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Subcontract Flow-Down and Payment Risk Memo

Before a subcontractor signs a subcontract, or when a payment or delay dispute arises and you need to see how the subcontract and prime contract interact.

Construction LawContract Law

Subcontractors sign paper written by the general contractor, and that paper usually pushes risk downstream. The terms that matter most are often a sentence each: a payment clause that may make owner payment a condition of getting paid at all, a broad flow-down that binds the sub to a prime contract it never saw, an indemnity that may reach the GC's own negligence, a no-damages-for-delay clause, and lien waiver forms that release more than they should.

This prompt gives Claude the subcontract and whatever prime contract sections are incorporated, each in its own tag, and asks for a subcontractor-side analysis topic by topic. For each topic it quotes the clause, explains the practical effect in plain English, rates the risk, poses the enforceability question for your jurisdiction, and proposes a revision. If the prime contract is missing, it lists the provisions you need to obtain before you can finish the flow-down analysis.

Whether these clauses are enforceable depends heavily on state law, which the prompt deliberately leaves as bracketed questions instead of answers. Counsel must research those questions, confirm the reading of each clause against the signed documents, and weigh the commercial relationship before recommending changes. The memo is a draft for attorney review.

The Prompt

I represent the subcontractor, [SUBCONTRACTOR], reviewing the subcontract below before signing. Scope: [TRADE AND SCOPE]. Subcontract value: [AMOUNT]. Project location: [JURISDICTION]. Client priorities: [e.g., cash flow, limiting indemnity, delay recovery].

<subcontract>
[PASTE THE SUBCONTRACT, INCLUDING EXHIBITS AND ANY INCORPORATED GENERAL CONTRACTOR TERMS]
</subcontract>

<prime_contract>
[PASTE THE PRIME CONTRACT SECTIONS THAT ARE INCORPORATED OR FLOWED DOWN, OR WRITE "NOT PROVIDED"]
</prime_contract>

Analyze from the subcontractor's side:
1. Payment conditions: quote the clause and say whether the language reads as pay-if-paid (owner payment as a condition precedent) or pay-when-paid (timing only), and why, based on the wording. Pose enforceability as a [JURISDICTION] question.
2. Flow-down: what prime contract obligations are incorporated, whether the incorporation is general or limited to the subcontractor's scope, and any prime contract terms (notice periods, dispute procedures, liquidated damages) that become stricter for the subcontractor because of timing.
3. Indemnity: who is indemnified, for what, whether it covers the indemnitee's own negligence, defense obligations, and any limits. Note any [JURISDICTION] anti-indemnity statute question.
4. No-damages-for-delay and other delay terms, including liquidated damages pass-through.
5. Retainage: percentage, release conditions and timing.
6. Lien waivers and releases: whether waivers are conditional on payment, and whether any waiver releases claims beyond the payment amount.
7. Other risk terms: termination for convenience, backcharges, warranty start date, dispute resolution, and venue.

Output: for each topic, Quoted clause | Plain-English effect | Risk (High/Medium/Low) | Enforceability question for [JURISDICTION] | Proposed revision. Then a top-five negotiation list. If prime contract text was not provided, list the provisions you would need to see. Quote everything you rely on; do not cite cases or statutes. This is a draft for attorney review.

Example Output

A topic-by-topic memo with quoted clauses, plain-English effect, risk ratings, jurisdiction-specific enforceability questions and proposed revisions, plus a top-five negotiation list.

Illustrative example — names, figures, and facts are fictional.

SUBCONTRACT RISK MEMO (DRAFT FOR ATTORNEY REVIEW)
Subcontractor: Arrowood Mechanical | GC: Linden Ridge Constructors | Scope: HVAC | Value: $1.8M

1. PAYMENT CONDITIONS
Quoted: "Receipt of payment by Contractor from Owner is a condition precedent to Contractor's obligation to pay Subcontractor." (Sec. 5.2)
Effect: Reads as pay-if-paid; the words "condition precedent" shift owner nonpayment risk to Arrowood.
Risk: High | [JURISDICTION] question: is a pay-if-paid clause enforceable, and are there statutory or bond exceptions?
Revision: "Payment shall be made within 7 days after Contractor's receipt of payment, and in any event within a reasonable time not to exceed 60 days after approval of the pay application."

2. FLOW-DOWN
Quoted: "Subcontractor assumes toward Contractor all obligations Contractor assumes toward Owner." (Sec. 2.1)
Effect: General incorporation, not limited to HVAC scope. Prime contract not provided.
Risk: High | Need: prime contract notice, claims, liquidated damages and dispute sections.

3. INDEMNITY
Quoted: "to the fullest extent permitted by law ... regardless of whether caused in part by a party indemnified hereunder." (Sec. 11.1)
Effect: May reach Contractor's own partial negligence; includes defense.
Risk: High | [JURISDICTION] anti-indemnity statute question.
Revision: Limit to the extent caused by Subcontractor's negligence.

4. NO DAMAGES FOR DELAY
Quoted: "Subcontractor's sole remedy for delay shall be an extension of time." (Sec. 8.4) Risk: Medium | [JURISDICTION] question: enforceability and exceptions (e.g., Contractor-caused delay). Revision: carve out Contractor-caused delay.

5. RETAINAGE: 10% until "final completion of the Project" (Sec. 5.6). Revision: release on completion of Subcontractor's scope.

6. LIEN WAIVERS: Exhibit D waiver is unconditional and releases "all claims through the date hereof." Risk: High | [JURISDICTION] question: is a statutory waiver form required? Revision: conditional waiver limited to the amount paid.

TOP FIVE ASKS: 1, 3, 6, 2, 5.

Tips

•Get the incorporated prime contract sections if at all possible. Flow-down risk cannot be assessed against a document you have not seen.
•Compare notice and dispute periods in the prime contract with the subcontract. The subcontractor often has less time than the GC once pass-through timing is counted.
•Read lien waiver exhibits closely; a waiver form attached to the subcontract may release more than the payment it covers.
•Research every enforceability question in [JURISDICTION] law. Treatment of pay-if-paid clauses, indemnity and no-damages-for-delay varies widely.
•The memo is a draft for attorney review; verify any authority you add before advising the client.

Frequently Asked Questions

What is the practical difference between pay-if-paid and pay-when-paid?

In general terms, pay-when-paid language addresses timing: the sub is paid when the GC is paid or within a reasonable time. Pay-if-paid language makes owner payment a condition of the sub's right to payment, shifting the risk of owner nonpayment. Whether a clause is read one way or the other, and whether pay-if-paid is enforceable, depends on the wording and [JURISDICTION] law.

Can I run this without the prime contract?

Yes, but the flow-down analysis will be incomplete. Claude will review the subcontract terms on their own and list the prime contract provisions you need. Request those sections from the GC before signing; a general flow-down clause can bind your client to notice periods and liquidated damages it has never seen.

Does this work for the general contractor's side?

The prompt is written for the subcontractor. For a GC, change the first line and the analysis instructions so the goal is consistent flow-down and enforceable payment terms rather than limiting risk. The structure of quoted clause, effect, risk and enforceability question still works well from either side.

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