Are Limitations on Subcontracting Advisable and Enforceable?

Public works contracts frequently include clauses limiting the subcontracting of the work. The prime contractor is required to perform a stipulated minimum percentage of the work, typically 50 percent, with its own forces. The policy behind these limitations is to award public contracts to companies that will actually construct the projects, not just bid, bond and broker out the work.

It is interesting to note that these clauses seldom specify a penalty for violation of the subcontracting limitation. Default termination? That is a severe sanction and may not be in the project owner’s best interest. Assessment of damages? Calculation would be problematic, and there is little precedent to provide guidance.

A recent federal case addressed this issue. A prime contractor performed no actual work with its own forces, maintaining only a supervisory presence at the site. As damages for breach of the subcontracting limitation, the prime’s contract price was reduced. The contractor was paid only its direct subcontract costs, plus administrative and bonding costs.

What is your opinion on this matter? Should responsible prime contractors be allowed to accomplish the work using the means and methods of their choice without limitation on the use of subcontractors? Or are these limitations appropriate to prevent contractors from serving merely as brokers of publicly funded work? And if a subcontracting limitation is violated, what is an appropriate sanction? I welcome your comments.

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Comments

[Eden Milroy, President, Pilot Development.]

Public work projects in our area do not have this restriction, and it has been a long time since we have dealt with it. As Owner's project managers, we fail to see what public interest is served.

Prime contractor's are required to take full responsibility for their subcontractor's activities and performance. We look to prime contractor's for their construction management expertise and their financial strength. Requiring them to perform the work with a set percentage of their own forces serves only to limit competition, and the level of specialized expertise that can be brought to the project.

[Account Deleted]

It true a prime contractor performed no actual work with its own forces, maintaining only a supervisory presence at the site. As damages for breach of the subcontracting limitation, the prime’s contract price was reduced. The contractor was paid only its direct subcontract costs, plus administrative and bonding costs.

[James]

We have seen this used when prime contracts are issued to specialty trades (i.e. concrete, drywall/metal studs, masonry, etc..) on project. The Construction Managers have become tired of subcontracting brokers bidding the work and then using multiple subcrews to perform the work since the broker does not really have a payrolled staff that can actually perform the work. The multiple subcrews seem to have their own individual focus instead of focusing on the project as a whole. The Construction Managers have also said the multiple subcrew approach seems to increase the odds of problems developing and also realize that if the suubcrews were truly qualified they would bid on the project directly and cut out the middleman broker.