Chapter 11

SUBCONTRACTORS AND MATERIALMEN

J. Kevin Bridston, Esq., Editor and Author

Holland & Hart LLP

SYNOPSIS

§ 11.1 DEFINITIONS AND DISTINCTIONS

§ 11.1.1—Subcontractors And Sub-Subcontractors

§ 11.1.2—Materialmen And Suppliers

§ 11.1.3—The Differences: The Importance Of Distinction

§ 11.1.4—Materials, Supplies, And Equipment

§ 11.2 CONTRACTING ISSUES

§ 11.2.1—Governing Law: Common Law Or The UCC

§ 11.2.2—Is There A Contract?

§ 11.2.3—Purchase And Delivery Orders

§ 11.3 SUBCONTRACTOR BIDS

§ 11.3.1—Binding Nature Of Subcontractor’s Bids

§ 11.3.2—Bid Mistakes

§ 11.3.3—Bid Shopping

§ 11.4 DUTIES AND LIABILITIES OF OWNER TO SUBCONTRACTORS AND

MATERIALMEN

§ 11.4.1—Economic Loss

§ 11.4.2—Express And Implied Duties Of The Owner

§ 11.4.3—Legal Theories Against The Owner

§ 11.5 DUTIES AND LIABILITIES OF CONTRACTOR TO SUBCONTRACTORS

AND MATERIALMEN

§ 11.5.1—Express And Implied Duties Of The Contractor

§ 11.5.2—Liabilities And Legal Theories

§ 11.6 DUTIES AND LIABILITIES OF OTHER SUBCONTRACTORS AND

MATERIALMEN

(10/07) 11-1

§ 11.7 DUTIES AND LIABILITIES OF SUBCONTRACTORS AND MATERIALMEN

TO OWNER

§ 11.7.1—Defined By The Contract

§ 11.7.2—In Warranty

§ 11.7.3—In Tort

§ 11.8 DUTIES AND LIABILITIES OF SUBCONTRACTORS AND

MATERIALMEN TO CONTRACTOR

§ 11.9 COMMON SUBCONTRACTOR CLAIMS

§ 11.9.1—Delay Claims§ 11.9.2—Acceleration§ 11.9.3—Changed Conditions§ 11.9.4—Change In Scope§ 11.9.5—Defective Plans And Specifications

§ 11.10 INDEMNIFICATION

§ 11.10.1—Indemnification Of The Contractor By Its Subcontractors

§ 11.10.2—Contractual Indemnity

§ 11.10.3—Common Law Indemnity And Contribution

§ 11.11 INSURANCE AND WAIVER OF SUBROGATION

§ 11.12 PAYMENT AND NONPAYMENT OF SUBCONTRACTORS AND

MATERIALMEN

§ 11.12.1—Pay-When-Paid Or Pay-If-Paid

§ 11.12.2—License Requirements And Payment

§ 11.12.3—Mechanics’ Liens

§ 11.12.4—Bonds

§ 11.12.5—Public Works

§ 11.12.6—Trust Fund Statute

§ 11.13 SUITS BY CONTRACTOR ON BEHALF OF THE SUBCONTRACTOR

(PASS-THROUGH CLAIMS)

§ 11.14 SUBCONTRACT CLAUSES: A CHECKLIST

§ 11.14.1—Documents Comprising The Subcontract

§ 11.14.2—Specifications

§ 11.14.3—Insurance And Bonds

§ 11.14.4—Manner Of Performance

The Practitioner’s Guide to Colorado Construction Law

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§ 11.14.5—Time Of Performance

§ 11.14.6—Payment Terms

§ 11.14.7—Indemnification

§ 11.14.8—Warranty

§ 11.14.9—Changes To Contracts

§ 11.14.10—Final Completion, Payment, And Release

§ 11.14.11—Termination

§ 11.14.12—Dispute Resolution

§ 11.15 CONCLUSION

§ 11.16 BIBLIOGRAPHY

§ 11.1.1—Subcontractors And Sub-Subcontractors

“[A]ny person who agrees to perform a substantial, specified portion of the work of con-

struction of a given building which is the subject of a general construction contract in accordance

with the plans and specifications of such contract is a subcontractor. . . .”1 More specifically, a

subcontractor is “one who has entered into a contract, express or implied, for the performance of

an act with the person who has already contracted for its performance.”2 In other words, a subcon-

tractor performs work necessary to complete all or some part of the work on a construction proj-

ect that another contractor has agreed to perform for the owner.3 A subcontractor’s agreement is

with the contractor rather than with the owner. A subcontractor may or may not also be required to

furnish the materials, supplies, and equipment needed to complete his or her part of the job.

A sub-subcontractor is a person who agrees to perform some portion of a subcontractor’s

work.

§ 11.1.2—Materialmen And Suppliers

Generally speaking, a materialman is a person who delivers materials, supplies, or equip-

ment used or expected to be used in a construction project. Materialmen typically do not perform

any substantial work on the project.4 Materialmen include persons who rent equipment for use in

but not incorporation into the project.5

§ 11.1.3—The Differences: The Importance Of Distinction

As is obvious from the definitions of subcontractors and materialmen, the primary distinc-

tion between materialmen and subcontractors is work provided to the project. The distinction

between a materialman and subcontractor can be important for lien rights. Subcontractors and

sub-subcontractors generally have lien rights against the project, as do materialmen supplying

materials directly to the owner, general contractor, or subcontractors. However, a materialman or

supplier to other materialmen generally will not have lien rights6 or protection under the Colorado

§ 11.1 • DEFINITIONS AND DISTINCTIONS

Subcontractors and Materialmen § 11.1.3

(10/07) 11-3

Public Works Act or the federal Miller Act.7 Mechanics’ Liens are discussed in more detail in

Chapter 19, “Mechanics’ Liens.”

§ 11.1.4—Materials, Supplies, And Equipment

Normally, it is easy to determine what constitutes materials, supplies, and equipment. If it

can be said that some item is to be incorporated into the project or used in the course of construc-

tion, that item can probably be characterized as materials, supplies, or equipment.8 Common

examples of materials include such things as lumber, bricks, tiles, shingles, paint, plumbing fix-

tures, and the like. Items that might ordinarily be considered to be materials may be treated as

subcontracted work on the project if they are custom made and/or have no value apart from the

project.9 Supplies are things that are consumed during a project without being incorporated into

the project. Examples include things such as gasoline to run generators and machinery, tools that

are consumed in the process of constructing a project (such as drill bits), and even groceries need-

ed to feed work crews.10 Equipment includes any tools, machinery, or other work aids used to

prosecute work on the project, and may include items such as scaffolding, generators, temporary

lights, power tools, heavy equipment, cranes, and virtually anything helpful to the work at hand

that might be rented or otherwise used on a temporary basis. Lessors of such equipment are

materialmen.11

§ 11.2.1—Governing Law: Common Law Or The UCC

A great deal of Colorado construction contract law is based on common law rather than

statutory law. Indeed, apart from the Uniform Commercial Code (UCC),12 there have been few

attempts to comprehensively codify the law of contracts in Colorado. To be sure there is a statute

of frauds outlining the circumstances where a writing is required to create an enforceable

contract,13 but beyond that and the UCC there is little statutory law governing contracting issues.

Thus, it is important to determine whether or not the UCC governs a contract. Where the UCC

does not govern, the contract will be governed by common law as defined by the Colorado courts.

(No attempt is made here to discuss contracting issues unique to federal projects, which may be

affected by a variety of statutory and regulatory provisions.)

The UCC only sometimes applies to construction contracts. Article 2 of the UCC, relating

to sales, is the only part of the UCC likely to have broad application to construction projects. In

most cases, the UCC will apply to materials, supplies, and equipment provided by materialmen.14

More often than not the UCC will not apply to subcontractors unless the “predominant purpose” of

the subcontract can fairly be characterized as a sale of goods.15 This is because Article 2 only

applies to the sale of goods, and does not apply to service contracts.16 “Goods” are things which

are moveable at the time of sale, C.R.S. § 4-2-105(1), which is usually a fair description of materi-

als and supplies, but not of subcontracted work. This can, however, be a fertile area for argument.17

§ 11.2 • CONTRACTING ISSUES

§ 11.1.3 The Practitioner’s Guide to Colorado Construction Law

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§ 11.2.2—Is There A Contract?

The most fundamental contracting issue is whether an enforceable contract exists between

the parties. The answer does not lie just in whether some written document labeled “contract”

exists, and the answer may differ significantly depending on whether the UCC applies. Although

it is preferable to have all construction agreements in writing, a construction contract need not be

in writing unless by its own terms it cannot be performed within a year.18 All that is required to

form a contract is an offer and acceptance, supported by consideration, and unless the agreement

is voided by an applicable statute of limitations a contract will be formed.19 Even if a contract

would otherwise be barred by the statute of limitations, the statute may be overcome by part per-

formance or other types of estoppel.20 More often than not, however, there will be a written con-

tract between the contracting parties.

The question of whether or not a contract exists comes up more often for materialmen

and suppliers, who are more likely to make deliveries based on phone, fax, or mail orders. Since

materialmen typically are governed by the UCC, they are bound by a different, more stringent

statute of frauds. If the price of products to be supplied is more than $500, then the contract must

be supported by “some writing sufficient to indicate that a contract for sale has been made

between the parties and signed by the party against whom enforcement is sought . . . .”21 The

writing itself need not be formal — it can even be in pencil on a scratch pad — so long as it evi-

dences a contract for the sale of goods, is “signed” (“a word which includes any authentication

which identifies the party to be charged”), and specifies a quantity.22

Generally, materialmen and their buyers fall within the UCC’s definition of “merchants,”

that is, persons who deal in goods of a particular kind or who have “knowledge or skill peculiar to

the practices or goods involved in the transaction. . . .”23 When dealing with a person who is a

merchant, the requirement of a signed writing is relaxed and may be replaced with a written con-

firmation of the contract, which is received and not objected to in writing within 10 days after

receipt.24 This “written confirmation” rule has given rise to what is commonly referred to as the

“Battle of the Forms,” discussed below.

A writing may not be required to enforce the contract where the party against whom

enforcement is sought admits in a pleading that a contract was made, where the goods are special-

ly manufactured for the buyer and are not suitable for sale to others (and the seller has substantial-

ly begun the process of manufacture or procurement), or for goods that are paid for (and the pay-

ment accepted by the seller) or received and accepted.25 Partial performance as a substitute for a

writing works only for “goods which have been accepted or for which payment has been made

and accepted.”26

§ 11.2.3—Purchase And Delivery Orders

Definition

A purchase order is a form used by purchasers to order goods from a supplier, and a

delivery order is a form used by a seller to confirm an order from a buyer. Purchase and delivery

orders typically consist of pre-printed forms with a front page where the essentials of the transac-

tion are spelled out, including such things as a description of the items being purchased or sold,

Subcontractors and Materialmen § 11.2.3

(10/07) 11-5

quantities, price, delivery date, and location. Purchase and delivery orders also often have detailed

terms and conditions spelled out in fine print, commonly on the back side of the form. In essence,

purchase and delivery orders are short-form contracts in which only the essential terms are negoti-

ated. As such, purchase and delivery orders are best suited to orders of materials and supplies,

where little more than item (i.e., paint), price, quantity, and place of delivery need be identified to

obtain the desired result.

Why a Purchase or Delivery Order

Purchase orders and delivery orders are often used when ordering materials and supplies

for a project. They are also occasionally but less often used in place of a subcontract for work to

be performed on a given project. The idea of using purchase and delivery orders instead of a sub-

contract is to save time and money that would otherwise be spent negotiating an agreement. In the

typical transaction where the parties have no problems with each other, purchase and delivery

orders actually accomplish this purpose. The “one size fits all” approach probably is fine when

small amounts and, therefore, small risks are involved. Unfortunately, many companies use these

forms for all transactions, including orders worth hundreds of thousands and sometimes even mil-

lions of dollars.

In a typical transaction, a contractor or subcontractor decides it needs a particular material

and issues a purchase order to a supplier. If the supplier simply accepts by filling the order, or even

if it signs the purchase order, there is no issue: the purchase order and its terms will control the

transaction. But what often happens in practice is that the purchase order is not the only form

involved. Very often the supplier has its own form which it delivers in response to the purchase

order, and the supplier’s form has its own set of detailed terms and conditions, some of which dif-

fer from the terms and conditions in the original purchase order. As long as things go smoothly and

both parties are happy with the transaction, the fact that the forms do not agree is not a problem.

What if something goes wrong, and both parties used different forms for the same trans-

action? A big mess results. One party, and often both parties, wind up with something different

from what they expected. For example, the contractor’s purchase order for a particular product

may have called for a two-year warranty, while the supplier’s form may have included a warranty

of only one year. If the product fails after 18 months, whose warranty language controls? The out-

come may differ depending on whether the UCC applies to the transaction. Where the UCC does

not apply, there may be no contract at all and the parties are stuck with rather limited remedies

under theories such as estoppel, part performance, quantum meruit, and possibly tort claims.

Depending on the circumstances, the parties may have more certain contractual remedies if the

UCC applies, as discussed below.

Battle of the Forms

Ideally when a materialman agrees to deliver goods to a project, the parties negotiate the

terms of their agreement. In practice, however, the parties often do not negotiate an agreement,

but instead agree to the sale and purchase of goods verbally, followed by the buyer issuing a pur-

chase order or similar form, and the seller issuing a delivery order/invoice or similar form.

Typically, both forms have a raft of terms and conditions on the back, in fine print.

§ 11.2.3 The Practitioner’s Guide to Colorado Construction Law

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To the extent that the terms and conditions on the two “crossing” forms are consistent,

there is no problem. More often than not, though, one or more significant terms or conditions will

be inconsistent. So which terms control when there are inconsistencies between the forms?

Between “merchants,” additional terms in the written confirmation of a transaction become a part

of the contract (and therefore control), unless (1) the initial “offer expressly limits acceptance to the

terms of the offer,” (2) the additional terms “materially alter” the terms of the offer, or (3) “objec-

tion to [the additional terms] has already been given or is given within a reasonable time.”27

The simplest case to consider is one in which the forms simply conflict on certain terms.

Consider the following example: supplier gives contractor a quote that provides for a one-year

warranty on materials. Contractor then submits a purchase order that calls for a two-year warran-

ty. If the product develops defects after 18 months, which warranty controls? The outcome

depends at least in part on whether the two-year warranty in the purchase order is a material alter-

ation of the original offer reflected by the quote. If the two-year warranty is found not to be a

material alteration of the quote, then the two-year warranty applies.28 If, as is perhaps more likely,

the two-year warranty is found to be a material alteration of the quote, then it does not become a

part of the contract and the one-year warranty controls.29

What if, as is often the case, both forms either condition acceptance to the terms of the

form or expressly object to differing terms in the other parties’ form? Forms often have a merger

clause stating that the purchase order constitutes the entire agreement of sale and purchase and

that the order is expressly limited to and made conditional upon the acceptance of all the terms

and conditions. Such a merger clause might itself be construed to be an objection to any different

terms in the other party’s form. A more clear example of an express objection that might be found

in either or both forms might say the following: “Any additional or different terms or conditions

contained in any prior quotation or that might be contained in any acknowledgment of this pur-

chase order shall be deemed objected to by Buyer without further notice of objection, and shall be

of no effect nor under any circumstances be binding upon Buyer.”

Arguably, where both parties’ forms insist on their own terms, and no other terms, they

have invoked the “mirror image rule.” Because neither form exactly matches the other, no con-

tract is formed. If the parties’ conduct nevertheless impliedly recognizes the existence of a con-

tract, then the terms of the contract include those terms on which the forms do agree, plus the

“gap fillers” provided by the UCC.30 Of course, for a party that attempted, for example, to dis-

claim liability for the incidental and consequential damages available under the UCC, this could

be a disastrous result because those liabilities may slip back in as a gap filler.31 The lesson from

all this is that for supply contracts of significant value, buyers and sellers are well advised to com-

pare forms to understand what they are, or are not, getting. Even more preferable on a supply con-

tract of consequence is that the parties negotiate a contract, rather than simply relying on forms

that may not get the job done.

Subcontractors and Materialmen § 11.2.3

(10/07) 11-7

A general contractor, whether on a public works project or a private project, may subcon-

tract by (1) negotiating a subcontract with a particular subcontractor, (2) letting the subcontract for

bid, and awarding it to the low bidder, or (3) letting the subcontract for bid, and then negotiating

with one or more of the bidders for a final price. In sum, absent agreement between the owner and

contractor, or absent agreement between contractor and proposed subcontractors, there is no

requirement that a contractor award subcontracts by bid, or if bids are taken, to award it to the low

bidder, or to not attempt to negotiate prices even lower than the bid.32 Of course, this freedom

may be restricted by provisions in the owner/contractor contract, or in bid material and bid solici-

tation or invitation for bid materials or in rare instances, based on legal principles.

§ 11.3.1—Binding Nature Of Subcontractor’s Bids

If a subcontractor submits a bid to a contractor, and the contractor incorporates that bid

into its bid to the owner, prior to the prime contractor “accepting” the bid, can the subcontractor

withdraw it? Under the UCC, if a materialman gives assurance that its bid will be held open, then

the bid is not revocable during the time stated, or if no time is stated, for a reasonable time.33

Even more generally, a subcontractor may be deemed to have made an irrevocable bid, at least for

a reasonable time until after the low bidder on the prime contractor is determined, under the prin-

ciple of promissory estoppel, if the general contractor reasonably relied on the subcontractor’s bid

in making his or her bid. In Mead Associates, Inc. v. Scottsbluff Sash & Door Co.,34 the defendant

materialman submitted a bid to the plaintiff contractor to provide materials for a project on which

the plaintiff contractor was going to submit a bid. The plaintiff contractor used the materials bid in

preparing its bid for the prime contract. The contractor confirmed each component of the material

bid with the defendant’s estimator before incorporating the materialman’s bid into the prime bid

on the project. The subcontractor, however, mistakenly computed its bid based upon supplying

“headwall trim” instead of “ headwalls” as called for by the plans and specifications.

The plaintiff was awarded the general contract, and then submitted a purchase order to the

defendant materialman based upon its bid. The purchase order included an indemnification clause

imposing liquidated damages for delay in construction completion caused by the defendant. It

conformed with a liquidated damage clause in the general contract, which had been made avail-

able to the defendant materialman prior to the submission of its bid. However, claiming that the

liquidated damage clause materially altered the bid, the defendant refused to execute or honor the

purchase order. The plaintiff proceeded to obtain the materials from other sources and brought suit

against the defendant for the difference between the defendant’s bid and the cost of materials

charged by the replacement supplier. On appeal, the award in favor of the plaintiff was affirmed.

The basic rule discussed above was cited:

Under the doctrine of promissory estoppel, as applied to construction contracts,

§ 11.3 • SUBCONTRACTOR BIDS

§ 11.3 The Practitioner’s Guide to Colorado Construction Law

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a material supplier’s bid is binding and cannot be revoked if the bidder should rea-

sonably expect that a general contractor would rely upon that bid in submitting its

own bid on a project. And, if the general contractor suffers damages in reasonable

reliance upon an erroneous bid, it may recover against the bidding party.35

Here, the court found that the plaintiff had reasonably relied on the defendant’s bid. The

court also found that where a general contractor relies on a bid and subsequently submits a pro-

posed contract to a subcontractor, the bid price and general work requirements should conform

essentially to those which formed the basis for the bid. In this case, the court found that the plain-

tiff’s purchase order tendered to the materialman generally mimicked the defendant’s bid concern-

ing the number, type, and costs of materials ordered. The addition of the indemnification clause

did not alter the substance of the underlying bid. Since the defendant’s bid did not contain an

indemnification clause and none was agreed upon by the parties, it was a collateral matter and its

inclusion in the purchase order did not bar the application of promissory estoppel to the terms of

the defendant’s bid. The defendant had a right to reject the inclusion of the indemnification clause

in the plaintiff’s purchase order but was still bound by the bid upon which the defendant expected

the plaintiff to rely.36

A subcontractor will not be bound to its bid where the contractor cannot demonstrate

reliance on the bid.37 “Lack of reliance by the general contractor may be demonstrated by evi-

dence that the general contractor continued to bargain with the subcontractor or failed to reply

promptly after award of the general contract.”38 Arguably, bid shopping fits this standard,

although no Colorado case has addressed the issue directly. Additionally, “any attempt to accept

the bid on terms materially different from the original bid is evidence of lack of reliance” and may

even constitute a counteroffer rather than an acceptance.39

§ 11.3.2—Bid Mistakes

In general, the law of a prime contractor’s bid mistake is equally applicable to subcon-

tractors. However, one difference arises when the contractor relies upon the subcontractor’s mis-

taken bid in submitting its bid to the owner, which is thereafter accepted. Colorado does not

appear to have any reported decisions on this point.40 See generally Chapter 3, § 3.5, “Bidding for

Private Construction Contracts,” and Chapter 4, § 4.11, “Mistakes in Bids.”

§ 11.3.3—Bid Shopping

There appears to be no Colorado law on the issue of whether the contractor who incor-

porates the subcontractor’s bid “into the prime contract bid” is obligated to award the subcon-

tract to that subcontractor in the event that the prime contractor is awarded the contract. It may

be that the prime contractor is still free to negotiate a reduced price with that subcontractor, or to

award the subcontract to still another subcontractor. Of course, these rights can be altered by the

solicitation for bid, or by any other express or implied agreement between the bidding subcon-

tractor and the prime contractor. Subcontractors in other states have sometimes asserted that

requirements that contractors list subcontractors on bids for public projects prohibit bid shop-

ping. There are, however, no such requirements in Colorado, although a contractor may be

required to demonstrate its ability to meet standards by submitting “acceptable plans to subcon-

tract for such necessary items.”41

Subcontractors and Materialmen § 11.3.3

(10/07) 11-9

§ 11.4.1—Economic Loss

In the recent BRW, Inc. v. Dufficy & Sons, Inc.42 decision, the Colorado Supreme Court

held that a subcontractor on a commercial construction project may not sue the design engineer in

tort for the subcontractor’s alleged economic losses on the project.43 The BRW decision turns on

the economic loss doctrine and underscores the importance of this doctrine for parties who are

engaged in litigation involving commercial construction projects.44 Practitioners who represent

subcontractors in commercial construction projects should be aware that any tort claim made

against an engineer, and possibly an owner, will be barred by the BRW decision. Residential con-

struction subcontractors likely may not maintain a tort claim against a homeowner or homeown-

er’s association.45 See § 11.7.3 in this Chapter for further discussion on how the economic loss

rule impacts subcontractors.

§ 11.4.2—Express And Implied Duties Of The Owner

Because owners do not typically contract directly with subcontractors and materialmen,

owners’ duties to subcontractors and materialmen are correspondingly limited. Where owners

make express promises, representations, assurances, and the like to subcontractors and/or mate-

rialmen (such as assurances of payment for extra work, issuance of joint checks, etc.), express

duties may result.46 Implied duties should include, at a minimum, access to site, non-interference

with work, and provision of adequate and accurate plans and specifications. Colorado law on such

implied duties in the context of subcontractors and materialmen is unclear at this time, and lack of

privity may be a limiting factor. Owners’ duties under tort law should be no different than for any

other party. Key questions include whether a duty existed, breach, causation, and damages.

§ 11.4.3—Legal Theories Against The Owner

The major hurdle confronting subcontractors and materialmen who claim against owners

is privity. Because their contract is with the contractor or a subcontractor rather than with the

owner, subcontractors and materialmen lack privity with the owner and thus may be barred from

asserting claims based on their subcontract against the owner.47 The general reluctance to impose

duties on owners to subcontractors and materialmen is probably attributable to two factors. The

first is a general belief that “an owner should not be forced into ‘legal relations with someone

other than the contract partner he ha[s] chosen.’”48 The second is that there are fairly extensive

statutory schemes designed to protect a subcontractor’s right of payment, including the mechan-

ic’s lien statute, the trust fund statute, the disburser’s notice statute, and the federal and state pub-

lic works statutes.

Of course, one possible means around the privity barrier is through a third party benefici-

ary analysis.49 For obvious reasons, only on rare occasions will a subcontractor or materialman be

able to establish the elements for a third-party beneficiary claim against the owner. The primary

reason is that the owner generally relies on the contractor to get the job done, without specifying

who is to do the work or whether subcontractors are to be used at all. In other words, owners usu-

§ 11.4 • DUTIES AND LIABILITIES OF OWNER

TO SUBCONTRACTORS AND MATERIALMEN

§ 11.4 The Practitioner’s Guide to Colorado Construction Law

11-10 (10/07)

ally do not intend to benefit subcontractors and materialmen by their contract with the contrac-

tor.50 For this reason, contractual claims against owners are very difficult for subcontractors and

materialmen to pursue.

Where there is no contract, subcontractors and materialmen may have a claim of unjust

enrichment. The elements of a claim of unjust enrichment are: “(1) at plaintiff’s expense (2)

defendant received a benefit (3) under circumstances that would make it unjust for defendant to

retain the benefit without paying.”51 The first two elements will almost always be easy to prove,

since whatever work or materials were supplied to a project will have been at the subcontractor or

materialman’s expense and will benefit the owner by increasing the value of the property. It is the

third element, circumstances that would make it unjust for the owner to retain the benefit without

paying, that may be difficult to prove. First, very often the owner will have paid the contractor for

the work in question. Under those circumstances a court is not likely to find it to be unjust for the

owner to retain a benefit for which it has paid. Second, at least in the context of improvements

created at the request of a tenant rather than the property owner, to establish injustice the subcon-

tractor or materialman must demonstrate that the owner has engaged in some form of improper,

deceitful, or misleading conduct.52 It is not clear whether this requirement extends beyond the ten-

ant improvement context.

Express promises, representations, and assurances may create causes of action sounding

in contract, implied contract (quantum meruit/quantum valebant), estoppel, and unjust enrichment.

For example, an owner’s “‘active role in creating a perception that the [goods or services] would

be paid for,’ along with other factors,” may be adequate to support a claim of unjust enrichment.53

Intentional conduct, and perhaps in some cases merely negligent conduct, may create tort causes

of action, the most obvious of which are misrepresentation and intentional interference with con-

tract. The author is unaware of any Colorado cases discussing such claims in the owner/subcon-

tractor context, but some obvious possibilities include refusal of site access (intentional interfer-

ence with the contractor/subcontractor contract), provision of defective plans and specifications

(misrepresentation), failure to adequately maintain access (negligence). Whether any such claims

will be viable is a fact-intensive inquiry, the answer to which will likely vary widely from case to

case. Additionally, if the obligations of the owner to the contractor are “passed through” by the

subcontract, the subcontractor may have certain rights against the owner.

§ 11.5.1—Express And Implied Duties Of The Contractor

A contractor’s express duties to its subcontractors and materialmen will be spelled out in

the subcontract or purchase order/delivery order.54 In general, the subcontract is almost sure to

spell the contractor’s duty to make payment. As noted in § 11.1 above, the contractor often tries to

limit this duty with a pay-when-paid or pay-if-paid clause. In the absence of a valid pay-if-paid

clause, a contractor is bound to pay the subcontractor even if the owner does not pay the contrac-

§ 11.5 • DUTIES AND LIABILITIES OF CONTRACTOR

TO SUBCONTRACTORS AND MATERIALMEN

Subcontractors and Materialmen § 11.5.1

(10/07) 11-11

tor.55 With respect to subcontractors, other express duties depend on what promises and assur-

ances are made by the contractor and what specific obligations he or she agrees to assume.56

Subcontractors and materialmen, and those dealing with them, should give consideration to the

items outlined below in § 11.14.

Even if they are not spelled out in the subcontract, a contractor owes certain implied

duties to its subcontractors. For example, a contractor has implied duties not to hinder or delay a

subcontractor’s performance.57 Among other things, the implied duty not to hinder or delay the

subcontractor’s performance may include an implied duty to provide site access at a definite

time.58 The duty to provide site access may include a duty to have the site prepared for or ready to

accept the subcontractor’s work.59 While not necessarily an implied duty, a contractor may not

complain of defective work by a subcontractor where the contractor’s own defective work is the

cause of the supposed defect in the subcontractor’s work.60

Materialmen are usually bound by the UCC, which permits a great deal of freedom of

contract among the parties, but which also creates certain express and implied duties. Where, by

agreement, course of dealing, usage of trade, or implication from circumstances, the buyer of

materials or supplies is required to specify the particulars of a materialman’s performance, there is

an express duty by the buyer to cooperate reasonably and in good faith to permit the materialman

to perform the contract.61 Additionally, the buyer is bound to accept and pay for materials in

accordance with the parties’ contract.62 Proper tender of the materials entitles a materialman to

acceptance of and payment for the materials.63 In addition to express duties, the UCC imposes

certain implied duties, the touchstone of which may be characterized as “commercial reasonable-

ness.” For example, there is in every contract to which the UCC applies “an obligation of good

faith in its performance or enforcement.”64 “Good faith” means “honesty in fact in the conduct or

transaction concerned.”65

§ 11.5.2—Liabilities And Legal Theories

Most claims of subcontractors against contractors will proceed on a breach of contract

theory. Since there is privity between the contractor and subcontractor, there is no need to find

other theories to reach the contractor. Subcontractors often assert, in the alternative, claims in

quantum meruit or unjust enrichment. The existence of an express contract does not automatically

preclude claims of unjust enrichment.66 Unjust enrichment claims also may be applicable to extra

work that is outside the contract. Note that a subcontractor that substantially performs its contract

may be able to recover the contract price minus damages for its failure to fully perform.67 In fact,

“even if the subcontractor does not substantially perform, it may recover the reasonable value of

the benefits conferred that exceeds the loss created by its own breach.”68 Note that a claim for lost

profits due to impaired bonding capacity is speculative as a matter of law, and therefore not per-

mitted in Colorado.69

§ 11.5.1 The Practitioner’s Guide to Colorado Construction Law

11-12 (10/07)

Because there is no privity between a subcontractor and the other subcontractors and

materialmen on the job, the duties among subcontractors are limited in much the same way such

duties are limited between the owner and a subcontractor. In general, it can be said that subcon-

tractors and materialmen have a duty not to interfere with or damage the work of other subcon-

tractors and materialmen, a duty not to breach tort duties, and, occasionally, duties arising in the

third-party beneficiary context. There do not appear to be any Colorado cases discussing the

duties of one subcontractor to another, and this is not surprising since subcontractors most often

assert claims of interference with their work against the general contractor directly.70

§ 11.7.1—Defined By The Contract

Although subcontractors and materialmen do not have a direct contractual relationship

with the owner, they may, nevertheless, owe contractual and other duties to the owner. For exam-

ple, an owner may have a cause of action against a subcontractor based on a third-party benefici-

ary theory.71 An owner is an intended “creditor beneficiary” of the subcontract, meaning that the

purpose of the subcontract is to fulfill a duty owed to the owner by the contractor.72 However, the

owner’s rights against a subcontractor are no greater than the rights of the contractor, and the con-

tractor and subcontractor retain the right to discharge or modify the contractual duty, unless the

subcontract provides otherwise or the owner can demonstrate detrimental reliance on the subcon-

tract.73 Among other things, this means that a settlement between the contractor and subcontractor

discharges any contractual claims by the owner against the subcontractor.74 By the same token

that an owner may by words or conduct create a direct contractual relationship with a subcontrac-

tor, so too may a subcontractor assume express duties to an owner.75

§ 11.7.2—In Warranty

Whether a subcontractor or materialman is liable to the owner in warranty is a two part

question: (1) is there a warranty, either express or implied; and (2) to whom does the warranty

extend? An express warranty may be contained in the subcontract or it may be created by the

promises, representations, and/or affirmations of the parties. Regardless of whether express war-

ranties exist, there may be implied warranties, depending on whether or not the UCC applies. If

the primary purpose of the contract is service, then there are no implied warranties.76 On the other

hand, if the primary purpose of the contract is the sale of goods, the UCC’s implied warranties

of merchantability and fitness for a particular purpose will apply unless they are effectively

disclaimed.77

§ 11.7 • DUTIES AND LIABILITIES OF SUBCONTRACTORS

AND MATERIALMEN TO OWNER

§ 11.6 • DUTIES AND LIABILITIES OF

OTHER SUBCONTRACTORS AND MATERIALMEN

Subcontractors and Materialmen § 11.7.2

(10/07) 11-13

Since warranties generally arise out of contractual relations, privity concepts may limit

the group of persons who may legitimately assert warranty claims. Logically, the same principles

of third-party beneficiary that apply to contractual claims also apply to warranty claims, although

the author is unaware of any Colorado cases discussing the issue. At least some state courts have

held that principles of privity limit warranties to the parties to the contract.78 Most of the time

privity is not an issue, either because the subcontract expressly provides that all warranties run

directly to the owner, or because the contractor assigns its warranty rights to the owner.

§ 11.7.3—In Tort

A subcontractor or materialman may be liable to an owner for personal injuries or proper-

ty damage resulting from negligence or other tortious conduct.79 However, when purely economic

damage results (i.e., the owner did not realize the benefits he or she expected under the contract),

no cause of action lies in tort against the subcontractor.80 The rationale for this “economic loss”

rule is that parties in an arm’s length transaction are free to “shape the terms of the contract as

they please and restrict the remedies for breach of the contract.”81 Permitting negligence claims

under such circumstances would permit a “party to avoid the contractual limitation of remedy.”82

In recent decisions, the Colorado Supreme Court has reaffirmed the application of the

economic loss rule in non-residential settings.83 In residential construction, however, the econom-

ic loss rule does not apply to bar homeowner claims in tort, including claims against subcontrac-

tors who worked on the home.84 More specifically, the Colorado Supreme Court has held that

subcontractors have an “independent duty to act without negligence in the construction of

homes.”85 This has long been the rule in Colorado,86 so the recent ruling is not particularly

surprising.

The economic loss rule “is limited to cases that involve only economic loss and does not

prevent a negligence action to recover for physical injury to property or persons because, in that

case, the duty breached generally arises independent of the contract.”87 The duty to avoid causing

such physical harm to others, including harm to property other than the thing itself that is being

constructed or repaired, arises from general tort law.88 With respect to tort claims in which the

economic loss rule is not implicated, contractual concepts of privity do not apply.89 Thus, subcon-

tractors and materialmen are subject to tort duties, regardless of whether they are in contractual

privity with the owner or such other third parties that may suffer some form of physical damage.

Subcontractors, of course, owe express duties to the contractor to perform in accordance

with the subcontract. These express duties will vary from subcontract to subcontract, and often

include duties incorporated by reference from the prime contract.90 Often, a subcontract includes

express warranties of quality. Even where the subcontract does not so provide, the courts are like-

ly to imply a warranty that the work will be performed in a workmanlike manner. A subcontractor

§ 11.8 • DUTIES AND LIABILITIES OF SUBCONTRACTORS

AND MATERIALMEN TO CONTRACTOR

§ 11.7.2 The Practitioner’s Guide to Colorado Construction Law

11-14 (10/07)

does not, however, owe a duty to correct problems created by other subcontractors.91 Note that a

contractor who fails to follow the termination and cure provisions of the subcontract may forfeit

damage claims.92

Materialmen are essentially sellers of goods. Accordingly, materialmen have the same

duties as any seller of goods. Most of these duties are spelled out in the Uniform Commercial

Code (UCC), which in Colorado is found at C.R.S. §§ 4-1-101, et seq. The most relevant portions

of the UCC for materialmen include Articles 1 (General Principles), 2 (Sales), and 2.5 (Leases).

Obviously, the most basic duty of a materialman is to deliver the goods in question.93 More spe-

cific duties, if any, should be spelled out in the agreement between the parties. If there is a miss-

ing term in the agreement, the gap-filling provisions of the UCC may supply a term. For example,

if the contract between the parties does not specify a time for delivery, then delivery must be

accomplished within a reasonable time.94 The UCC has other gap-filling provisions, but these pro-

visions cannot be relied on to supply essential terms such as price and quantity.

Perhaps the most important duties imposed by the UCC are those created by the implied

warranties that exist unless expressly disclaimed. Implied warranties under the UCC include war-

ranties of merchantability and (sometimes) fitness for a particular purpose.95 Additionally, express

warranties are quite easily created by affirmation or promise, description of the goods to be sup-

plied, and samples or models that are part of the basis of the bargain.96 Warranties may be modi-

fied or even completely excluded if done in writing in a conspicuous manner. For example, by use

of language such as “as is,” by course of performance or usage of trade, and even by the buyer’s

failure to note defects that could have been identified by an examination of the goods, warranty

liability may be greatly reduced or even eliminated.97

Although this treatise makes no attempt to cover the UCC in depth, some aspects of the

UCC are worth bearing in mind. The UCC broadly addresses many duties of buyers and sellers,

but it does not and cannot cover every possible scenario. Moreover, with notable exceptions, the

UCC favors freedom of contract and the right of buyers and sellers to determine their duties to

each other and the standard of performance. Thus, the parties may by agreement vary the effect of

the UCC, except for the obligations of good faith, diligence, reasonableness, and care (and except

as otherwise provided in the UCC).98 The course of dealing between the parties and normal usage

of the trade also may play a role in defining the duties of the parties, so long as they are consistent

with the terms of the agreement.99

Although no effort is made here to categorize all of the types of claims that may be asso-

ciated with subcontractors, some claims are common enough to be discussed in some depth.

Among these common claims, each of which are discussed below, are delay claims, acceleration

claims, changed conditions claims, change in scope claims, and claims relating to defective plans

and specifications. Although many of the contract clauses discussed below are from owner/con-

tractor contracts, flow down clauses in subcontracts often make them effectively a part of the sub-

§ 11.9 • COMMON SUBCONTRACTOR CLAIMS

Subcontractors and Materialmen § 11.9

(10/07) 11-15

contract, with the contractor assuming (relative to the subcontractor) the rights and duties speci-

fied for the owner in the contract and the subcontractor assuming (relative to the contractor) the

rights and duties of the contractor.

§ 11.9.1—Delay Claims

Overview

Construction projects usually begin and end on specific dates or within a particular dura-

tion of time. A delay clause in a construction contract may provide that a party who causes delay

in the completion of that project must pay to the aggrieved party damages that result from that

delay. The delay clause in the contract will define what constitutes “delay” and generally will

govern the parties’ rights and responsibilities with regard to delay. As it relates to the subcontrac-

tor, delay typically occurs when the work of the subcontractor, for one reason or another, is not

substantially completed by a fixed date. In some circumstances, the subcontractor may be respon-

sible for the delay and be subject to damages resulting from this delay. In other cases, the subcon-

tractor may be the party harmed by delays encountered while performing his or her work. In this

situation, the subcontractor will be seeking damages resulting from the delay.

No Damages for Delay

Construction delays are often classified either as excusable or nonexcusable. A delay

caused by an unforeseeable event outside the reasonable control of the subcontractor is considered

excusable under most construction contracts.

Examples of excusable delay include delays due to labor disputes, owner-caused delays,

fires, unusually severe weather, and acts of God. A delay deemed to be excusable will entitle the

subcontractor to an extension of time to complete its work and will protect the subcontractor from

liquidated damages. However, an excusable delay is not usually compensable. For instance, bad

weather (but short of unusually adverse weather) generally is considered reasonably foreseeable

and will not give rise to an excusable delay allowing a contract extension. However, most con-

struction contracts recognize that delays caused by “unusual” weather may be excusable.

Nonetheless, even if severe weather that causes delay is regarded as excusable, it is usually not

compensable. Other examples of delays that are considered noncompensable include labor strikes

and acts of God.

In order for a subcontractor to recover its costs from the owner, the construction delay

must be both excusable and compensable. Encountering an unforeseen rock formation lying

below the surface is an example of a delay that may be considered compensable, as is the situa-

tion where the subcontractor incurs costs associated with working in adverse weather conditions

that could have been avoided had the owner not caused delays of the construction project.

Depending upon the contract provisions, the subcontractor may not be permitted to recover delay

damages. However, the subcontractor will be permitted an extension of time to complete his or

her work equal to the length of the delay caused by the contractor or owner.

§ 11.9 The Practitioner’s Guide to Colorado Construction Law

11-16 (10/07)

The party seeking delay damages has the burden of proving both the amount of those

damages and that it is entitled to delay damages. This can be a troublesome task from the subcon-

tractor’s perspective because he or she must establish sufficient evidence that a delay actually

occurred and that the delay is compensable.

Liquidated Damages

Owners and contractors commonly use a “liquidated damages” clause to seek recovery of

losses due to delays on a construction project. In terms of delay, the liquidated damages are the

sum that a party to the contract agrees to pay if he or she fails to substantially complete the proj-

ect by a fixed date as promised in the contract. The purpose of liquidating damages is to fix the

amount to be paid in lieu of promised performance. This amount, which is recoverable when the

party breaches the contract, must have been arrived at through a good faith effort to estimate the

actual damage that probably would ensue from a breach. These are damages that are reasonably

ascertainable at the time of the breach, measurable by a fixed or established external standard, or

by a standard apparent from documents upon which the plaintiffs based their claim. Damages for

breach by either party may be liquidated in the agreement but only at an amount that is reasonable

in the light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss,

and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy.

In Colorado, terms fixing liquidated damages that are disproportionate to any possible

loss incurred are void as a matter of law.100 In order for a provision for liquidated damages to be

enforceable, the anticipated damages must be uncertain in amount or difficult to prove, the parties

must intend to liquidate the damages in advance, and the amount stated as liquidated damages

must be reasonable and not greatly disproportionate to the presumable loss or injury.101 Likewise,

a liquidated damages clause addressing delay in a construction contract will not be enforced when

the delay is caused by the party claiming the clause’s benefit.102

Sample delay clauses are found in § 11.14, below.

§ 11.9.2—Acceleration

Acceleration Defined

Acceleration takes place when a subcontractor must accelerate its performance beyond

that required by the construction schedule and complete performance earlier than originally antici-

pated or complete a larger amount of work in the time period originally anticipated.

Directed Versus Constructive Acceleration

Acceleration is classified as either directed acceleration or constructive acceleration.

Directed acceleration takes place when the owner or general contractor directs the subcontractor to

complete performance in advance of the scheduled completion date. Constructive acceleration is

more common than directed acceleration and occurs when the contractor causes the subcontractor

to accelerate its performance and complete the work by the original completion date, even though

an excusable delay has occurred which would justify an extension of time. Increased costs to the

subcontractor usually result from the contractor’s attempts to speed up work because the subcon-

tractor must incur overtime and additional equipment costs. However, the subcontractor may not be

Subcontractors and Materialmen § 11.9.2

(10/07) 11-17

permitted to recover these costs, if they involve contingencies covered by the contract documents.

For instance, a subcontractor claiming that it was forced to accelerate its performance, thus result-

ing in uncompensated labor and other cost overruns, was not entitled to recover its increased costs

where the terms of the contract stated that the contractor could direct the subcontractor to work

extra shifts at no additional cost if the contractor determined that the work was behind schedule.103

Depending on the type of acceleration that has occurred, several elements must be proven in order

for the subcontractor to recover the damages flowing from the acceleration.

Generally, in order to succeed on a claim of directed acceleration, the subcontractor must

prove:

1) The contractor issued a verbal or, if contractually required, a written change order;

2) The subcontractor reasonably attempted to accelerate its performance;

3) Actual acceleration occurred; and

4) The subcontractor incurred additional costs as a result of the acceleration.104

Likewise, in order to prove a constructive acceleration claim, the subcontractor must gen-

erally show that:

1) The subcontractor experienced an excusable delay that was unforeseen and beyond the

subcontractor’s control;

2) The subcontractor timely requested a time extension that was in total compliance with

the subcontract;105

3) The contractor failed or refused to grant the time extension within a reasonable time;

4) The contractor ordered or directed the subcontractor to complete performance within

the unextended subcontract completion period; and

5) The subcontractor, in order to meet the unextended completion date, increased its

efforts and incurred additional costs.106

In addition to affording the subcontractor a basis to recover damages due to acceleration,

constructive acceleration may also furnish a defense to a contractor’s claim for liquidated dam-

ages if the subcontractor refuses to accelerate performance.

A sample acceleration clause is found in § 11.14, below.

§ 11.9.3—Changed Conditions

Overview

Subcontractors often encounter site conditions during the construction phase that are dif-

ferent from the conditions contemplated in the subcontract or different from conditions normally

encountered in the specific type of work being performed by the subcontractor. A clause in the

subcontract, usually referred to as a changed or differing site condition clause, allocates risk when

encountering these changed conditions and permits the subcontractor to secure a modification to

both the subcontract price and to the time in which performance must be completed. The clause

may permit the subcontract price to be adjusted upward or downward.

§ 11.9.2 The Practitioner’s Guide to Colorado Construction Law

11-18 (10/07)

Generally, when the subcontract fails to contain a changed condition clause, the subcon-

tractor assumes all risks and cannot recover under the subcontract when it encounters differing

site conditions. Specifically, the subcontractor cannot recover for its error in calculating the

expense or difficulty of the work to be performed unless the subcontractor’s performance is

excused by misrepresentation, impossibility, commercial impracticability, acts of God, or where

its performance is impeded by the other party.107 However, the contract may be rescinded if both

parties were mistaken regarding site conditions.108

Changed condition clauses in the construction contracts are often categorized as either

“Type I” or “Type II” conditions.

Type I Condition

The Type I condition refers to the situation encountered when the actual site condition

differs from the condition as expressed or implied in the contract documents. For instance, subsur-

face soil conditions at the construction site may differ from the soil conditions as indicated in the

soil report. In addition, latent physical site conditions may form the basis for a Type I claim. An

example of a latent condition is the situation encountered by a roofing subcontractor who, while

replacing an existing roof with a new roof, discovers several layers of old roofing that were not

indicated in the contract documents. A subcontractor may be entitled to an adjustment in the sub-

contract or recovery of the damages associated with the additional costs incurred when the site

condition varies from the condition as indicated in the contract documents.

Type II Condition

The Type II condition refers to the situation encountered when the actual site condition

differs from what is “usual” or “inherent” in the type of work being performed. For instance, an

excavating subcontractor encountering a different type of rock than is ordinarily encountered in

that general geographic area may be awarded its extra cost of excavating the different type of

rock. The subcontractor must show that it had no actual knowledge of the condition and should

not have reasonably expected to encounter the condition in order to recover its additional expens-

es. In considering whether the subcontractor should have reasonably expected to encounter the sit-

uation, the subcontractor’s experience and knowledge of the geographical area and local trade

practices may be examined. Likewise, the contractor has an affirmative duty to disclose material

information related to the project that is known to the contractor.109

Notice of Changed Conditions

The AIA prime contract differing site provision contains a notice requirement requiring

the contractor to give the owner notice of the changed condition. This is a common provision

that allows the owner to evaluate the condition before the condition is interfered with. Some

states require strict compliance with the notice requirement before the contract may be adjusted.

However, in Colorado, when the owner has denied the contractor’s claim based “on the merits”

of the claim, rather than on the contractor’s failure to give prompt notice, a contractor may still

receive an adjustment. This is true even though the contractor may have failed to give prompt

notice of the changed condition as called for in the contract. The reasoning is that by denying the

claim on the merits, the owner has waived the failure of the contractor “to give prompt written

Subcontractors and Materialmen § 11.9.3

(10/07) 11-19

notice of the changed conditions and cannot thereafter assert the matter by way of defense when

subsequently sued.”110 This logic also ought to apply to claims by subcontractors against

contractors.

Sample changed conditions clauses are found in § 11.14.8, below.

§ 11.9.4—Change In Scope

Overview

Changes on every construction project are inevitable. A “changes clause” in the subcon-

tract allows the contractor the flexibility to make changes to the scope of work that may be neces-

sary for a variety of reasons. Although the changes clause permits the contractor to make changes

to the subcontract, it also entitles the subcontractor to recover an adjustment for the increased cost

and time needed to perform the changes. Nevertheless, changes in the scope of work constitute

the basis for numerous claims pursued by subcontractors.

Determining What Constitutes a Change in Scope of Work

Changes, additions, or “extras” requested by the contractor that increase the scope of the

labor and materials required beyond that which was originally contemplated by the subcontract

constitute a change in scope of work.111 The subcontractor is justified in seeking to negotiate new

terms for a modified subcontract to include compensation for the changes and additions. The sub-

contractor’s attempts to negotiate new terms does not constitute a breach of contract by the sub-

contractor. However, the subcontractor may recover damages from the contractor for the contrac-

tor’s breach of contract if the contractor terminates the subcontract after the subcontractor’s

attempted renegotiation of new terms.112

At the outset, it is necessary to determine whether the “change” actually constitutes a

change in scope of work under the subcontract or is merely work necessary to carry out the work

as originally contemplated in the subcontract. In Colorado, a court will presume that the work

constituting the change was not required under the subcontract, unless either the agreement specif-

ically requires the work to be performed or custom dictates that the work is necessary to complete

performance.113 The contractor in No. 5 Mining Co. v. Bruce114 had an agreement to sink a shaft

so many feet into the ground for so much money per foot. The owner later directed the contractor

to “timber” the shaft. The contractor was entitled to the additional cost involved in timbering the

shaft because neither the contract nor the evidence provided that the contractor had agreed to sink

and timber the shaft.

An example of a change in scope of work is found in Belmont Electric Service, Inc. v.Dohrn.115 In Belmont Electric, the court found that completion of the installation of a heating sys-

tem by the electrician after the heating contractor defaulted “was not within the ambit” of the

electrical contractor’s contract.116 Consequently, the electrician was entitled to recover for the

labor and materials furnished in work done on the heating system. However, tiling of the floor and

walls of a bathroom as part of the contractor’s construction of an addition is included in the con-

tract price for construction of a new bathroom.117

§ 11.9.3 The Practitioner’s Guide to Colorado Construction Law

11-20 (10/07)

Notice Requirements

A changes clause will likely contain a requirement that the contractor be notified prior to

the subcontractor effectuating changes in the scope of work. This requirement that the subcontrac-

tor provide notice to the contractor insures that the contractor is aware of the change and is per-

mitted the opportunity to evaluate the cost and scheduling of the change. Similarly, if the contrac-

tor directs the subcontractor to perform work that the subcontractor believes constitutes a change

in the scope of the work, the subcontractor must object to the “extra” work as being beyond the

scope of the subcontract. This is true even if the contractor directs the subcontractor to continue

with the disputed work.

Change Orders

Oftentimes, the contract documents will require that changes must be ordered in writing.

However, this requirement may be waived when the actions and conduct of the parties indicate an

intention to waive the writing requirement.118

For instance, a contractor’s statements to a subcontractor painter that the contractor con-

sidered exterior painting to be an “extra” and that he would seek additional compensation for the

painter from the project architect was sufficient to constitute waiver of a contract provision requir-

ing that contract “extras” be in writing.119 Likewise, where the “accounts were handled very

loosely by both parties” and there “was never any written authority signed for changes or extras,

although both parties knew that such additional work and materials would cost more money,” the

parties’ conduct constituted a waiver of the requirement that changes be order in writing.120 A

contractor also may recover the expense associated with a change where a representative of the

owner requests the “extras” even though the contract required a written change order.121

Further, where the owner has knowledge that the contractor is performing work not with-

in the scope of the work required under the contract, yet allows the contractor to continue with the

work, the contractor may recover from the owner the costs associated with the additional work.122

§ 11.9.5—Defective Plans And Specifications

Overview

In order to prevent misunderstandings with regard to the intentions of the designer, plans

are usually drawn showing the general and detail features of the work to be performed. Likewise,

specifications, including a written description of the work to be performed, the materials to be

used, and the time and manner of payments should accompany the plans. Together, plans and

specifications are intended to communicate to the contractor the owner’s requirements regarding

the construction process, thereby preventing misunderstandings and allowing the contractor to

properly perform under the contract. The plans and specifications serve to notify the contractor of

exactly what he or she is required to construct.

Design versus Performance Specifications

Design specifications provide a high degree of detail by incorporating, among other

things, drawings with measurements, variances, inspection requirements, and the types of materi-

als to be utilized. Performance specifications, on the other hand, enumerate the necessary per-

Subcontractors and Materialmen § 11.9.5

(10/07) 11-21

formance characteristics while foregoing the detail of how to obtain the requisite performance. It

is the responsibility of the contractor to perform the detailed engineering and design necessary to

meet the performance requirements. Courts commonly differentiate between design and perform-

ance specifications when determining liability for inadequate drawings and prohibit recovery by

the contractor when performance, rather than design specifications, are at issue.

Subcontractor May Rely on the Plans and Specifications

Since it is important that the contractor be able to rely on the drawings and specifications,

the owner is deemed to have impliedly warranted that the drawings and specifications are accurate

and suitable for the construction project. This may be true in some circumstances, even though the

owner includes a disclaimer in the contract. While the owner impliedly warrants to the contractor

that the plans and specifications are correct, absent contract language, the architect or engineer

who prepares the plans and specifications does not so warrant to the owner.123 See Chapter 8,

“Architect/Engineer Liability.” If contractors were not permitted to rely on the accuracy and suit-

ability of the owner’s plans and specifications, informed bidding on the project would become

infeasible.124 Accordingly, at least absent contractual provisions, a contractor will not be liable for

damages resulting from the owner’s defective specifications, if the contractor itself was not negli-

gent in exercising the required skill, care, and knowledge.125 Likewise, when the owner provides

the contractor with plans and specifications, the contractor is entitled to a cost adjustment, if

design defects are encountered during the construction process that increase the contractor’s cost

of performing. These implied warranties generally pass through to subcontractors.126

Nevertheless, if the plans and specifications contain a mistake that is readily apparent, the

contractor may have a duty to investigate the accuracy of those plans and specifications prior to

performing under the contract.

§ 11.10.1—Indemnification Of The Contractor By Its Subcontractors

Indemnity claims by a contractor against its subcontractors may be based on either sub-

contract provisions or common law indemnity principles. Insurance provisions in a contract may

allow the parties to jointly shift certain risks to an insurer and may affect the scope of the parties’

indemnity obligations. Note that Colorado’s construction defect act, C.R.S. §§ 13-21-801 through

-807, governs indemnity for construction defect claims. Claims for indemnity “arise at the time

the third person’s claim against the claimant is settled or at the time final judgment is entered on

the third person’s claim against the claimant, whichever comes first.”127 Such claims must be

brought within 90 days after the claims arise.128

§ 11.10.2—Contractual Indemnity

Construction contracts often contain indemnity provisions. These may impose an obliga-

tion on the subcontractor to indemnify the contractor or owner or other parties involved in the

construction project. Often a subcontractor is required to indemnify a contractor on a project for

all claims and losses associated with the subcontractor’s work.

§ 11.10 • INDEMNIFICATION

§ 11.9.5 The Practitioner’s Guide to Colorado Construction Law

11-22 (10/07)

There are three general approaches to the scope of contractual indemnity obligations.

Under one approach, the subcontractor is required to indemnify the contractor for claims resulting

solely from the subcontractor’s negligence. Under the second approach, the agreement obligates

the subcontractor to indemnify the contractor for all claims that involve, even in part, the subcon-

tractor’s negligence. The third approach contractually requires that the subcontractor indemnify

the contractor for all claims on the project, even if they involve no fault by the subcontractor.129

The second and third approaches may have the effect of requiring the subcontractor to indemnify

the contractor for claims arising from the contractor’s own negligence.

Under Colorado case law, any of the three approaches to contractual indemnity will be

enforceable if clearly described in the parties’ contract. Courts typically apply standard rules of

contract interpretation to indemnity agreements in an effort to effectuate the intent of the parties.

Indemnity contracts can arise orally. Ambiguities in the contract are resolved against the party

seeking indemnity.130

The courts will strictly construe an agreement if it purports to indemnify a party for its

own negligence.131 A contractual provision will not be interpreted to permit a party to be indemni-

fied for its own negligence unless the court is firmly convinced that this was the parties’ intent.132

In the context of negotiated contracts in commercial settings, however, the courts sometimes relax

this rule of strict construction. The court may conclude that a party is to be indemnified for its

own negligence even if the parties do not expressly refer to the indemnitee’s negligence.133 For

example, broad, all-inclusive indemnity language in a contract may be construed to include

indemnity for claims arising due to the negligence of the indemnitee.134

A public entity may not require its contractors to indemnify it against the public entity’s

own negligence.135 Effective July 1, 2007, this prohibition extends to all construction contracts,

such that any clause requiring a contractor or subcontractor to provide an indemnity for damage

caused by the fault of the indemnified party is void as against public policy.136

§ 11.10.3—Common Law Indemnity And Contribution

Even in the absence of a contractual right to indemnity, in limited circumstances contractors

may have indemnity claims against their subcontractors based on common law agency principles.

Historically, claims for indemnity and contribution were available among joint tortfeasors

in Colorado. Colorado’s 1986 legislative tort reform and the Uniform Contribution Act, C.R.S.

§ 13-50.5-102(6), and the enactment of a pro rata liability system137 eliminated most forms of

common law indemnity. In Brochner v. Western Insurance Co.,138 the Colorado Supreme Court

determined that the statutory abolition of joint and several liability in most situations and the

adoption of a proportionate fault system eliminated the doctrine of indemnification between cer-

tain joint tortfeasors, which the Colorado judiciary had previously recognized. In Brochner, none

of the alleged joint tortfeasors, all of whom were alleged to have been actively negligent and all

of whom entered into a settlement agreement with plaintiff, could assert indemnification claims

against one another.

Subcontractors and Materialmen § 11.10.3

(10/07) 11-23

Even after tort reform, however, common law indemnity claims may be available by a

principal who is not directly at fault but is vicariously liable for his or her agent’s tort. In these lim-

ited circumstances, the principal has a right to be indemnified by his or her agent. Brochner’s aboli-

tion of the doctrine of common law indemnity contained one caveat which related to this situation.

The opinion specifically noted that the question of whether indemnity could still be obtained in

those situations in which “the party seeking indemnity is vicariously liable or is without fault is not

presented by the circumstances of this case.”139 Cases following Brochner recognize that there may

still be a claim for indemnity when liability is imposed on a defendant who is without fault due to

principles of respondeat superior.140 Under the common law, a master who pays for damages to

another resulting from his servant’s tort has a right to be indemnified by the servant for the amount

paid.141 In a situation where a contractor is alleged to be vicariously liable for the torts of its sub-

contractor and the contractor has not personally been negligent to any degree, the contractor may

still have a common law right to indemnity based on agency principles.

Indemnity agreements are one method for the parties to a construction contract to allocate

risks among themselves. Some of the courts’ willingness to allow parties to be indemnified for

their own negligence is their recognition that indemnity provisions are often coupled with agree-

ments to insure.142

When the parties agree to insure certain risks, the agreement to insure may affect the

scope of indemnity obligations. For example, in Hartford Insurance Co. v. CMC Builders, Inc.,143

the parties’ agreement required the contractor to indemnify the owner for all claims relating to the

project. The contract also provided that any loss of property would be covered by builders’ risk

insurance provided by the owner. After a fire on the project, the owner’s insurer paid for the loss

and then asserted subrogation claims against the contractor based on the indemnification provi-

sions in the construction contract. The Colorado Court of Appeals concluded that the owner’s

obligation to insure limited the scope of the contractor’s duty to indemnify the owner. The con-

tractor’s duty to indemnify did not include claims that were covered by the owner’s insurance

required by the contract. This interpretation is consistent with the desire of the participants in the

construction project to allocate risks and insure them to the extent possible.

Waiver of subrogation provisions limit the right of the insurer who pays for a loss to seek

to recover from other parties to the construction agreement. This allows the parties to expressly

require in their contract the type of result the court reached in CMC Builders. These clauses pro-

vide additional assurance that an insurer to whom the parties thought a risk was allocated will not

assert subrogation claims after paying a loss.144

§ 11.11 • INSURANCE AND WAIVER OF SUBROGATION

§ 11.10.3 The Practitioner’s Guide to Colorado Construction Law

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Near and dear to the heart of every subcontractor and materialman is the question of pay-

ment. Specifically, the questions that matter are “When am I entitled to payment, and what rights

do I have if I am not paid?” The first place to look is the contract. As discussed above, in the

absence of a contract, materialmen may also look to the UCC. Surprisingly, the contract may

leave questions as to whether or not payment is owed. This is discussed below under the heading

“Pay When Paid.” When payment is owed under the contract but is not forthcoming for whatever

reason, including the contractor’s insolvency, a variety of other potential remedies are available,

including mechanics’ liens, claims under various public works acts, and claims under the trust

fund statute. Each of these remedies is discussed briefly below and in more depth elsewhere in

this book.

§ 11.12.1—Pay-When-Paid Or Pay-If-Paid

Contractors naturally prefer to pay subcontractors and materialmen from moneys paid to

the contractor by the owner. After all, the subcontracted work and materials are for the owner’s

benefit and, apart from the ability to obtain payment from the owner, of no value to the contractor.

Sometimes contractors include or seek to include a clause in their subcontracts to the effect that

payment for the subcontracted work or materials will be due only when or if the contractor is paid

by the owner.145 If enforced, this has the effect of shifting the risk of non-payment by the owner

from the contractor to the subcontractor and/or materialman.

Courts often look with disfavor on such pay-when-paid clauses, and the majority rule is

that absent exceptionally clear language creating a condition precedent, a pay-when-paid clause

only sets a reasonable time for payment by the contractor rather than shifting the risk of non-pay-

ment to subcontractors and materialmen.146 Some states enforce such clauses if there is language

clearly indicating that payment by the owner is a condition precedent to payment by the contrac-

tor, although even in those circumstances many courts are reluctant to enforce such clauses, often

finding ambiguities in seemingly clear language.147

Colorado follows the majority approach, holding that the “when” of such a clause “is not

a contingency, but rather means that payment may be delayed.”148 In order to create a condition

precedent, rather than a mere promise, “the language of the parties’ agreement must clearly

express their intent that the subcontractor is to be paid only if the owner first pays the general con-

tractor.”149 In other words, “[i]f the risk of the owner’s nonpayment is to be shifted from the gen-

eral contractor to the subcontractor, then this shift must be clearly articulated in the agreement.”150

Note that a pay-when-paid clause will not defeat a Miller Act claim unless it is “clear and

express.” To be effective, the clause must, at a minimum, “include mention of the Miller Act and

unambiguously express intention to waive the rights provided by it.”151 Even such a clear and

express clause may not be enforced by the federal courts. It is not clear whether a pay-when-paid

clause will preclude the assertion of a mechanic’s lien, since payment is not due from the contrac-

§ 11.12 • PAYMENT AND NONPAYMENT OF

SUBCONTRACTORS AND MATERIALMEN

Subcontractors and Materialmen § 11.12.1

(10/07) 11-25

tor until the owner has made payment to the contractor, but for obvious policy reasons, it seems

unlikely that a pay-when-paid clause would permit an owner to avoid mechanics’ liens by its own

lack of payment.

§ 11.12.2—License Requirements And Payment

Subcontracts often require that a subcontractor be licensed in the county or municipality

where the project is located. Such requirements may not preclude an unlicensed subcontractor

from pursuing payment, even when the subcontractor misrepresented its unlicensed status.152

At least this appears to be true when the work itself was performed by a licensed sub-subcontrac-

tor.153 Nor in such a case will an anti-assignment clause bar recovery in quantum meruit.154

§ 11.12.3—Mechanics’ Liens

Although subcontractors and materialmen generally do not have direct claims against the

owner, on private projects they generally have lien rights against the project. The Colorado

Mechanic’s Lien Act is found at C.R.S. §§ 38-22-101 through -133. As a general rule, subcontrac-

tors, sub-subcontractors, and materialmen who supply subcontractors and sub-subcontractors have

rights under the mechanic’s lien statute. However, suppliers to materialmen do not have lien

rights.155 Subcontractors and materialmen also may take advantage of the Disburser’s Notice to

require owners, lenders, or others with authority to make disbursements on a project to pay them

directly or, in event of a dispute, to impound sufficient funds to cover the claim.156

Mechanics’ liens and the mechanic’s lien statute are discussed in detail in Chapter 19,

“Mechanics’ Liens.”

§ 11.12.4—Bonds

Bonds may provide another avenue for payment to subcontractors and materialmen. Most

public and some private projects require payment bonds to ensure payment to the subcontractors

and materialmen working on a project. Bonds are discussed in some detail in Chapter 12,

“Construction Sureties.”

§ 11.12.5—Public Works

While there are no lien rights on public projects, subcontractors, and materialmen do have

some protection on such projects. First, subcontractors and materialmen are entitled to prompt

payment on public works projects following payment of the contractor by the public entity.157

Second, the Colorado Public Works Act158 acts in place of the mechanic’s lien statute on public

projects.159

Public Works Prompt Pay Statute

The Colorado Public Works Prompt Pay Statute applies to public entity contracts for con-

struction exceeding $150,000. Under C.R.S. § 24-91-103(2), when a public entity owner pays a

contractor, the contractor shall make payments to each of its subcontractors of any amounts actu-

ally received from the public entity that were included in the contractor’s request for payment to

the public entity for such subcontracts. The contractor is required to make this payment within

seven days after receipt of payment from the public entity in the same manner as the public entity

§ 11.12.1 The Practitioner’s Guide to Colorado Construction Law

11-26 (10/07)

is required to pay the contractor under C.R.S. § 24-91-103(1), but only if the subcontractor is sat-

isfactorily performing its subcontract. If the contractor fails to make the required timely payments

to the subcontractor, interest shall be paid for the period of delay at the higher of 15 percent per

annum, or the rate provided in the contract.

In turn, the subcontractor has similar obligations to its suppliers, sub-subcontractors,

laborers, and any other persons who provide goods, materials, labor, or equipment to the subcon-

tractor for any amounts actually received by the subcontractor that were included in the subcon-

tractor’s request for payment to the contractor for such persons. Failure to pay such amounts

results in interest charges at the greater of the subcontract rate or 15 percent per year.

In addition, at the time that the subcontractor submits a request for payment to the con-

tractor, the subcontractor shall also submit a list of the subcontractor’s suppliers, sub-subcontrac-

tors, and laborers. The contractor is relieved of its obligation to pay the subcontractor within

seven days until the subcontractor submits the list.

Colorado Public Works Act

The basic concept behind the Colorado Public Works Act is to require payment bonds (on

public projects exceeding $50,000) and retainage for the protection of subcontractors and mate-

rialmen.160 As with the mechanic’s lien statute, subcontractors, sub-subcontractors, and material-

men who supply subcontractors and sub-subcontractors have rights under the Colorado Public

Works Act.161 And as with the mechanic’s lien statute, suppliers to materialmen do not have rights

under the Colorado Public Works Act.162

Miller Act

Subcontractors and materialmen also have rights on federal projects under the Miller

Act,163 although suppliers to materialmen do not have such rights.164 In rare cases subcontractors

and materialmen may even have equitable lien rights to retainage held by the governmental

agency and to payments made in contravention of that agency’s payment regulations.165 No effort

is made here to cover the Miller Act.

§ 11.12.6—Trust Fund Statute

Colorado’s Mechanic’s Lien Act has a trust fund provision that requires contractors and

subcontractors to hold payments in trust for the benefit of lower-tier subcontractors and material-

men who may have a lien against the project and for whose benefit the payments were made.166

The trust fund provisions do not apply where the contractor has a good faith belief that the sub-

contractor or materialman is not entitled to payment.167 Where the trust provisions do apply, how-

ever, the “trustee” may be subject to criminal liability for failure to comply with the statute.168

Subcontractors and Materialmen § 11.12.6

(10/07) 11-27

What happens when the owner causes extra work or delays to a subcontractor, whose

contract is with the contractor rather than with the owner? There is no privity of contract between

the subcontractor and the owner, so the subcontractor does not have a breach of contract claim

against the owner.169 The subcontractor’s claim under the contract is against the contractor, who

obviously has great incentive to force the owner to pay for any extra work or delays caused by the

owner. One answer is for the subcontractor to file suit against the contractor for extra work and

delay damages, and for the contractor to file suit against the owner for indemnification against

any such damages that were actually caused by the owner.

Often, the subcontractor and contractor are in agreement that the owner’s actions caused

the extra work and/or delays. In these circumstances, a lawsuit involving all three parties has an

extra layer of litigation, and therefore cost, that may be unnecessary. Sometimes the extra layer of

litigation makes sense, such as in those instances where the owner claims in its defense that some

or all of the extra work and/or delays are the fault of the contractor. In those instances where the

extra layer of litigation does not make sense, the contractor may agree to assert the subcontrac-

tor’s claim against the owner. Such a claim is referred to as a “pass-through claim.”

When a contractor asserts a pass-through claim on behalf of a subcontractor, it obviously

runs the risk of inconsistent results because failure of the pass-through claim against the owner

will not preclude the subcontractor from asserting the same claim against the contractor. In order

to avoid such a result, contractors often seek “liquidation agreements” with the subcontractor as

part of the agreement to pursue pass-through claims on behalf of the subcontractor. The basic

point of a liquidation agreement is to permit the contractor to pursue the pass-through claim while

protecting the contractor from inconsistent results by requiring the subcontractor to accept the

final determination of the pass-through claim. In creating a liquidation agreement, the parties must

be careful to avoid anyting that might be construed as a complete and unconditional release of

claims against the contractor. A complete release of the contractor likely would run afoul of the

Severin doctrine,170 although at this point there are so many exceptions to the Severin doctrine

that it can easily be avoided by careful drafting.171 There is no reported Colorado law on pass-

through claims and liquidation agreements, but there is a fairly well-developed body of federal

law on these topics.172

Before a subcontractor decides to assert a claim against the owner using the pass-through

method, it may want to review the general contractor’s agreement with the owner. For example, if

the subcontractor were to assert a pass-through claim, it would be subject to the general contract’s

arbitration provisions.173 Of course, the subcontractor could be already bound to the general con-

tract by use of a “flow-through clause.” See § 11.14.1, below, for discussion on flow-through

clauses.

§ 11.13 • SUITS BY CONTRACTOR ON BEHALF OF

THE SUBCONTRACTOR (PASS-THROUGH CLAIMS)

§ 11.13 The Practitioner’s Guide to Colorado Construction Law

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One of the greatest misconceptions regarding construction subcontract agreements is that

there exists a “standard” subcontract agreement. In reality, unless a contractor is using one of the

forms sold by the American Institute of Architects (AIA), the Associated General Contractors of

America (AGC), or a similar organization,175 no two subcontract agreements are alike. Further,

even if a contractor elects to use an AIA, AGC, or similar “form” subcontract agreement, these

forms require the contractor to complete terms or add exhibits that can substantially transform the

agreement. Moreover, standard form contracts are frequently modified by the parties.176 The AIA

and AGC also have several different “standard” subcontract agreements from which to choose.

Ultimately, regardless of whether the prime contractor presents their in-house subcontract agree-

ment, or a “form” subcontract agreement prepared by the AIA, AGC, or similar organization, the

subcontractor can be sure that the agreement has not been prepared from the subcontractor’s per-

spective.

Some subcontractors may also feel it an exercise in futility to carefully review the ten-

dered subcontract agreement because they do not feel they are in a position to negotiate terms.

However, regardless of whether the subcontractor intends to attempt such a negotiation, it is

important that the subcontractor at least understand the terms of the agreement, if only (1) to

avoid breaching its terms and incurring unnecessary liability therefor, and (2) to properly handle

contract administration.

The following is a checklist of types of contract clauses typically contained in subcontract

agreements. Where possible, sample clauses from AIA or AGC contracts have been included. The

sample clauses do not represent the only place within the subcontract agreement that the high-

lighted issues are addressed, but merely serve as examples of the specified clauses. The checklist

does not provide detailed legal analysis regarding the various clauses; it simply highlights the

types of clauses in a typical subcontract agreement that should be reviewed or considered.

§ 11.14.1—Documents Comprising The Subcontract

In order to be aware of the terms of the subcontract agreement, the subcontractor must

understand which documents are part of the agreement. Subcontract agreements almost never

stand alone; they often incorporate the prime contract as well as other documents, including gen-

eral conditions, specifications, and drawings.177 All incorporated or referenced documents must

also be reviewed to understand fully the terms of the subcontract agreement. References to other

documents may occur in any section of the subcontract agreement; however, preferably the sub-

contract agreement will have a section specifically defining (listing) all documents that are part of

the subcontract agreement.

Incorporation of Prime Contract

The prime contract is the document most frequently incorporated into (and thereby made

a part of) the subcontract agreement.178 As seen in the following examples, the incorporation of

the prime contract often leads to the incorporation of other documents that are considered a part

§ 11.14 • SUBCONTRACT CLAUSES: A CHECKLIST174

Subcontractors and Materialmen § 11.14.1

(10/07) 11-29

of the prime contract. Incorporated documents may even include documents not in existence at

the time the subcontract agreement is entered into, such as subsequent modifications to the prime

contract.179 The subcontractor should be sure it receives and reviews every document incorporated

into the subcontract agreement, and should further insist upon a process that will alert the subcon-

tractor to the creation of these subsequently created documents which are de facto part of the sub-

contract agreement.

Example:

The Subcontract Documents include this Agreement, the Owner-Contractor agree-

ment, special conditions, general conditions, specifications, drawings, addenda,

Subcontract Change Orders, amendments and any pending and exercised alter-

nates.180 Appendix B, AGC Docs. 650 and 655, ¶ 2.3 (1998).

See also Appendix A, AIA Doc. A-401, ¶ 1.1 (1997).

Flow-Through Clauses

In addition to incorporating the terms of the prime contract, many subcontract agreements

also provide that the subcontractor assumes any responsibilities to the prime contractor that the

prime contractor has to the owner under the prime contract. In these circumstances, the subcon-

tractor must not only understand what obligations it directly owes the prime contractor, but what

obligations it consequently owes under such a flow-through clause,181 and to whom — be it the

prime contractor, owner, architect, or other party. The general flow-through statement often leaves

uncertainty as to what in fact flows through.182

Many disputes arise over this type of clause. For example, is the subcontractor bound by

an arbitration clause contained in the prime contract? To be certain, subcontract agreements that

do not contain flow-through or arbitration clauses will not compel arbitration.183 Subcontract

agreements often state that in the case of conflict between the subcontract and the other incorpo-

rated documents, the subcontract agreement provisions prevail. But what about subcontracts that

do not address arbitration? Though it seems to be a matter of first impression in Colorado, consid-

ering Colorado’s presumption in favor of arbitration,184 unless expressly185 forbidden by a sub-

contract clause, a court is likely to uphold a prime contract arbitration clause incorporated into the

subcontract via a flow-through clause.186 This is not to say, however, that subcontractors who are

not bound by the general contract (via flow-through clause or incorporation by reference) will be

forced to arbitrate.187

From the subcontractor’s perspective, it is often better to define specifically which of the

prime contract provisions apply to the subcontractor. Otherwise, the subtleties of whether a specif-

ic provision in an incorporated document applies under a flow-through clause may be left to liti-

gation and general rules regarding contract interpretation.

§ 11.14.1 The Practitioner’s Guide to Colorado Construction Law

11-30 (10/07)

Example:

To the extent the terms of the prime contract between the Owner and the Contractor

apply to the work of the Subcontractor, then the Contractor hereby assumes toward

the Subcontractor all the obligations, rights, duties, and redress that the Owner

under the prime contract assumes toward the Contractor. In an identical way, the

Subcontractor hereby assumes toward the Contractor all the same obligations,

rights, duties, and redress that the Contractor assumes toward the Owner and

Architect under the prime contract. Appendix B, AGC Docs. 650 or 655, ¶ 3.1

(Obligations) (1998).

See also Appendix A, AIA Doc. A-401, ¶ 2.1 (1997).

Reference to Other Documents

Often, the subcontract agreement references other documents in clauses other than the

specific clause listing the “contract documents.” These documents should also be reviewed as they

relate to the subcontract.

Example:

If the dispute cannot be resolved through direct discussions, the parties shall par-

ticipate in mediation under the Construction Industry Mediation Rules of the

American Arbitration Association before recourse to any other form of binding dis-

pute resolution. Appendix B, AGC Docs. 650 or 655, ¶ 11.1 (Initial Dispute

Resolution) (1988, 1998).

See also Appendix A, AIA Doc. A-401, ¶ 1.2 (1997).

Whole Agreement (Integration) Clauses

Clauses that state that a contract is “integrated” or that the written contract supersedes all

prior negotiations and representations attempt to prevent the introduction of parol evidence to add

to or vary the written contract.188 Subcontractors should be certain that any negotiated terms are

reflected in the final written subcontract agreement, because, if not, the negotiated terms will not

be considered part of the subcontract agreement.

Example:

The Subcontract represents the entire and integrated agreement between the parties

hereto and supersedes prior negotiations, representations, or agreements, either

written or oral. Appendix A, AIA Doc. A-401, ¶ 1.1 (1997).

§ 11.14.2—Specifications

The most basic subcontract agreement generally will discuss the scope of work to be per-

formed by the subcontractor, and the price to be paid for that work. While this may appear to be a

clearly defined area of the subcontract agreement, questions can arise regarding what materials

and services are included within the scope of work, what fees are to be paid by the subcontractor,

and what the subcontractor will be paid for the subcontract work.

Subcontractors and Materialmen § 11.14.2

(10/07) 11-31

Scope of Work

When reviewing the scope of work, the subcontractor may want to answer the following

questions: Who is responsible for site preparation prior to the subcontractor beginning work? Is

follow-on work like grading, painting, or landscaping included within the scope of work? Does

the subcontractor have the duty to prepare the site for work that will follow this subcontractor’s

work? Is the subcontractor responsible for providing signs and safety barricades? If the answers to

these questions are unclear from the face of the document (as in the following example, which

provides for “necessary or incidental” work and work “reasonably inferable from” the subcontract

documents), the subcontractor should clarify the scope of work prior to entering into the subcon-

tract agreement.

Example:

The Contractor contracts with the Subcontractor as an independent contractor to

provide all labor, materials, equipment, and services necessary or incidental to

complete the work described in Article 1 for the Project in accordance with, and

reasonably inferable from, that which is indicated in the Subcontract Documents,

and consistent with the Progress Schedule, as may change from time to time. SeeAppendix B, AGC Docs. 650 or 655, ¶ 2.1 (Subcontract Work) (1988, 1998).

Pricing

There are several different ways to price the subcontract work, with the three most com-

mon being: fixed price, unit pricing, and time-and-materials. The contract terms should be scruti-

nized to determine whether they correctly reflect the agreed price. If the subcontract calls for

exhibits that will determine unit prices or time and materials prices, as in the example below, the

subcontractor should confirm that the exhibits are attached to the subcontract agreement and that

they correctly reflect the agreed pricing structure. If a fixed price is specified as being determined

by a given quantity of units, the subcontractor should clarify whether that price will be adjusted if

the number of units provided is increased or decreased.

Example:

As full compensation for performance of this Agreement, Contractor agrees to pay

Subcontractor in current funds for the satisfactory performance of the Subcontract

Work subject to all applicable provisions of the Subcontract:

(a) the fixed-price of __________ Dollars ($__________) subject to additions and

deductions as provided for in the Subcontract Documents; and/or

(b) unit prices in accordance with the attached schedule of Unit Prices and estimat-

ed quantities, which is incorporated by reference and identified as Exhibit _____;

and/or

(c) time and material rates and prices in accordance with the attached Schedule of

Labor and Material Costs which is incorporated by reference and identified as

Exhibit _____.

§ 11.14.2 The Practitioner’s Guide to Colorado Construction Law

11-32 (10/07)

The fixed-price, unit prices and/or time and material rates and prices are referred to

as the Subcontract Amount. See Appendix B, AGC Docs. 650 or 655, ¶ 6,

(Subcontract Amount) (1988, 1998).

Inclusions

The subcontractor should determine what materials, equipment, and additional costs will

be borne by the subcontractor.

Materials, Equipment, and Shop Drawings

In certain labor-only subcontracts, all the materials and equipment are supplied by the

prime contractor, the owner, or some other party. However, in most subcontracts, the subcontrac-

tor is responsible for supplying all materials and equipment to be used in conjunction with the

subcontract work, as well as shop drawings, samples, and other incidentals to the work.

Example:

The Subcontractor shall furnish all of the labor, materials, equipment, and services,

including but not limited to, competent supervision, shop drawings, samples, tools,

and scaffolding as are necessary for the proper performance of the Subcontract

Work. See Appendix B, AGC Docs. 650 or 655, ¶ 3.2 (Responsibilities) (1988,

1998).

See also Appendix A, AIA Doc. A-401, ¶ 8.1 (1997).

Permits, Fees, Inspections, and Testing

In most subcontract agreements, the subcontractor is responsible for paying any fees asso-

ciated with permitting, inspections, and/or testing involving the subcontract work.

Example:

The Subcontractor shall bear all expenses associated with tests, inspections and

approvals required of the Subcontractor by the Subcontract Documents which,

unless otherwise agreed to, shall be conducted by an independent testing laborato-

ry or entity approved by the Contractor and Owner. Appendix B, AGC Docs. 650

or 655, ¶ 3.12 (Tests and Inspections) (1988, 1998).

See also Appendix A, AIA Doc. A-401, ¶ 4.2.1 (1997).

§ 11.14.3—Insurance And Bonds

Who provides insurance and/or bonds, if any, relating to the prime contract and the sub-

contract work? The subcontract agreement should be reviewed for provisions relating to types and

amounts of insurance coverage required, whether a payment and performance bond is required,

and who pays for these requirements. In the following examples, the subcontractor is required to

pay for both bonds and insurance, but is reimbursed for the cost of the bonds.

Subcontractors and Materialmen § 11.14.3

(10/07) 11-33

Examples:

The Subcontractor shall be reimbursed, without retainage, for the cost of any

required performance or payment bonds simultaneously with the first progress pay-

ment. Appendix B, AGC Docs. 650 or 655, ¶ 3.27.3 (1988, 1998).

Before commencing the Subcontract Work, and as a condition of payment, the

Subcontractor shall purchase and maintain insurance that will protect it from the

claims arising out of its operations under this Agreement, whether the operations

are by the Subcontractor, or any of its consultants or subcontractors or anyone

directly or indirectly employed by any of them, or by anyone for whose acts any of

them may be liable. Appendix B, AGC Docs. 650 or 655, ¶ 9.2.1 (Subcontractor’s

Insurance) (1988, 1998).

§ 11.14.4—Manner Of Performance

While some subcontract agreements are relatively silent with regard to the manner in

which the subcontractor is to perform the work, others have numerous requirements regarding

performance. The subcontractor must scrutinize the contract for such requirements to avoid inad-

vertent breach.

Supervision

The subcontractor is generally required to provide adequate supervision to its workforce.

However, the subcontractor is advised to review any provisions regarding supervision to confirm

whether there will be shared supervision or supervision of the subcontractor’s workforce accom-

plished completely by the prime contractor. Further, the subcontractor may have certain require-

ments regarding notification to the prime contractor of its representative or supervisor.

Examples:

The Subcontractor shall designate a person, subject to Contractor’s approval, who

shall be the Subcontractor’s authorized representative. This representative shall be

the only person to whom the Contractor shall issue instructions, orders, or direc-

tions, except in an emergency. The Subcontractor’s representative is __________,

who is agreed to by the Contractor. Appendix B, AGC Docs. 650 or 655, ¶ 3.11

(Subcontractor’s Representative) (1988, 1998).

See also Appendix A, AIA Doc. A-401, ¶¶ 3.2.2. and 4.1.1 (1997).

Equipment Storage

If on- or near-site storage of equipment and materials is an important aspect of the sub-

contract agreement, the subcontractor will want to be sure such storage is provided. As an illustra-

tion, compare the following two provisions, the first of which states unequivocally that storage

will be provided, while the second states that storage will be provided “if available.” In the sec-

ond scenario, the subcontractor may wish to clarify how storage of its equipment and materials

will be handled if not “available.”

§ 11.14.3 The Practitioner’s Guide to Colorado Construction Law

11-34 (10/07)

Example:

The Contractor shall allocate adequate storage areas, if available, for the

Subcontractor’s materials and equipment during the course of the Subcontract

Work. Appendix B, AGC Docs. 650 or 655, ¶ 4.6 (1988, 1998).

See also Appendix A, AIA Doc. A-401, ¶ 3.1.2 (1997).

Availability of Work Site

The extent to which the work site is available to the subcontractor, and the access routes

which must be used, may impact upon the ability of the subcontractor to timely perform its work.

Example:

The subcontractor shall use such entrance or entrances to the construction site dur-

ing its performance of this subcontract agreement as may be designated by the

prime contractor and at such times as may be designated by the prime contractor.

The subcontractor shall enforce such access locations and times among its employ-

ees, suppliers, and sub-subcontractors.

Coordination with Prime/Other Subcontractors

Scheduling

While coordinating work is generally the duty of the prime contractor, the subcontractor

must coordinate with either the prime contractor or other subcontractors to accomplish efficient

scheduling of the work. The level of effort required by the subcontractor involved in such coordi-

nation may vary.

Example:

The Subcontractor . . . shall cooperate with the Contractor in scheduling and per-

forming the Subcontractor’s Work to avoid conflict, delay in, or interference with

the Work of the Contractor, other subcontractors or Owner’s own forces. Appendix

A, AIA Doc. A-401, ¶ 4.1.1 (1997)

See also Appendix B, AGC Docs. 650 or 655, ¶ 2.5 (Protection of Work) (1988, 1998).

Protection of Work

The subcontractor is usually required to protect the work of the prime contractor and

other subcontractors from damage caused by its own work. The subcontractor may be liable for

damages resulting from his or her failure to properly protect the work of others.

Example:

The Subcontractor shall take necessary precautions to protect properly the Work of

other subcontractors from damage caused by operations under this Subcontract.

Appendix A, AIA Doc. A-401, ¶ 4.1.7 (1997).

Subcontractors and Materialmen § 11.14.4

(10/07) 11-35

See also Appendix B, AGC Docs. 650 or 655, ¶ 3.15 (Protection of the Work)

(1988, 1998).

Assignment/Subcontracting

A clause in the subcontract agreement that prohibits either assignment of the subcontract

or further subcontracting of the work, or gives the prime contractor or owner a veto power over

the subcontractor’s right to assign or sub-subcontract the work may adversely affect the subcon-

tractor’s ability to perform. If the subcontractor foresees any scenario in which all or a portion of

the subcontract work is to be assigned or further subcontracted, the subcontractor must be aware

of any provisions prohibiting such assignment. See Appendix A, AIA Doc. A-401, ¶ 7.4.2 (1997).

See also Appendix B, AGC Docs. 650 or 655, ¶ 3.17 (Assignment of Subcontract Work) (1998).

Work for Others

The subcontractor must also be aware of any prohibitions in the subcontract agreement

against performing work for other parties during performance of the subcontract work.

Example:

Until final completion of the Subcontract Work, the Subcontractor agrees not to

perform any work directly for the Owner or any tenants, or deal directly with the

Owner’s representatives in connection with the Subcontract Work, unless other-

wise approved in writing by the Contractor. Appendix B, AGC Docs. 650 or 655,

¶ 3.26 (Work for Others) (1988, 1998).

§ 11.14.5—Time Of Performance

The subcontractor needs to clearly understand the provisions relating to its time of per-

formance. These provisions may relate both to the time of day and days of the week that the work

must be or may be performed, as well as to required starting and ending dates of performance. If

time for performance is measured in days, the subcontractor must clarify whether the reference is

to calendar days or working days (and what they are). The subcontractor will also want to clarify

who bears the burdens relating to “bad weather” days during which performance by the subcon-

tractor is not practical or feasible, as the most commonly outlined measure of damages included in

a subcontract agreement relates to damages for delay.189

Example:

The subcontractor shall perform the subcontract work at the times of the day and

on the days of the week designated by the prime contractor.

Time is of the Essence

The subcontract agreement usually specifies that “time is of the essence,” which estab-

lishes the importance of completing the work by the designated completion date: if the work is

not completed “on time,” and time is of the essence, the prime contractor can recover any dam-

ages suffered by reason of the delay.

§ 11.14.4 The Practitioner’s Guide to Colorado Construction Law

11-36 (10/07)

Example:

With respect to the obligations of both the Contractor and the Subcontractor, time

is of the essence of this Subcontract. Appendix A, AIA Doc. A-401, ¶ 9.4. (1997).

See also Appendix B, AGC Docs. 650 or 655, ¶ 5.1 (1988, 1998).

Delay Damages

Delay damage provisions are commonly included in subcontract agreements. Generally,

the clause provides for either actual damages (which may include consequential damages and

attorney fees) or liquidated damages. The first example below outlines a relatively simple and

straightforward liquidated damages provision.190 The second example assesses actual damages

against the subcontractor, but also attempts to require the subcontractor to indemnify the prime

contractor for any liquidated damages assessed against the prime contractor by the owner that

result from delay caused by the subcontractor. The subcontractor should also determine whether it

has a reciprocal right to collect delay damages from the prime contractor who is responsible for a

delay in the subcontractor’s performance.

Example:

The subcontractor shall pay the contractor $1000 for each day that the Project is not

completed beyond the completion date that is caused by the subcontractor. This

sum is liquidated damages and is not a penalty.

If the Subcontract Documents provide for liquidated or other damages for delay

beyond the completion date set forth in the Subcontract Documents, and such dam-

ages are assessed, the Contractor may assess a share of the damages against the

Subcontractor in proportion to the Subcontractor’s share of the responsibility for

the delay. . . . This paragraph 5.3 [Delays and Extensions of Time] shall not limit

the Subcontractor’s liability to the Contractor for the Contractor’s actual delay

damages caused by the Subcontractor’s delay. Appendix B, AGC Docs. 650 and

655, ¶ 5.3 (1988, 1998).

§ 11.14.6—Payment Terms

Although payment is generally of utmost importance to the subcontractor, the payment

terms are often considered “standardized” and are not carefully scrutinized beyond the process for

achieving progress payments and the amount of retainage withheld by the prime contractor. There

are several other provisions that may impact upon payment to the subcontractor and that should

be reviewed. Further, the subcontractor will want to include provisions that provide for interest on

late payments.

Payment Process

The payment process for obtaining progress payments should be reviewed to determine

that there is a fair and reasonable procedure for the calculation of progress payments, and the

prompt payment thereof.

Subcontractors and Materialmen § 11.14.6

(10/07) 11-37

Example:

The Subcontractor shall submit progress payment applications to the Contractor no

later than the __________ day of each payment period for the Subcontract Work

performed up to and including the __________ day of the payment period indicat-

ing work completed and, to the extent allowed under the Subparagraph 8.2.4 [Stored

Materials], materials suitably stored during the preceding payment period. Appendix

B, AGC Docs. 650 or 655, ¶ 8.2.3 (Time of Application) (1988, 1998).

Retainage

Provisions regarding retainage should be reviewed to determine both the percentage to be

retained, and the process by which that retainage is released, either through a partial release, or

final release.

Example:

The rate of retainage shall be _____ percent (_____%) which is equal to the per-

centage retained from the Contractor’s payment by the Owner for the Subcontract

Work. Appendix B, AGC Docs. 650 and 655, ¶ 8.2.2 (Retainage) (1988, 1998).

Pay-When-Paid Clause

Pay-when-paid clauses generally discuss the timing of the payment from the prime con-

tractor to the subcontractor and usually provide for payment to the subcontractor within a certain

period of time after the prime contractor has received payment from the owner. If the prime con-

tractor never receives payment from the owner, the prime contractor is still liable to the subcon-

tractor for the work completed. This clause differs markedly from the pay-if-paid clause discussed

below. The pay-when-paid subject is discussed in full at § 11.12.1, above.

Examples:

Progress payments to the Subcontractor for satisfactory performance of the

Subcontract Work shall be made no later than seven (7) days after receipt by the

Contractor of payment from the Owner for the Subcontract Work. If payment from

the Owner for such Subcontract Work is not received by the Contractor, through no

fault of the Subcontractor, the Contractor will make payment to the Subcontractor

within a reasonable time for the Subcontract Work satisfactorily performed.

Appendix B, AGC Doc. 650, ¶ 8.2.5 (Time of Payment) (1988, 1998).

See also Appendix A, AIA Doc. A-401, ¶ 11.3 (1997).

Pay-If-Paid Clause

Unlike the pay-when-paid clause, a pay-if-paid clause, while setting the time for payment

to the subcontractor, also makes payment from the owner to the prime contractor a condition

precedent to the prime contractor’s liability to pay the subcontractor. In this scenario, the subcon-

tractor is accepting the risk of the owner’s nonpayment. If the subcontract agreement contains a

pay-if-paid provision, the subcontractor would be wise to inquire into the creditworthiness of the

owner or otherwise secure guarantees of payment from the owner. See § 11.12.1, above.

§ 11.14.6 The Practitioner’s Guide to Colorado Construction Law

11-38 (10/07)

Examples:

Receipt of payment by the Contractor from the Owner for the Subcontract Work

is a condition precedent to payment by the Contractor to the Subcontractor. The

Subcontractor hereby acknowledges that it relies on the credit of the Owner, not

the Contractor, for payment of Subcontract Work. Progress payments received

from the Owner for the Subcontractor for satisfactory performance of the

Subcontract Work shall be made no later than seven (7) days after receipt by the

Contractor of payment from the Owner for the Subcontract Work. Appendix B,

AGC Doc. 655, ¶ 8.2.5 (Time of Payment) (1998).

It is an express condition precedent to payment by the prime contractor to the

subcontractor that the prime contractor receive payment from the owner for the

subcontractor’s work. The prime contractor shall be under no obligation to pay

the subcontractor for any work done pursuant to this agreement until the prime

contractor has been paid therefor by the owner, and then only to the extent of the

payment received from the owner. The subcontractor expressly bears the risk of

the owner’s nonpayment.

Waiver of Claims and/or Liens

The ability of a subcontractor to file a mechanic’s lien upon failure of payment is a pow-

erful tool to secure eventual payment for improvement to a property (see Chapter 19, “Mechanics’

Liens”). The subcontractor will want to review the contract documents to determine if the agree-

ment contains a waiver of its ability to lien or otherwise pursue claims against the prime contrac-

tor or owner. In some instances, the prime contract may include a waiver of mechanics’ liens

without regard to whether the subcontractor has received any payments.191 Colorado law requires

consideration to accompany a valid lien waiver, although such consideration need not be in the

form of payments to the subcontractor.192 The subcontractor should either insist upon the addition

of a provision that waives the right to liens only to the extent payment is received by the subcon-

tractor, or require the removal of the blanket waiver from the agreement.

Example:

Subcontractor hereby waives and relinquishes any right to a mechanic’s lien it

may hereafter have pursuant to C.R.S. § 38-22-119, regardless of whether pay-

ment has been made for the work performed under this subcontract.

§ 11.14.7—Indemnification

Extent of Indemnification

Indemnification clauses are frequently included in subcontract agreements. It is important

that the subcontractor determine whether the indemnification covers direct damages only, or also

includes consequential damages and attorney fees and costs. The subcontractor should also deter-

mine who it must indemnify and for what it must indemnify. For example, must the subcontractor

indemnify the prime contractor or owner (1) only for damages caused by the subcontractor, (2) for

damages where there is no fault on the part of the subcontractor, or (3) for damages for which the

Subcontractors and Materialmen § 11.14.7

(10/07) 11-39

indemnified party is in part at fault?193 Effective July 1, 2007, indemnification clauses that require

a subcontractor to indemnify a contractor for damages beyond the subcontractor’s fault are void

as against public policy.194 See Appendix A, AIA Doc. A-401, ¶ 4.6.1 (1997) for an example.

Fines

As a subset of indemnification clauses, the subcontract agreement may also include provi-

sions whereby a subcontractor must indemnify the prime contractor for any fines assessed against

the prime contractor relating to the subcontractor’s work. This may be in addition to any fines

assessed directly against the subcontractor relating to the same violation. While it may be reason-

able for the prime contractor to require indemnification for fines relating to the subcontract work,

a clause that provides for reciprocal indemnification (as in the example below) is far preferable to

a one-sided clause requiring only that the subcontractor indemnify the prime contractor. The sub-

contractor should also seek removal of flow-down clauses that add penalties in addition to the

requirement for indemnification.

Example:

Each party to this Agreement shall indemnify the other party from and against fines

or penalties imposed as a result of safety violations, but only to the extent that such

fines or penalties are caused by its failure to comply with applicable safety require-

ments. Appendix B, AGC Docs. 650 or 655, ¶ 3.14.9 (1988, 1998).

Hazardous Materials

The subcontractor should ascertain who has responsibility for the handling of hazardous

materials. Often the subcontractor must agree to indemnify the prime contractor and/or other par-

ties for damages relating to the handling and storage of hazardous materials.

Example:

To the extent that the Contractor has rights or obligations under the Owner-

Contractor agreement or by law regarding hazardous materials as defined by the

Subcontract Document within the scope of the Subcontract Work, the

Subcontractor shall have the same rights or obligations. Appendix B, AGC Docs.

650 or 655, ¶ 3.18 (Hazardous Materials) (1988, 1998).

§ 11.14.8—Warranty

Type and Duration of Warranties

The warranty provisions of the subcontract agreement may have the subcontractor

granting greater and/or longer warranties on materials than the subcontractor has received on

those same materials. If possible, the subcontractor should limit its warranty on materials and

equipment to the scope and duration of the warranty it receives, or simply pass through those war-

ranties. In any case, the subcontractor should be aware of the extent and duration of the warranties

granted under the subcontract agreement, and to whom those warranties are granted.

§ 11.14.7 The Practitioner’s Guide to Colorado Construction Law

11-40 (10/07)

Examples:

The Subcontractor warrants that all materials and equipment furnished under this

Agreement shall be new, unless otherwise specified, of good quality, in conformance

with the Subcontract Documents, and free from defective workmanship and materi-

als. Warranties shall commence on the date of Substantial Completion of the Work

or a designated portion. Appendix B, AGC Docs. 650 or 655, ¶ 3.21 (Warranties)

(1988, 1998).

Subcontractor warrants its work and materials against defects to the prime contrac-

tor and the owner for the longer of: (1) one year from completion of the subcon-

tractor’s work, (2) one year from substantial completion of the project, or (3) the

time period required under the provisions of the contract between the prime con-

tractor and the owner.

See also Appendix A, AIA Doc. A-401, ¶ 4.5.1 (1997).

Project Feasibility

The subcontract agreement may overtly or impliedly require the subcontractor to warrant

the feasibility of the project (or some portion thereof), or the suitability of the specifications. For

example, the following three paragraphs, when read together, may require such a warranty from

the subcontractor as relates to the subcontract work.

Example:

The Subcontractor shall make a careful analysis and comparison of the drawings,

specifications, other Subcontract Documents and information furnished by the

Owner relative to the Subcontract Work. . . . Should the Subcontractor discover any

errors, inconsistencies, or omissions in the Subcontract Documents, the Sub-

contractor shall report such discoveries to the Contractor in writing within three (3)

days. Appendix B, AGC Docs. 650 or 655, ¶ 3.3 (Inconsistencies and Omissions)

(1988, 1998).

Prior to performing any portion of the Subcontract Work, the Subcontractor shall

conduct a visual inspection of the project site to become generally familiar with

local conditions and to correlate site observations with the Subcontract Documents.

Appendix B, AGC Docs. 650 or 655, ¶ 3.4 (Site Visitation) (1988, 1998).

If the Subcontractor fails to perform the reviews and comparisons required in

Paragraphs 3.3 [Inconsistencies and Omissions] and 3.4 [Site Visitation], above,

to the extent the Contractor is held liable to the Owner because of the

Subcontractor’s failure, the Subcontractor shall pay the costs and damages to the

Contractor that would have been avoided if the Subcontractor had performed those

obligations. Appendix B, AGC Docs. 650 or 655, ¶ 3.5 (Increased Costs and/or

Time) (1988, 1998).

Subcontractors and Materialmen § 11.14.8

(10/07) 11-41

It would be in the subcontractor’s best interests to require deletion of any warranties relat-

ing to project feasibility or specification suitability. It is more reasonable for the owner or the

prime contractor to insist upon such a warranty from the party who developed the plans and speci-

fications.

Differing Site Conditions

The subcontractor is sometimes required to assume the risk that the conditions of the site

(most frequently the underground conditions) are different from those contemplated by the con-

tract documents or specifications. The apportionment of the risk of unexpected site conditions

could make a significant difference in the ability of the subcontractor to profitably complete the

subcontract work. Compare the two examples below.

Examples:

If in the performance of the Subcontract Work the Subcontractor finds latent, con-

cealed, or subsurface physical conditions that differ materially from those indicat-

ed in the Subcontract Documents or unknown physical conditions of an unusual

nature, which differ materially from those ordinarily found to exist, and not gener-

ally recognized as inherent in the kind of work provided for in this Agreement, the

Subcontract Amount and/or the progress Schedule shall be equitably adjusted by a

Subcontract Change Order within a reasonable time after the conditions are first

observed. The adjustment that the Subcontractor may receive shall be limited to the

adjustment the Contractor receives from the Owner on behalf of the Subcontract,

or as otherwise provided under Subparagraph 5.3.2 [Claims Relating to Owner].

Appendix B, AGC Docs. 650 or 655, ¶ 7.3 (Unknown Conditions) (1988, 1998).

The subcontractor has conducted an inspection of the site and assumes the risk of

the conditions of the site, including the character of the subsurface conditions of the

site. No additions to the contract price or performance time shall be approved relat-

ing to unexpected site conditions.

The first example above appears to shift the risk of differing site conditions away from

the subcontractor. However, the final sentence in that clause limits the ability of the subcontractor

to collect for additional costs relating to differing site conditions to that which the prime contrac-

tor is able to collect. Prior to accepting such a clause, the subcontractor should refer to the prime

contract to determine whether the prime contractor will be able to collect any amounts for differ-

ing site conditions (and thus, whether the subcontractor will be able to collect). The second exam-

ple above allocates all the risk of differing site conditions to the subcontractor, and should be

completely avoided.195

§ 11.14.9—Changes To Contracts

Once a subcontract agreement has been entered into, changes to the agreement often

become necessary as schedules or specifications change. The subcontractor is cautioned to pro-

ceed carefully in performing work according to a change in the agreement unless the agreement

has been modified to reflect authorization for the change and additional time or payment for per-

formance by the subcontractor.

§ 11.14.8 The Practitioner’s Guide to Colorado Construction Law

11-42 (10/07)

Change Orders

Most subcontract agreements require that any changes to the contract be in writing. If the

agreement contains such a requirement, subcontractors are cautioned against performing work

upon the change without written authorization, as they may be unable to collect additional monies

from the prime contractor without the written authorization. The subcontractor should insist on

written authorization for the change, even if a price is not agreed upon prior to beginning the

change work.

Examples:

When the Contractor orders in writing, the Subcontractor, without nullifying this

Agreement, shall make any and all changes in the Subcontract Work which are

within the general scope of this Agreement. . . . No adjustments shall be made for

any changes performed by the Subcontractor that have not been ordered by the

Contractor. Appendix B, ACG Docs. 650 or 655, ¶ 9.2.1 (Subcontract Change

Orders) (1988, 1998).

See also Appendix A, Doc. A-401, ¶ 5.2 (1997).

In spite of the requirement for written change orders, subcontractors often find that they

are still expected to begin work upon the change prior to receipt of the written change order. If

done, this often has disastrous consequences for the subcontractor: nonpayment. Subcontractors

may wish to negotiate a clause that relieves the subcontractor from any obligation to begin work

prior to receipt of the change order.

Example:

The subcontractor has no obligation to perform changes in the subcontract work

until a duly authorized, written change order has been issued in accordance with

this Agreement. Damages for any delay caused by a delay in delivery of the

required change order shall be born by the prime contractor.

Authority to Make Changes

The subcontractor should ascertain who has the authority to issue changes to the work.

Requests for payment pursuant to a written change order may be rejected if the person issuing the

change order did not have the necessary authority. For example, the job superintendent or an

inspector at the site may request changes to the contract that they have no authority to request.

Example:

The Contractor shall designate a person who shall be the Contractor’s authorized

representative. The Contractor’s representative shall be the only person the

Subcontractor shall look to for instructions, orders, and/or directions, except in an

emergency. The Contractor’s representative is __________. Appendix B, AGC

Docs. 650 or 655, ¶ 4.1 (Contractor’s Representative) (1988, 1998).

Subcontractors and Materialmen § 11.14.9

(10/07) 11-43

Notice of Changes

Even in the most carefully administered construction contracts, constructive changes to

the contract can occur that may lead to a claim by the subcontractor for additional time or pay-

ment for the changed conditions. Alternatively, a properly obtained written change order, while

detailing the change in work, may not have specified a change in time for performance or pay-

ment to the subcontractor. In these scenarios, a subcontractor will want to make a claim for such

additional time or payment. The subcontract agreement may outline specific procedures and time

deadlines for making such claims. The subcontractor should be familiar with these procedures

since a failure to comply with them may invalidate the claim of the subcontractor.196

Examples:

The Subcontractor agrees to initiate all claims for which the Owner is or may be

liable in the manner and within the time limits provided in the Subcontract

Documents for like claims by the Contractor upon the Owner and in sufficient time

for the Contractor to initiate such claims against the Owner in accordance with the

Subcontract Documents. Appendix B, AGC Docs. 650 or 655, ¶ 5.3.2 (Claims

Relating to Owner) (1998).

The Subcontractor shall give the Contractor written notice of all claims not includ-

ed in Subparagraph 5.3.2 [Claims Relating to Owner] within seven (7) days of the

Subcontractor’s knowledge of the facts giving rise to the event for which the claim

is made; otherwise, such claims shall be deemed waived. Appendix B, AGC Docs.

650 or 655, ¶ 5.3.4 (Claims Relating to Contractor) (1998).

See also Appendix A, AIA Doc. A-401, ¶ 5.3 (1997).

§ 11.14.10—Final Completion, Payment, And Release

The subcontractor should determine when and how final payment and release is accom-

plished. Provisions regarding final payment and release may vary, depending upon whether a pay-

when-paid clause (example two, below) or pay-if-paid clause (example three, below) is included

in the general payment provisions.

Examples:

Final payment of the balance due of the Subcontract Amount shall be made to the

Subcontractor within seven (7) days after receipt by the Contractor of final pay-

ment from the Owner for such Subcontract Work. Appendix B, AGC Doc. 650, ¶

8.3.3 (Time of Payment) (1998).

If final payment from the Owner for such Subcontract Work is not received by the

Contractor, through no fault of the Subcontractor, the Contractor will make pay-

ment to the Subcontractor within a reasonable time. Appendix B, AGC Doc. 650, ¶

8.3.4 (Final Payment Delay) (1988).

§ 11.14.9 The Practitioner’s Guide to Colorado Construction Law

11-44 (10/07)

Receipt of final payment by the Contractor from the Owner for the Subcontract

Work is a condition precedent to payment by the Contractor to the Subcontractor.

The Subcontractor hereby acknowledges that it relies on the credit of the Owner,

not the Contractor, for payment of Subcontract Work. Appendix B, AGC Doc. 655,

¶ 8.3.3 (Time of Payment) (1998).

See also Appendix A, AIA Doc. A-401, ¶ 121.1 (1997).

§ 11.14.11—Termination

Under common law, a subcontract agreement may be terminated by the prime contractor

upon a material default by the subcontractor. Similarly, a subcontract agreement can be terminated

by the subcontractor upon a material default of the prime contractor.

Often, a subcontract will define when it can be terminated other than as allowed by the

common law. In certain situations, a subcontract agreement may also contain provisions allowing

for the termination of the agreement for the convenience of the prime contractor or the owner

without regard to the default of the subcontractor. The subcontractor is cautioned to carefully

assess the risk of entering into a contract that may be terminated for the convenience of another

party, and should also carefully review the notice requirements prior to any termination.

For Default

Subcontract agreements may or may not contain a provision requiring the prime contrac-

tor to give the subcontractor an opportunity to cure defective performance prior to terminating the

agreement for default of the subcontractor.

Example:

If the Subcontractor fails to commence and satisfactorily continue correction of a

default within three (3) days after written notification issued under Subparagraph

10.1.1 [Notice to Cure], then the Contractor may, in lieu of or in addition to

Subparagraph 10.1.1 [Notice to Cure], issue a second written notification, to the

Subcontractor and its surety, if any. Such notice shall state that if the Subcontractor

fails to commence and continue correction of a default within seven (7) days of the

written notification, the Agreement will be deemed terminated. A written notice of

termination shall be issued by the Contractor to the Subcontractor at the time the

Subcontractor is terminated. Appendix B, AGC Docs. 650 or 655, ¶ 10.1.2

(Termination by Contractor) (1988, 1998).

See also Appendix A, AIA Doc. A-401, ¶ 7.2.1 (1997).

For Convenience

If a contract between a prime contractor and the owner contains a termination for conven-

ience provision, generally a related subcontract agreement will contain a similar provision. The

subcontractor should determine how it will be compensated when terminated for convenience.

Subcontractors and Materialmen § 11.14.11

(10/07) 11-45

Example:

If the Owner terminates the Contract for the Owner’s convenience, the Contractor

shall deliver written notice to the Subcontractor. Appendix A, AIA Doc. A-401, ¶

7.2.2 (1997).

§ 11.14.12—Dispute Resolution

Disputes arising under a subcontract agreement can be resolved in any number of forums.

Subcontractors should be aware of and avail themselves of any mandatory levels of dispute reso-

lution, or possibly be held liable for the costs incurred by the prime contractor for failure to abide

by the mandated dispute resolution procedures.197 The required location for any dispute resolution

is of paramount importance to the subcontractor as the requirement to travel could place a signifi-

cant burden on the subcontractor. Dispute resolution is discussed in detail in Chapter 21,

“Arbitration and Mediation of Construction Disputes.”

Mediation

Mediation is the least formal of the various forums for dispute resolution, and usually the

least costly. Many subcontract agreements mandate mediation prior to resorting to more formal-

ized methods of dispute resolution.

Example:

If a dispute arises out of or relates to this Agreement or its breach, the parties shall

endeavor to settle the dispute first through direct discussions. If the dispute cannot

be resolved through direct discussions, the parties shall participate in mediation

under the Construction Industry Mediation Rules of the American Arbitration

Association before recourse to any other form of binding dispute resolution.

Appendix B, AGC Docs. 650 or 655, ¶ 11.1 (Initial Dispute Resolution) (1988,

1998).

See also Appendix A, AIA Doc. A-401, ¶ 6.1 (1997).

Arbitration

Arbitration is another form of dispute resolution also slightly less formal than resorting to

litigation. Arbitration may or may not be binding upon the parties.198 See Appendix A, AIA Doc.

A-401, ¶ 6.2.1 (1997) for an example of an arbitration clause.

Choice of Law

In any dispute resolution scenario, the choice of state law that will be applied to the sub-

contract agreement can greatly effect the interpretation of duties and responsibilities under the

agreement. If the state law to be applied to the agreement is a state foreign to the subcontractor,

the subcontractor may be subjected to the additional expense of obtaining legal counsel licensed

to practice in that state in order to obtain appropriate advice as to the subcontractor. More impor-

tantly, the subcontractor may be surprised by the interpretation of the contract imposed by a state

with whom law he or she is not familiar. Effective July 1, 2007, Colorado law shall apply to all

construction contracts affecting improvements to real property within Colorado, notwithstanding

any contractual provision to the contrary.199

§ 11.14.11 The Practitioner’s Guide to Colorado Construction Law

11-46 (10/07)

Examples:

This Agreement shall be governed by the law in effect at the location of the Project.

Appendix B, AGC Docs. 650 or 655, ¶ 12.1 (Governing Law) (1988, 1998).

This contract shall be interpreted under the laws of the State of Colorado.

Location

The venue for the dispute resolution may present an additional expense to the subcontrac-

tor if the location is outside of the area or state where the subcontractor is located.

Examples:

The location of the mediation shall be the location of the Project. Appendix B, AGC

Docs. 650 or 655, ¶ 11.1 (Initial Dispute Resolution) (1988, 1998).

Any suit brought on this subcontract agreement shall be brought in El Paso County,

Colorado.

Venue for any dispute resolution shall be the state and county where the prime con-

tractor’s national headquarters are located.

See also Appendix A, AIA Doc. A-401, ¶ 6.1.3 (1997).

Attorney Fees and Costs

In any dispute regarding the subcontract, the related attorney fees and costs can be exten-

sive. While some subcontract agreements provide for attorney fees and costs to the prevailing

party, others are one-sided and only provide for the subcontractor’s payment of the prime contrac-

tor’s attorney fees and costs. The subcontractor should be extremely reluctant to agree to a one-

sided attorney fee clause in favor of the prime contractor.

Examples:

The cost of any mediation proceeding shall be shared equally by the parties partic-

ipating. The prevailing party in any dispute arising out of or relating to this

Agreement or its breach that is resolved by a dispute resolution procedure designat-

ed in the Subcontract Documents shall be entitled to recover from the other party

reasonable attorney fees, costs, and expenses incurred by the prevailing party in

connection with such dispute resolution process. Appendix B, AGC Docs. 650 or

655, ¶ 11.6 (Cost of Dispute Resolution) (1988, 1998).

If the prime contractor brings or defends a suit to enforce this subcontract agree-

ment, the subcontractor shall pay all attorney’s fees and costs incurred by the prime

contractor.

The prevailing party in any dispute shall be entitled to recover reasonable attorney

fees, costs, charges, and other reasonable costs expended or incurred as a result of

said dispute.

Subcontractors and Materialmen § 11.14.12

(10/07) 11-47

A subcontractor must be willing to negotiate regarding the inclusion, exclusion, or modi-

fication of subcontract provisions. Careful review of the subcontract agreement is a necessary first

step. Once the subcontractor obtains a good understanding of the proposed agreement, the subcon-

tractor is in a position to analyze the risks and costs of entering into the agreement, and propose

modifications from a realistic and informed vantage.

Other sources regarding this topic:

• 1-4 Construction Law (Mathew Bender, 1998).

• R.F. Cushman, et al., Construction Industry Forms (1988).

William H. Wiedemann, “Labor and Material Claims on State Public Works Projects,” 24 Colo.Law. 2165 (Sept. 1995).

Annotation, “Building and Construction Contracts: Prime Contractor’s Liability to Subcontractor

for Delay in Performance,” 16 A.L.R. 3d, 1252 (1967).

Annotation, “Construction and Effect of Statutes Requiring Construction Fundholder to Withhold

Payments upon ‘Stop Notice’ from Subcontractor, Materialmen, or Other Person Entitled

to Funds,” 4 A.L.R. 5th 772 (1992).

Annotation, “Equipment Leasing Expense as Element of Construction Contractor’s Damages,” 52

A.L.R. 4th 712 (1987).

Annotation, “Enforceability of Voluntary Promise of Additional Compensation because of

Unforeseen Difficulties in Performance of Work Required Under Existing Contract,” 85

A.L.R. 3d 259 (1978).

Annotation, “Validity in Construction of No Damage Clause with Respect to Delay in Building or

Construction Contract,” 74 A.L.R. 3d 187 (1976).

Annotation, “Liability of Subcontractor Upon Bond or Other Agreement Indemnifying General

Contractor Against Liability for Damage to Person or Property,” 68 A.L.R. 3d 7 (1976).

Annotation, “Building and Construction Contracts: Right of Subcontractor Who Has Dealt Only

with Primary Contractor to Recover Against Property Owner in Quasi Contracts,” 62

A.L.R. 3d 288 (1975).

Annotation, “Who is Contractor or Subcontractor, as Distinguished from Materialman, for

Purposes of Mechanic’s Lien, Contractor’s Bond, or Other Provision for Securing

Compensation Under Construction Contract,” 141 A.L.R. 321 (1942).

Annotation, “Liability of Builder or Subcontractor for Insufficiency of Building Resulting from

Latent Defects in Materials Used,” 61 A.L.R. 3d 792 (1975).

§ 11.16 • BIBLIOGRAPHY

§ 11.15 • CONCLUSION

§ 11.15 The Practitioner’s Guide to Colorado Construction Law

11-48 (10/07)

Davyne A. Ryals, Esq., Author (1999), Schumack & Ryals; George Koons, III, Esq., Author (1999), Hall &Evans, L.L.C.; and Dale A. Gaar, Esq., Author (1999), Dale A. Gaar, P.C., were previous contributors to this

Chapter.

1. Kobayashi v. Meehleis Steel Co., 472 P.2d 724, 728 (Colo. App. 1970).

2. Black’s Law Dictionary 1277 (5th ed. 1979).

3. See Lovell Clay Prods. Co. v. Statewide Supply Co., 580 P.2d 1278, 1280 (Colo. App. 1978).

4. See Aetna Cas. & Sur. Co. v. Canam Steel Corp., 794 P.2d 1077, 1079 (Colo. App. 1990)

(merely contracting to deliver material to the job site does not make a party a subcontractor, focusing

specifically on the lack of any work to be performed at the site).

5. Cf. Beco Equip. Co. v. Box, 608 P.2d 850, 851 (Colo. App. 1980).

6. Schneider v. J.W. Metz Lumber Co., 715 P.2d 329, 332 (Colo. 1986).

7. Western Metal Lath v. Acoustical & Constr. Supply, Inc., 851 P.2d 875, 878-80 (Colo. 1993)

(CPWA); United States ex rel. Bryant v. Lembke Constr. Co., 370 F.2d 293 (10th Cir. 1966).

8. See C.R.S. § 38-22-101(1).

9. See Kobayashi, 472 P.2d at 727-28; Ragsdale Bros. Roofing v. United Bank of Denver, 744

P.2d 750, 755 (Colo. App. 1987).

10. Olson v. Model Land & Irrigation Co., 225 P. 259, 260 (Colo. 1924). See also CPS Distrib.,Inc. v. Federal Ins. Co., 685 P.2d 783, 784-85 (Colo. App. 1984) (defining “materials” as “items actually

used in the structure which become a part of it,” and defining “equipment” as generally including the

“tools, machinery, or appliances which are used to facilitate the work but which are not incorporated into

the structure”).

11. Cf. Beco Equip. Co., 608 P.2d at 850.

12. C.R.S. §§ 4-1-101 through 4-11-102.

13. C.R.S. § 38-10-110 (non-UCC contracts); C.R.S. § 4-2-201 (UCC contracts).

14. See Schneider, 715 P.2d at 333.

15. See Colorado Carpet Installation, Inc. v. Palermo, 647 P.2d 686, 688 (Colo. App. 1982).

16. See C.R.S. § 4-2-102 (“Unless the context otherwise requires, this article applies to transac-

tions in goods . . .”); Samuelson v. Chutich, 529 P.2d 631, 633-34 (Colo. 1974) (applying Uniform Sales

Act); Johnson-Voiland-Archuleta, Inc. v. Roark Assocs., 572 P.2d 1220, 1221 (Colo. App. 1977).

17. For example, is the predominant purpose of a contract calling for the fabrication, delivery, and

installation of custom cabinetry the sale of goods or the provision of services? One could legitimately argue

either side of that question, and there are almost countless other examples where this is equally true.

18. C.R.S. § 38-10-112(1)(a).

19. See Linder v. Midland Oil Refining Co., 40 P.2d 253 (Colo. 1935).

20. See Ridgeway v. Pope, 430 P.2d 77, 78 (Colo. 1967) (part performance); Ralston Oil & GasCo. v. July Corp., 719 P.2d 334, 339 (Colo. App. 1985) (part performance); Kiely v. St. Germain, 670 P.2d

764, 770 (Colo. 1983) (promissory estoppel).

21. C.R.S. § 4-2-201(1).

22. C.R.S. § 4-2-201, cmt. 2. As with contractors, materialmen may be able to overcome the

statute of frauds based on part performance or other types of estoppel.

23. C.R.S. § 4-2-104(1).

24. C.R.S. § 4-2-201(2).

25. C.R.S. § 4-2-201(3).

26. C.R.S. § 4-2-201, cmt. 2. See also Colorado Carpet Installation, Inc., 647 P.2d at 688.

NOTES

Subcontractors and Materialmen Notes

(10/07) 11-49

27. C.R.S. § 4-2-207(2); Offen, Inc. v. Rocky Mountain Constructors, Inc., 765 P.2d 600, 601

(Colo. App. 1988) (additional terms providing for interest and collection costs were not material and there-

fore became a part of the contract). See also Mead Assocs., Inc. v. Scottsbluff Sash & Door Co., 856 P.2d

40, 42 (Colo. App. 1993).

28. C.R.S. § 4-2-207(2)(b).

29. See Flight Sys., Inc. v. Elgood-Mayo Corp., 660 P.2d 909, 911 (Colo. App. 1982); Cargill, Inc.v. Stafford, 553 F.2d 1222, 1225 (10th Cir. 1977).

30. C.R.S. § 4-2-207(3).

31. See Westinghouse Elec. Corp. v. Nielsons, Inc., 647 F. Supp. 896, 900-01 (D. Colo. 1986).

32. See O. C. Kinney, Inc. v. Paul Hardeman, Inc., 379 P.2d 628, 631 (Colo. 1963).

33. C.R.S. § 4-2-205.

34. Mead Assocs., Inc. v. Sash & Door Co., 856 P.2d 40 (Colo. App. 1993).

35. Id. at 41 (citation omitted).

36. See Mead Assocs., Inc. v. Antonsen, 677 P.2d 434, 436 (Colo. App. 1984).

37. Haselden-Langley Constructors, Inc. v. D. E. Farr & Assocs., Inc., 676 P.2d 709, 711 (Colo.

App. 1983).

38. Id.

39. Id.

40. But see Powder Horn Constructors, Inc. v. City of Florence, 754 P.2d 356, 360 (Colo. 1988)

(discussing general contractor’s mistaken bid).

41. 1 C.C.R. 101-9, R-24-103-401-03, subpart (b) (ability to meet standards).

42. See BRW, Inc. v. Dufficy & Sons, Inc., 99 P.3d 66, 72 (Colo. 2004).

43. Id.44. Id.45. See, e.g., A.C. Excavating v. Yacht Club II Homeowners Assoc., Inc., 114 P.3d 862 (Colo.

2005).

46. Cf. White Constr. Co. v. Sauter Constr. Co., 731 P.2d 784, 786 (Colo. App. 1986) (contractor’s

assurances of payment to sub-subcontractor created contractual relationship).

47. See Brannan Sand & Gravel Co. v. Santa Fe Land & Improvement Co., 332 P.2d 892, 895

(Colo. 1958).

48. DCB Constr. Co. v. Central City Dev. Co., 965 P.2d 115, 121 (Colo. 1998) (citation omitted).

49. E. B. Roberts Constr. Co. v. Concrete Contractors, Inc., 704 P.2d 859, 865-66 (Colo. 1985);

Montezuma Plumbing & Heating, Inc. v. Housing Auth. of Montezuma County, 651 P.2d 426, 428 (Colo.

App. 1982).

50. Cf. Heritage Pools, Inc. v. Foothills Metro. Rec. and Park Dist., 701 P.2d 1260, 1262-63 (Colo.

App. 1985) (subcontractor was not named in contract and at most was only incidental beneficiary and there-

fore not entitled to recover as a third-party beneficiary to the contract).

51. DCB Constr. Co., 965 P.2d at 119-20.

52. Id. at 123; R.A.S. Builders, Inc. v. Euclid & Commonwealth Assocs., 965 P.2d 1242, 1244-45

(Colo. 1998).

53. DCB Constr., 965 P.2d at 123, quoting Ninth District Production Credit Assoc. v. Ed Duggan,Inc., 821 P.2d 788, 798 (Colo. 1991).

54. For more on whose form controls when purchase orders and delivery orders control, see dis-

cussion at § 11.2.3 regarding the Battle of the Forms.

55. Main Elec., Ltd. v. Printz Svcs. Corp., 980 P.2d 522 (Colo. 1999); David C. Olson, Inc. v.Denver & Rio Grande W. R.R., 789 P.2d 492, 496 (Colo. App. 1990).

56. For example, where the contractor agreed to supply paint to the painting subcontractor, the

contractor assumed a duty to supply paint that was not defective. Wynne v. United States ex rel. Mid-StatesWaterproofing Co., 382 F.2d 699, 701 (10th Cir. 1967).

57. Burgess Constr. Co. v. M. Morrin & Son Co., 526 F.2d 108, 113 (10th Cir. 1975). Cf. David C.Olson, Inc., 789 P.2d at 496.

58. Burgess Constr. Co., 526 F.2d at 113.

Notes The Practitioner’s Guide to Colorado Construction Law

11-50 (10/07)

59. See Hinds v. Hinchman-Renton Fireproofing Co., 165 F. 339, 341 (8th Cir. 1908).

60. DuBois v. B. H. Baker, General Contractors, 511 P.2d 522, 523 (Colo. 1973) (not selected for

official publication).

61. See C.R.S. § 4-2-311.

62. See C.R.S. § 4-2-301.

63. See C.R.S. § 4-2-507.

64. C.R.S. § 4-1-203.

65. C.R.S. § 4-1-201(19).

66. Denver Ventures, Inc. v. Arlington Lane Corp., 754 P.2d 785, 787 (Colo. App. 1988).

67. Id.

68. Id.

69. Denny Construction, Inc. v. City and County of Denver, 2007 Colo. App. LEXIS 274 (Colo.

App. Feb. 22, 2007).

70. At some level, the BRW decision might be argued to deal with this issue, as the court noted that

where commercial parties are bound by the network of interrelated contracts that are common on construc-

tion projects, the contractual relationships and allocations of risk will be respected by the courts. BRW, Inc.,99 P.3d at 72-74.

71. Jardel Enters., Inc. v. Triconsultants, Inc., 770 P.2d 1301, 1303 (Colo. App. 1988).

72. Id.

73. Id.

74. Id.

75. See White Constr. Co., 731 P.2d at 786 (where privity was created by promise to insure pay-

ment by issuance of joint checks, sub-subcontractor owed obligation to perform in a workmanlike manner).

76. Samuelson, 529 P.2d at 633 (installation of gas pipe); Johnson-Voiland-Archuleta, Inc., 572

P.2d at 1221 (engineers).

77. Aetna Cas. & Sur. Co. v. Crissy Fowler Lumber Co., 687 P.2d 514, 516 (Colo. App. 1984)

(whether implied warranty of fitness for a particular purpose applied to roof trusses is question for trier of

fact); Thomas v. Bove, 687 P.2d 534, 536 (Colo. App. 1984) (UCC warranties applied to heating system).

78. See B&C Constr. Co. v. Grain Handling Corp., 521 S.W.2d 98, 102 (Tex. Ct. App. 1975)

(applying third-party beneficiary analysis); Cox v. Curnutt, 271 P.2d 342, 344 (Okla. 1954).

79. Jardel Enters., Inc., 770 P.2d at 1304.

80. Id. at 1303.

81. Id. at 1303-04

82. Id. at 1304.

83. BRW, Inc. v. Dufficy & Sons, Inc., 99 P.3d 66 (Colo. 2004).

84. A.C. Excavating v. Yacht Club II Homeowners Association, Inc., 114 P.3d 862 (Colo. 2005).

85. Id. at 869.

86. See, e.g., Cosmopolitan Homes, Inc. v. Weller, 663 P.2d 1041, 1042-43 (Colo. 1983).

87. Jardel Enters., Inc., 770 P.2d at 1304.

88. Id. See also Metropolitan Gas Repair Serv. v. Kulik, 621 P.2d 313, 317 (Colo. 1980) (contract

does not transform the measure of tort liability arising out of contractual performance); CosmopolitanHomes, Inc. v. Weller, 663 P.2d 1041, 1043 (Colo. 1983) (same); Lembke Plumbing & Heating v. Hayutin,

366 P.2d 673, 677 (Colo. 1961).

89. Iverson v. Solsbery, 641 P.2d 314, 315-16 (Colo. App. 1982).

90. Dutton & Kendall Co. v. Hoffman, 264 P. 1092, 1094 (Colo. 1928).

91. See J.F. White Eng’g Corp. v. United States ex rel. Pittsburgh Plate Glass Co., 311 F.2d 410,

412 (10th Cir. 1962).

92. Denver Ventures, Inc., 754 P.2d at 788.

93. See C.R.S. § 4-2-301.

94. C.R.S. § 4-2-309(1). See also C.R.S. § 4-2-503.

95. C.R.S. §§ 4-2-314 and -315.

96. C.R.S. § 4-2-313.

Subcontractors and Materialmen Notes

(10/07) 11-51

97. C.R.S. § 4-2-316.

98. C.R.S. § 4-1-102(3).

99. C.R.S. § 4-1-205.

100. See Rohauer v. Little, 736 P.2d 403, 410 (Colo.1987) (liquidated damages as penalty or actual

damages).

101. Perino v. Jarvis, 312 P.2d 108, 109-10 (Colo. 1957).

102. Medema Homes, Inc. v. Lynn, 647 P.2d 664, 667 (Colo. 1982).

103. Scott Co. of Cal. v. MK-Ferguson, 832 P.2d 1000, 1004-05 (Colo. App. 1991).

104. See Granite Constr. Co. v. United States, 24 Cl. Ct. 735, 753-54 (1991).

105. Cf. Malouff v. Midland Fed. Sav. & Loan Ass’n, 509 P.2d 1240, 1245 (Colo. 1973) (when no

definite time is specified in mortgage, reasonable time for exercise of acceleration clause depends on cir-

cumstances).

106. See Continental Heller Corp., GSBCA 6812, 84-2 BCA ¶ 17,275.

107. See Newcomb v. Schaeffler, 279 P.2d 409, 411 (Colo. 1955); Eastern Tunneling Corp. v.Southgate Sanitation Dist., 487 F. Supp. 109, 113 (D. Colo. 1979); Ruff v. Yuma County Transp. Co., 690

P.2d 1296, 1298 (Colo. App. 1983); Hennessey v. Fleming Bros., 90 P. 77, 78 (Colo. 1907); Rippy v. Phipps,

475 P.2d 646, 648 (Colo. App. 1970) (not selected for official publication).

108. Cf. Carpenter v. Hill, 283 P.2d 963, 965 (Colo. 1955).

109. Cf. Cohen v. Vivian, 349 P.2d 366, 367 (Colo. 1960); Denver Bus. Sales Co. v. Lewis, 365 P.2d

895, 898-99 (Colo. 1961); Carpenter v. Donohoe, 388 P.2d 399, 400 (Colo. 1964).

110. Metropolitan Paving Co. v. City of Aurora, 449 F.2d 177, 182 (10th Cir. 1971).

111. See Hennessey, 90 P. at 78.

112. Meinhardt v. Investment Builders Prop. Co., 518 P.2d 1376, 1379 (Colo. App. 1973) (not

selected for official publication).

113. See No. 5 Mining Co. v. Bruce, 4 Colo. 293, 298 (1878).

114. Id.

115. Belmont Elec. Serv., Inc. v. Dohrn, 516 P.2d 130, 131 (Colo. App. 1973) (not selected for offi-

cial publication).

116. Id.

117. Granberry v. Perlmutter, 364 P.2d 211, 212 (Colo. 1961).

118. R.W. Mier Constr. Co. v. Concrete Contractors, Inc., 440 P.2d 788-89 (Colo. 1968).

119. Hahl v. Langfur Const. Corp., 529 P.2d 1369, 1371 (Colo. App. 1974) (not selected for official

publication).

120. Hi-Valley Constructors, Inc. v. Heyser, 428 P.2d 354, 357 (Colo. 1967).

121. C.R.S. § 38-22-127.

122. Mills v. Sharpe, 272 P.2d 641, 642 (Colo. 1954).

123. See Johnson-Voiland-Archuleta, Inc., 572 P.2d at 1221.

124. Gardner v. City of Englewood, 282 P.2d 1084, 1089 (Colo. 1955); Klipfel v. Neill, 494 P.2d

115, 117 (Colo. 1972).

125. Miller v. City of Broken Arrow, 660 F.2d 450, 456-57 (10th Cir. 1981) (applying Oklahoma

law).

126. Richardson Elec. Co. v. Peter Francese & Son, 484 N.E.2d 108 (Mass. App. 1985).

127. C.R.S. § 13-80-104(1)(b)(II)(A).

128. C.R.S. § 13-80-104(1)(b)(II)(B).

129. R. Cushman, J. Carter, and A. Silverman, Construction Litigation: Representing the Contractor § 8.8 (1986).

130. Williams v. White Mountain Constr. Co., 749 P.2d 423, 426 (Colo.1988).

131. Id.

132. Public Serv. Co. of Colo. v. United Cable Television of Jeffco, Inc., 829 P.2d 1280, 1283 (Colo.

1992).

133. Id. at 1284, citing Heil Valley Ranch, Inc. v. Simkin, 784 P.2d 781 (Colo. 1989).

134. Id. at 1284-85.

Notes The Practitioner’s Guide to Colorado Construction Law

11-52 (10/07)

135. C.R.S. § 13-50.5-102(8).

136. C.R.S. § 13-21-115.5(6)(b).

137. C.R.S. § 13-21-111.5

138. Brochner v. Western Ins. Co., 724 P.2d 1293 (Colo. 1986).

139. Id. at 1298 n. 6.

140. Unigard Mutual Ins. Co. v. Mission Ins. Co., 907 P.2d 94, 97-98 (Colo. App. 1994).

141. Hamm v. Thompson, 353 P.2d 73, 74 (Colo. 1960); Dyer v. Johnson, 757 P.2d 178, 181 (Colo.

App. 1988).

142. Public Service Co. of Colo., 829 P.2d at 1285.

143. Hartford Ins. Co. v. CMC Builders, Inc., 752 P.2d 590 (Colo. App. 1988).

144. An example of the operation of a waiver of subrogation clause is provided by May Dept. StoresCo. v. University Hills, Inc., 789 P.2d 434, 437 (Colo. App. 1989).

145. Absent such a clause, there is no question that “the failure of an owner to pay a . . . contractor

does not relieve the . . . contractor of the obligation to pay a subcontractor.” David C. Olson, Inc., 789 P.2d

at 496.

146. David R. Hendrick, John I. Spangler, III, and Robert B. Wedge, “Battling for the Bucks: The

Great Contingency Payment Clause Debate,” 16 The Construction Lawyer 12 (July 1996). See also Byler v.Great Am. Ins. Co., 395 F.2d 273, 276-77 (10th Cir. 1968).

147. See Byler, 395 F.2d at 276-77.

148. Main Elec., Ltd., 980 P.2d at 523.

149. Id. (emphasis in original).

150. Id.

151. United States ex rel. DDC Interiors, Inc. v. Dawson Constr. Co., 895 F. Supp. 270, 274 (D.

Colo. 1995).

152. A.T.E., Inc. v. Nelson West Constructors, Inc., 757 P.2d 151, 152 (Colo. App. 1988). See alsoWood Bros. Homes, Inc. v. Walker Adjustment Bureau, 601 P.2d 1369, 1371 (Colo. 1979) (stating in dictathat the lack of a contractor’s license is no impediment to the enforceability of the contract).

153. A.T.E., 757 P.2d at 152.

154. Id. at 152-53.

155. Schneider v. J.W. Metz Lumber Co., 715 P.2d 329, 332-33 (Colo. 1986).

156. C.R.S. § 38-22-126.

157. C.R.S. § 24-91-103.

158. C.R.S. §§ 38-26-101 through -107.

159. Western Metal Lath v. Acoustical & Constr. Supply Co., 851 P.2d 875, 877; Flaugh v. EmpireClay Prods., Inc., 402 P.2d 932, 933 (Colo. 1965); Continental Cas. Co. v. Rio Grande Fuel Co., 119 P.2d

618, 620 (Colo. 1941).

160. C.R.S. § 38-26-105.

161. South-Way Constr. Co. v. Adams City Service, 458 P.2d 250, 252 (Colo. 1969).

162. Lovell Clay Prods. Co. v. Statewide Supply Co., 580 P.2d 1278, 1280 (Colo. App. 1978).

163. 40 U.S.C. §§ 270(a) through (f).

164. United States ex rel. Bryant v. Lembke Constr. Co., 370 F.2d 293, 296-97 (10th Cir. 1966).

165. Kennedy Elec. Co. v. United States Postal Serv., 508 F.2d 954, 960 (10th Cir. 1974).

166. C.R.S. § 38-22-127(1).

167. C.R.S. § 38-22-127(2).

168. C.R.S. § 38-22-127(5).

169. See Brannan Sand & Gravel Co. v. Santa Fe Land & Improvement Co., 332 P.2d 892, 895

(Colo. 1958).

170. Severin v. United States, 99 Ct. Cl. 435 (1943).

171. See Joel D. Heusinger, “Practical Concerns in Prosecuting Pass-Through Claims,” 25 TheConstruction Lawyer 3, 26 (Spring 2005).

Subcontractors and Materialmen Notes

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172. For an excellent general discussion of pass through claims and liquidation agreements, see Carl

A. Calvert and Carl F. Ingwalson, Jr., “Pass Through Claims and Liquidation Agreements,” 18 TheConstruction Lawyer 29 (Oct. 1998).

173. See City and County of Denver v. District Court, 939 P.2d 1353, 1370 (Colo. 1997) (holding

that third parties are not bound by arbitration clauses in the prime contract).

174. For an exhaustive discussion of subcontracting clauses, see Jon M. Wickwire, William B.

Fisher, Michael P. Kelley, and Frank H. Bertke, The Construction Subcontracting Manual (John Wiley &

Sons, Inc. 1995).

175. Some other organizations that also sell form agreements are the Engineers Joint Contract

Documents Committee, the American Society of Interior Designers, and the Construction Management

Association of America.

176. An excellent resource on possible modifications to standard form contracts is AlternativeClauses to Standard Construction Contracts (Glower W. Jones, ed., Aspen Publishers 1998).

177. Courts will attempt to construe these documents as a single contract. See, e.g., Wheeler &Lewis v. Slifer, 577 P.2d 1092 (Colo. 1978). See also 17A C.J.S. Contracts §§ 299 and 327(2) (1963).

178. The Colorado Supreme Court has held that parties are bound by terms of a prime contract

incorporated by reference into a subcontract. Dutton & Kendall Co., 264 P. at 1094.

179. Presumably, such modifications would be effective only to the extent that they do not exceed

the scope of the contract. A clause incorporating future documents or modifications of existing documents

should not be effective as to modifications that “constitute a radical or substantial departure from the origi-

nal contract.” 17A C.J.S. Contracts § 373(b) (1963). Cf. Meinhardt, 518 P.2d at 1379 (not selected for offi-

cial publication).

180. AGC Doc. 650 ¶ 2.3 is entitled “Standard Form of Agreement Between Contractor and

Subcontractor (Where the Contractor Assumes the Risk of Owner Payment).” AGC Doc. 655 is entitled

“Standard Form of Agreement Between Contractor and Subcontractor (Where the Contractor and

Subcontractor Share the Risk of Owner Payment).” These two documents are substantially similar except in

the payment terms, as discussed below. Provisions of AGC Docs. 650 and 655 were reproduced under the

express written permission of the Associated General Contractors of America. Any further reproduction is

prohibited. AGC Contract Documents are available for purchase from the AGC Publications Department,

1957 E Street, NW, Washington, DC 20006-5107 (phone: 202-393-2040; fax: 202-737-5011).

181. The oft-used term, “Flow-Through Clause,” is also commonly referred to as “Pass-Through

Clause,” “Flow-Down Clause,” and “Conduit Clause.”

182. See Justin Sweet & Marc M. Schneier, Legal Aspects of Architecture, Engineering, and theConstruction Process § 28.04 (7th ed. 2004).

183. See City and County of Denver v. District Court, 939 P.2d 1353, 1370 (Colo. 1997) (holding

that third parties are not bound by arbitration clauses in the prime contract).

184. See id. (holding that a district court, when determining whether a dispute should be arbitrated,

should presume that the parties intended arbitration unless expressly conferred otherwise).

185. AIA Doc. A-401 provides that the benefits provided for in the general contract flow down to

the subcontract unless expressly prohibited by the subcontract. Conversely, burdens in the general contract

flow down to the subcontract only if expressly provided by the subcontract. Is an arbitration clause more

like a benefit of a burden? That is the question to be addressed if a Colorado court examines this issue.

186. See Pioneer Indus. v. Bevyn Const. Corp., 458 F.2d 582 (1st Cir. 1972); Commercial Union Ins.Co. v. Gilbane Bldg. Co., 992 F.2d 386, 388-89 (1st Cir. 1993) (holding that bond company and subcontrac-

tor are bound by general contract’s arbitration clause because the bond contract incorporated subcontract,

which in turn incorporated general contract’s arbitration clause); Kvaerner ASA v. Bank of Tokyo-Mitsubishi,Ltd., 210 F.3d 262, 267 (4th Cir. 2000) (holding that construction lender was bound to arbitration clause

between joint-venture and project owner); MPACT Const. Group, LLC v. Superior Concrete Const., Inc.,802 N.E.2d 901, 907 (Ind. 2004) (finding that, under the Federal Arbitration Act, a subcontract can incorpo-

rate an arbitration clause by reference to the general contract). But see Case Int’l Co. v. T. L. James & Co.,

907 F.2d 65, 67 (8th Cir. 1990) (holding that subcontract’s flow-through clause never specifically indicated

the subcontractor’s and contractor’s intention to arbitrate the dispute).

Notes The Practitioner’s Guide to Colorado Construction Law

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187. See Youmans v. District Court, 589 P.2d 487, 488 (Colo. 1979).

188. Boyer v. Karakehian, 915 P.2d 1295, 1299 (Colo. 1996). See also U.S. v. Rockwell Int’l Corp.,124 F.3d 1194, 1199 (10th Cir. 1997); 1 Construction Law ¶ 307[2][a] (Matthew Bender 1998) (definition

of an “integrated” contract).

189. Under common law, “bad weather” delay is excusable only for unusually severe weather. The

subcontractor bears the risk of foreseeable bad weather, regardless of its severity. 2 Construction Law¶ 6.09[1] (Matthew Bender 1998). The contract may contain provisions, which override the common law

rule.

190. The elements of a valid liquidated damages clause in Colorado are (1) the damages are uncer-

tain or will be difficult to prove, (2) the parties intend to liquidate damages in advance, and (3) the stated

amount is reasonable and not merely a penalty. Perino, 312 P.2d at 109.

191. Courts are likely to strictly construe any such waivers. See Bishop v. Moore, 323 P.2d 897, 898

(Colo. 1958).

192. Western Fed. Sav. and Loan Ass’n of Denver v. Nat’l Homes Corp., 445 P.2d 892, 897 (Colo.

1968). See also In re Woodcrest Homes, Inc., 15 B.R. 886, 888 (D. Colo. 1981) (“It is settled in Colorado

that consideration is required [to support a lien waiver]”).

193. A contract holding an indemnitee harmless from his or her own negligent acts must contain

clear and unequivocal language to the effect. Williams, 749 P.2d at 426; Doyle v. Missouri ValleyConstructors, Inc., 288 F. Supp. 125, 128 (D. Colo. 1968).

194. C.R.S. § 13-21-115.5(6)(b).

195. Such a provision would likely be upheld. See, e.g., Eastern Tunneling Corp., 487 F. Supp. at

113 (applying Colorado law).

196. 2 Construction Law ¶ 6.09[3] (Matthew Bender 1998).

197. For example, the existence of a valid arbitration clause is an affirmative defense that divests a

court of jurisdiction over all arbitrable disputes. Mountain Plains Constructors, Inc. v. Torrez, 785 P.2d 928,

930 (Colo. 1990); see C.R.S. § 13-22-219. Upon a finding by the court of a valid and enforceable arbitra-

tion clause, the litigation is stayed pending completion of the arbitration. Mountain Plains Constructors,

785 P.2d at 931; see C.R.S. § 13-22-204. Failure to arbitrate prior to filing suit in such a scenario could pro-

vide adequate grounds for an award of attorney fees.

198. Mountain Plains Constructors, 785 P.2d at 930-31.

199. C.R.S. § 13-21-115(6)(g).

Subcontractors and Materialmen Notes

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