Become familiar with ‘scope of work’ and indemnity in contract agreements

Understanding those terms can limit liability

By Mary Beth Applegate, Guidemark Inc.

Subcontractors may be unaware they can review and negotiate subcontracts before signing them.

Negotiating can be as simple as "red lining" words to delete from the document or adding words or sentences.

Two important items that should be thoroughly reviewed before signing any subcontract agreement are the “scope of work” and “indemnification” clauses. The scope of work should be clearly defined and is usually one of the first paragraphs of the subcontract. The scope of work details the tasks the subcontractor is going to perform for the prime contractor. This is often referenced throughout the subcontract as "the Work.". It is important to make sure that all pricing and conditions are accurately and thoroughly defined in this section.

Next is the indemnification clause. Indemnity is a contractual obligation of one party to compensate for the loss incurred by another party due to the acts of a third party or one's own actions. In other words, the indemnification clause addresses who will cover losses or damages a party incurred or will incur due to a specific incident. Almost every subcontract agreement contains an indemnification paragraph.

A simple indemnification clause that says the subcontractor is only responsible for its activity is fair. Wording such as this falls in that category: "Subcontractor shall indemnify, defend, and hold harmless, Contractor and/or Owner from and against any and all actual or alleged claims, damage, liability, loss or expenses related to bodily injury, property damage, losses, penalties, fines and attorney's fees (collectively referred to as "Losses") arising out of Subcontractor's performance of the Work."

Prime contractors tend to try to transfer as much risk as they can to the subcontractor. This is usually done in the indemnification clause. Examples of words or clauses used in subcontracts to accomplish this risk transfer are: "in whole or in part," "directly or indirectly," "whether related to this agreement or any other agreement between the parties," and "regardless of whether or not is caused in part by Contractor or a party indemnified hereunder." These words or clauses can make the subcontractor liable for something outside its scope of work. This type of language should be stricken from the subcontract.

A good way to avoid having to review every subcontract from a particular prime contractor is to have a master negotiated subcontract. This type of subcontract is normally negotiated and signed each year. Once the master subcontract is in place, the contractor will send a purchase order or addendum to the subcontractor which is usually only a page or two that incorporates the master subcontract. The purchase order or addendum will spell out the specific project, the scope of work and pricing.

Being aware of these two paragraphs and their wording will help limit exposure to litigation and insurance costs. It also will prevent prime contractors from transferring their risk to your company.

This is the second in a series of blogs regarding legal liability issues. 

ATSSA will hold a Nov. 8 webinar at 2 p.m. ET on “Leveling the Playing Field for Contractual Liability.” Register here.

Mary Beth Applegate is a paralegal and contract administrator for Guidemark Inc. in Souderton, Pa.

NOTE: Information provided here is not legal advice. Rather, all information, content and references are for general informational purposes only.