Top 4 contract risks for commercial electrical subcontractors

A commercial electrical subcontract can run to sixty pages, and most of it won't decide whether the job makes money. Four kinds of clauses usually do: what's in your scope, when you get paid, who pays for claims, and who carries the delay.

They're also the ones that come up again and again when we talk with electrical contractors. Here's what each one looks like, and what to ask for before you sign.

1. Scope creep and undefined work

Electrical scope is easy to describe loosely and expensive to describe badly. "All electrical work necessary for a complete and operational system," "as needed," "as directed by the GC" and "coordinate with other trades" can each pull in work you never priced: temporary power for other trades, low-voltage systems, equipment connections, or design that nobody finished.

What to ask for:

• A detailed, itemized scope exhibit. List what's included and what's excluded, by system, drawing and specification section. Exclusions matter as much as inclusions.
• Written change orders before extra work. If the subcontract says you'll do "as needed" or "as directed" work, tie it to a written, priced change order, or at least a written directive that preserves your right to be paid.
• A clear owner for RFIs and design clarifications. When an answer to an RFI changes your work, it's a change. When a field superintendent tells you to do something differently, confirm it by email the same day.

Unpriced scope rarely shows up as one big loss. It shows up as dozens of small ones that nobody wrote down. Extra work, no change order and "Complete and operational" go deeper.

2. Pay-when-paid and pay-if-paid

These two clauses sound alike and work very differently.

• Pay-when-paid is about timing. The GC pays you after the owner pays the GC. Many courts read it as giving the GC a reasonable time to collect, not a right to wait forever.
• Pay-if-paid makes the owner's payment a condition of yours. If the owner never pays, the GC may never have to either, which moves the owner's credit risk onto you.

Enforceability depends on the state. California and New York courts, for example, won't enforce pay-if-paid clauses, while other states will if the wording is clear. Many states also have prompt payment laws that set deadlines for paying subs once the GC has been paid.

What to ask for:

• A fixed payment deadline, such as 30 days after your invoice, with an outside date that applies whether or not the owner has paid.
• Pay-when-paid, not pay-if-paid, if the GC won't accept a fixed deadline.
• Your lien and bond rights intact. Check that nothing else in the subcontract waives them in advance.

Check the law of the state where the project is before you sign, and the law the subcontract chooses, since they may not be the same. California's prompt payment laws.

3. Indemnification and insurance overreach

The indemnity clause decides who pays when someone is hurt or property is damaged. Broad versions ask you to defend and indemnify the GC and owner for any claim "arising out of" your work, including claims caused partly, or even entirely, by them. Most states have anti-indemnity laws for construction contracts, but they differ widely in what they prohibit, and many subcontract forms are written to reach as far as each state allows.

The insurance exhibit usually comes with it: additional insured status for the GC, owner and others, for ongoing and completed operations, on a primary and non-contributory basis, with a waiver of subrogation. Each of those can cost money on your premium or narrow the coverage you have left for yourself.

What to ask for:

• Mutual or proportional indemnity. You cover losses to the extent you caused them, and the GC does the same for you.
• Insurance requirements priced into your bid. Additional insured, completed operations and primary and non-contributory endorsements aren't free.
• A broker review of the indemnity, not just the insurance exhibit. A standard commercial general liability (CGL) policy covers some liability you take on by contract, but not all of it, and endorsements can narrow it further. Ask whether your policy covers the indemnity as written.

The insurance page of your subcontract, explained.

4. Schedule and delay risk

Electrical work runs through the whole job, from underground and rough-in to energization and commissioning, so the electrical sub is often the one standing when the schedule slips. Watch for:

• Liquidated damages passed down from the prime contract, at the owner's daily rate, with no cap and no apportionment between trades.
• No-damages-for-delay clauses that give you more time but no money when the owner or GC causes the delay. Some states limit these, particularly on public work.
• Short notice deadlines for delay claims, with late notice waiving the claim.
• Acceleration by instruction. Being told to "do whatever it takes" to hold the date, without a written directive that says who pays.

What to ask for:

• A cap on liquidated damages, limited to delay you cause and shared fairly when several trades contribute.
• Excusable delay and time extensions for owner- and GC-caused delays, weather and documented supplier delays.
• Written delay notices sent on time, every time. Put the notice deadline on the job calendar at start-up. A strong claim with a late notice can be worth nothing.
• A written directive and cost agreement before you accelerate: added crews, overtime or out-of-sequence work.

Liquidated damages, consequential damages, and why a low LD can be your friend.

Before you sign: a four-point check

1. Scope. Is there an itemized scope exhibit with exclusions, and does extra work require a written change order?
2. Payment. Is there a fixed payment deadline, and is the clause pay-when-paid rather than pay-if-paid?
3. Indemnity and insurance. Is the indemnity limited to your share of fault, and has your broker confirmed your policy covers it?
4. Schedule. Are liquidated damages capped and apportioned, and do you know every notice deadline?

You won't win every point on every job. Knowing where the risk sits lets you price what you can't change. For a longer list, see 10 subcontract clauses that cost subcontractors the most, and if you work on data centers, 10 contract risks on data center jobs.

For general information only, not legal advice. Contract terms vary by transaction and project, and the law varies by state.