The definition of a subcontractor, and why it matters

What is a subcontractor?

The answer to this question seems obvious: A subcontractor is a contractor that contracts with a prime contractor to perform a scope of work on a construction project.

However, it’s not always easy to distinguish a subcontractor from a materials supplier (sometimes referred to as a “materialman”). That distinction is important in the context of claims that lower-tier subcontractors or materials suppliers may have on payment bonds, such as those provided by prime contractors on federal and state public-works projects. It’s worth remembering here that a lower-tier subcontractor or materials supplier may not be entitled to recovery from a payment bond if its contract is with a materials supplier instead of a subcontractor. For this reason, you should always take time at the outset of a project to identify the roles of any parties you might be contracting with.

This distinction is most important in the context of federal public-works projects. For these projects, the Miller Act restricts claimants on payment bonds to parties that have a contract with a prime contractor or parties that have a contract with a subcontractor and provide notice of that contract to the prime contractor. In other words, if a company has a contract with a materials supplier, rather than a subcontractor, it has no entitlement to payment under the bond. Courts look at the “total relationship” between parties to decide if a particular party is a subcontractor or materials supplier.

To do this, courts have applied a balancing test that looks for certain tell-tale signs. Some of these are considered to be indicative of a subcontractor relationship and some of a materials-supplier relationship.

The signs of a subcontractor relationship include: 1, a product that’s being supplied is custom fabricated; 2, a product being supplied is a complex integrated system; 3, there’s a close financial relationship with the prime contractor; 4, there’s a continuing relationship with the prime contractor as evidenced by the requirement of shop-drawing approval by the prime contractor or a requirement that a supplier’s representative be on the job site; 5, there is a contract for labor in addition to materials; 6, the term “subcontractor” is used in the project agreement; 7, any materials supplied do not come from existing inventory; 8, the supplier’s contract constitutes a substantial portion of the prime contract; 9, the supplier is required to furnish all the material of a particular type used on the project; 10, the materials supplier is required to post a performance bond; 11, there is a back-charge for any cost of correcting the materials supplier’s mistakes; and 12, there is a system of progressive or proportionate fee payment.

On the other hand, the signs of a materials-supplier relationship are: 1, a purchase order form that’s used by the parties; 2, supplied materials come from existing inventory; 3, an item supplied is relatively simple in nature; 4, the contract with the prime contractor accounts for a small percentage of the total construction cost; and 5, sales tax is included in the contract price. As all this illustrates, deciding whether a party is a subcontractor or materials supplier for the purposes of a claim on a Miller Act payment bond is by no means easy.

But since distinguishing between subcontractors and materials suppliers can have a direct effect on which companies have access to payment bonds, these sorts of determinations should be made, to the extent possible, at the outset of projects. If recovery from a payment bond is barred or seems questionable, a prudent contractor will take other steps (e.g., proposing a joint-check agreement) to secure payment.

Brent Carpenter is an attorney at Jordan Ramis PC and specializes construction law. Call him at 503-598-7070 or write to him at [email protected]. Note: This article is intended to provide readers with general information and not legal advice.