Subcontractor “pass-through” claims, sponsored by a prime contractor against a public project owner, are both useful and controversial. A pass-through claim results from a claim liquidation agreement between the prime and the sub. The prime agrees to pursue the project owner, at the prime’s expense, for the subcontractor’s increased costs. The prime will pass through the recovery, if any, to the sub. In return, the sub agrees to accept only what the prime is able to recover from the owner and otherwise hold the owner harmless.
Pass-through claims have gained wide acceptance because they promote the settlement of claims and bring all the parties together in a single forum to resolve a dispute arising out of a single set of facts and contract documents. But pass-through claims are not viewed favorably in all circles. They expose public entities to liability to parties that never received a public contract. A recent Tennessee case held that pass-through claims are not allowed in that state.
Are pass-through claims an efficient claims administration tool consistent with sound policy on public projects? Or, is it inappropriate to expose public entities to contractual liability with regard to parties that don’t hold a public contract?
As always, I invite your comments below.
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Bruce Jervis, Editor
Construction Claims Advisor
Posted by: E Neumann | 07/16/2010 at 12:19 PM
The pass through claim is often something simply forwarded to the Owner as though from a mail forwarding service. The prime seemingly cares little about the entitlement,the accuracy of the quote or for that matter much of anything other than the modest mark up associated with the possible yield.
We have taken a Severin approach to the pass through claim by insisting that not only there be a formal liquidation agreement between the subcontractor and prime but also that the agreement be drafted in a form acceptable to us and containing a guaranty that the prime will pay the stipulated amount in the agreement regardless of the outcome of discussions with the Owner. Our hope is to mobilize the prime's powerful ability to negotiate fair prices on our behalf by placing the prime at risk.
Posted by: John McGrail PE | 07/16/2010 at 12:22 PM
Prime contractors are responsible for 100% of the work. They do not avoid liability for subs' nonconforming work. Owners understand that many primes will not be performing 100% of the work, and various government owner requirements (such as prequalification for certain types of work and DBE/MBE/WBE goals) obviously envision and encourage the use of subs. It is, therefore, appropriate and efficient for prime contractors to handle subs' claims on a pass through basis. Owners should not be insulated from legitimate claims and enjoy a windfall at the expense of primes or subs.
Posted by: Heather Henthorne/Contract Facilitation, LLC | 07/16/2010 at 12:25 PM
Interesting discussion. I don't see the issue as being insulated from legitimate claims but an expectation that the prime contractor take responsibility for the contract signed (that is to perform or subcontract work and be responsible for the entire contract). Requiring an owner to work with a subcontract claim seems like asking them to administer the prime contractor's contract with the sub. If the claim is valid, and the prime agrees, the prime should pursue the claim within their contract. Of course I am not a lawyer but an engineer who is giving a perspective.
Posted by: Gene | 07/16/2010 at 12:31 PM
I guess the main issue is who has a contract with who. The Agency is not in a direct contractual relationship with the sub nor are they privy to the contract bewtween the sub and the prime. The prime can pass through a claim with the understanding that the Agency will view it as claim from the prime - which is what it is.
I dont think its a good idea from the owner standpoint to get between the prime and the sub. In many cases, it is really a case of the Prime passing the responsibility of paying the sub onto the Owner and/or a direct result of poor field mangement pracitices by the Prime and sub. If the sub performed work at the direction of the Agency, they went at risk. If at the direction of the prime, the prime has to pay them whether the owner pays the prime or not. If the Agency directed properly through the Prime and the Prime did their due diligence by recording the direction and then we wouldnt be having this discussion. It seems this practice (although gives voice to often cheated subcontractors) is not the right way to go.
Just to clarify - I have been a contract representative for Government Agencies, a General Contractor, a Subcontractor - and a Construction claims specialist for a large CM firm - so I think I am looking at it from different viewpoints.
Posted by: Vince Jarak | 07/16/2010 at 01:49 PM
Especially if the prime and sub contract are in synch, the issues I have seen where pass-through claims were appropriate revolve around whether direction from the owner and/or his agents (architect, construction manager, contracting officer's representative) constitute a change to the prime ocntract or are merely direction to perform to the contract requirements. This is not always a simple question to resolve. While I believe that the contractor owes the owner a duty to review sub requests before passing them through, I don't think the contractor needs to agree to pay the sub prior to hearing the owner's defenses re whether or not something is a change.
Also, if the change is a large amount, most owners I have dealt with prefer to have a chance to negotiate the amount of a change. Assuming owner liability for a change,if the Prime and Sub have agreed to an amount for a change and the sub is paid, generally the owner is stuck with that amount, absent fraud. Therefore, there are times when an owner will want to participate in a quantum discussion prior to the Prime settling with the Sub.
Again, a lot of this will depend on the relationship between the owner and the prime on the contract. But generally, if the Prime does a decent job of screening potential sub requests, the owner will work with the Prime to resolve sub requests. If not, then everyone ends up paying big money to their attorneys and claims consultants.
Posted by: Karl | 07/16/2010 at 07:44 PM
Passing through claim mechanism is a practical solution to a potential dispute if the prime are only project manager without other construction input.If it is clearly the default of the Employer and the prime refuses to stand in to pursue the Employer for whatsover reason,then to include such provision in teh Sub agreement may be helpful to the cheated sub.
Posted by: EC | 07/16/2010 at 08:16 PM
Only lawyers can obfuscate the simplicity of minds meeting in this way.
If the GC isn't at risk, then the subcontractor should make his handshake with the owner. If the sub makes his handshake with the GC, then the GC should definitely be on the hook for payment of the subcontract. Or as they say, whatever the GC can get the sub to agree to and vice versa. Let the buyer beware and in the case of contracting moreso, let the seller beware. Stop agreeing to things you don't agree to. Subs, GCs and owner/developers stop being criminals about your dealings with one another and there'll be no more controversy. hahaha
Posted by: Chris Thompson | 07/29/2010 at 04:07 PM