Subcontractor Defined

When is a supplier a subcontractor?

That is not a silly question. The Construction Dictionary (published by the Greater Phoenix, Arizona Chapter #98 of the National Association of Women in Construction) defines subcontractor as: "A secondary contractor who performs some part of the prime contractor's obligation under the contract."

That definition and common usage suggests that the subcontractor does actual construction work. However, courts sometimes define "subcontractor" more broadly-treating some suppliers as subcontractors.

For example, in the recent case of LaGrand Steel Products v. A.S.C Constructors, Inc., 702 P.2d 885 (Id. 1985), the Idaho Court of Appeals ruled that a supplier who contracted to provide fabricated steel amounting to about 10% of the total construction cost was a subcontractor, not supplier, on the project-mainly because of the relative dollar amount of its contract.

This subcontractor characterization may make a critical legal difference. That is because under many mechanic's lien statutes, the federal Miller Act, various construction bond forms and many state public contractor bond statutes ("Little Miller Acts") only suppliers to subcontractors are entitled to statutory mechanic's liens or bond remedies.

In the above-mentioned case, the raw steel supplier was successful on its public works bond claim because its customer, the steel fabricator, was held to be a subcontractor rather than a supplier (materialman).

The issue is important because bonds and statutes frequently fix limits on the tiers of subcontractors and materialmen entitled to relief. These tiers are the levels of construction parties below the general contractor. For example, subcontractors are on the first tier, sub-subcontractors (who are subcontractors to subcontractors) are the second level, etcetera.

The reason for the distinction and discrimination is to protect owners and general contractors from mechanic's lien or bond claims of suppliers and subcontractors who are too far removed from the project. The more remote they are, the less likely it would be that they could be identified by the general contractor in his efforts to make sure that they are paid.

For example, it would be nearly impossible for a contractor to deliver a project lien-free of claims of a manufacturer who sold machine parts for mechanical equipment furnished by a supplier to the installing mechanical contractor.

Typically, statutes and bonds limit remedies to second tier subcontractors and suppliers. Thus, a materialman to a meterialman may not be - depending on the bond or statute involved. Similarly, a sub-subcontractor may have lien or bond remedies, but his laborers may not.

Potentially remote or lower tier suppliers should be aware of this peculiar nuance of defining subcontractor to include some major suppliers in the event that they must resort to statutory, lien or bond relief. Otherwise, ordinary lower tier suppliers must rely upon assurances of payment or other credit protections other than statutory or bond remedies.