If a subcontractor is working on multiple projects with a general contractor and the GC includes a “set off” clause in its subcontracts, the GC is leveraging its ability to use money available on any of the jobs to pay for the impact on a problem job. The subcontractor’s cash flow could be severely impacted if a general contractor offsets a claim on one job against payment for all other jobs.
ASA’s newest “Subcontractor’s Negotiating Tip Sheet” on “Payment Set Off” warns subcontractors that a general contractor customer could hold payments on all jobs as leverage to force a subcontractor into a compromised position on a dispute, or a customer with its own cash flow problems may fabricate reasons to hold payment on all of a subcontractor’s jobs.
A couple of examples of such “set off” clauses in a GC’s proprietary subcontract include: “Contractor may set off or credit against amounts otherwise payable to subcontractor, all amounts due from subcontractor to contractor, whether arising out of this project or otherwise,” or “Contractor may apply any payments otherwise due to the subcontractor hereunder to any other indebtedness, liability or obligation of Subcontractor to contractor whether under this subcontract or any other agreement or circumstance.”
The new ASA tip sheet recommends that subcontractors strike such “set off” language from the subcontract.
General contractors may object: “You’re working on multiple projects for us. We see it as one big picture.” The subcontractor could respond, “Each job should stand on its own.”
The GC also might argue: “Each of these jobs is fairly small. If you create a major problem, we need to be sure you have enough skin in the game.” To such an argument, the subcontractor could say, “We have substantial amounts of insurance and net worth to offset any problem you may face on a project.” The general contractor might say: “Filing and getting paid on an insurance claim can take some time. We need to keep this job moving.” The subcontractor could reply: “If you hold back my pay on other jobs for a problem on this job, it could severely impact my company’s cash flow, making it harder for me to perform. Robbing Peter to pay Paul won’t achieve what you want.”
ASA tip sheets are released weekly and are designed to provide the subcontractor with the information it needs to negotiate a particular subcontract clause, including ASA-recommended language, samples of what a subcontractor may see in a client’s proprietary subcontract, an explanation of the impact of poor language on a subcontractor, negotiating tips, and sources for more information.