Are Subcontractor Pass-Through Claims a Sound Administrative Practice?

A prime contractor’s sponsorship of a subcontractor’s claim is an expeditious way to resolve disputes involving significant subcontractor costs. Under these arrangements, frequently referred to as pass-through agreements, the prime asserts a claim against the project owner which includes the costs incurred by the sub. The prime passes through to the sub the money recovered from the owner, if any, attributable to the sub’s work. The subcontractor in turn waives any other claim against the prime contractor.

The sponsorship of subcontractor claims has been controversial among public project owners. Owners argue that they have no contractual relationship with a subcontractor and are not subject to claims by the sub, even indirect claims asserted by the prime contractor. Many public works dispute resolution mechanisms are expressly limited to parties in contract with the project owner.

Claim sponsorship agreements have gained acceptance in the public sector, however, primarily because they are an efficient way to resolve disputes involving multiple parties. The federal government has long allowed pass-through claims. And the states are following suit. A Texas court recently ruled, for the first time, that a prime contractor could sponsor a pass-through claim against a municipal project owner.

I’m interested in feedback from prime contractors, subcontractors and public project owners. What has your experience been with sponsored pass-through claims? Are they the expeditious claim resolution device endorsed by many? Or are there pitfalls and inequities inherent in these claims? I welcome your comments.

Featured in Next Week’s Construction Claims Advisor:

• Retroactive Revocation of Statute of Repose Stands – U.S. Supreme Court Declines Review
• Arbitration Clause Enforced Against Sub on Federal Project
• Wage Rate Treatment Confused Bidder

Comments

[Ed Duarte]

As a Public Works General Contractor, we routinely sponsor pass-thru claims, but ONLY IF they have merit. Otherwise, it would seem exceedingly unfair if a sub has a legitimate claim and the owner tries to deny based on a constructionist interpretation by claiming they only have a contract with the GC, and not the sub.

I have never seen any of the language you refer to here in California and I am astounded that such contract intepretation exists. Given that most building projects have at a MINIMUM, 65% subcontractor participation, how in the world would the subs ever be able to collect on legitimate claims if the owner can use this as a defense???
As far as we are concerned, the only risk is to our reputation were we to sponsor a claim that is totally without merit. We quite often will advise the sub that their claim is invalid by analyzing it via the plans & specs. Then if they decide they still want to proceed, we will do so, but with a disclamer that we do not support the claim.
Conversely, if we feel their claim is legitimate and fair, we will go to bat for them as that is the morally right thing to do.
Doing so does not of course, guarantee payment.