6 Crucial Checks Before Signing a Subcontract or Teaming Agreement in California

Protect Your Business Before You Sign

Signing a subcontract or teaming agreement without a thorough review can jeopardize your cash flow and expose you to unexpected liabilities. California law provides strong protections for subcontractors, such as banning pay-if-paid clauses and limiting the withholding of disputed funds. Ensure the contract aligns with these protections rather than circumventing them.

The 6-Point Pre-Signature Checklist

1. Termination and Cure Periods Always verify that the contract includes a defined "cure period" (typically 3 to 10 days). This gives you a specific window to fix an alleged breach before the prime contractor can terminate the agreement for cause. Without this, a prime could terminate immediately and hire a replacement at your expense.

2. Handling Disputed Funds Under California's prompt payment laws, a prime contractor can only withhold up to 150% of the amount actually in good-faith dispute. If they withhold more, or do so without a valid reason, they could face a 2% per month penalty. Ensure the contract does not give the prime "sole discretion" to withhold funds indefinitely. Remember: "pay-if-paid" clauses are void in California.

3. Insurance and Indemnity Flow-Down Ensure your insurance and indemnity requirements are strictly limited to your scope of work. California law restricts primes from demanding "Type I" indemnity (where you cover their sole negligence) in commercial construction. Make sure any "additional insured" endorsements only apply to liabilities arising directly from your work.

4. Pass-Through Liquidated Damages Many subcontracts attempt to pass the prime's liquidated damages (LDs) down to you automatically. Insist on a clause that requires the prime to prove your specific work caused the delay before LDs can be applied. On public works projects, California law also protects your right to claim damages for unreasonable delays caused by the public agency.

5. Teaming Agreement Enforceability Verbal teaming agreements are typically viewed as unenforceable "agreements to agree" in California. To be binding, your teaming agreement must be in writing and clearly define the workshare, exclusivity terms, and a firm commitment from the prime to award you a subcontract if they win the bid.

6. Authorized Signatures Ensure the person signing the contract actually has the authority to bind their company. Under California Corporations Code 313, a contract is presumed authorized if signed by two key officers (one from operations and one from finance/records). If only one person signs, ask for a board resolution confirming their authority.