

Indemnification

Flow-down

Change orders

Termination

Legal Considerations

Construction-Specific Issues

How to Fill Out the Agreement

Identify parties and project

Attach prime contract and plans

Scope and schedule of values

Progress billing terms

Insurance and wrap-up

Lien waiver schedule

Change-order and claims procedure

Termination and warranty

Frequently Asked Questions

Create your construction subcontract in under 10 minutes.