An Essential Guide To Prime Contracts vs. Subprime Contracts for California Contractors

When it comes to booking work as a general contractor or a subcontractor in California, it’s absolutely essential that you know the finer points of prime and subprime contracts.

You can face substantial legal consequences if you run afoul of a contract – whether on purpose or by accident – so knowing what belongs in a prime or subprime contract means protecting your business from the law.

But as contractors, we’re not lawyers – we just build things – so many contractors know very little about prime and subprime contracts. In this article, we’ll fill you in on all the essential elements of prime and subprime contracts, so you can make sure your business is compliant now and in the future.

Construction Prime Contracts in California

What Is A Prime Contract?

Prime contracts are the most essential contracts that you’ll find on construction projects, involving direct relationships between the project owner and the primary contractor. Usually, a general contractor or a construction manager are the ones that are involved in prime contracts.

This contractor holds complete responsibility for project execution, which may include hiring and managing multiple subcontractors for various project components. When a prime contractor hires any subcontractors, a subprime contract is created.

Legal Requirements and Provisions

When it comes to what needs to be prime contracts in California, there’s a lot to be aware of. Prime contracts have far more legal requirements and frameworks than subprime contracts, which are a bit more random and ad hoc to the job itself. Subprime contracts can be easily worked out between the prime contractor and the subcontractor, with no oversight necessary.

Prime contracts are heavily regulated by the state. California law mandates specific provisions in prime contracts, including the inclusion of the contractor’s license number, adherence to regulations set by the Contractors’ State License Board, and compliance with the Business and Professions Code.

These contracts must also comply with provisions for home improvement projects, as detailed in Section 7159 of the Business and Professions Code​​.

When it comes to making sure you’re in compliance with California law, we highly recommend hiring a lawyer. The reality is that we’re only contractors – we’re not equipped to understand the labyrinth that is California contract law.

What Needs To Be In A Prime Construction Contract In California?

There are specific stipulations set forth by the California legal system as to what exactly needs to be in a prime contract for construction.

These requirements are constantly changing and can be extremely specific – it’s important that you hire a legal specialist to make sure your contracts are compliant.

That said, here are the main things that absolutely must be in a prime contract in California.

  1. Contractor’s License Number: The California Business and Professions Code section 7030.5 mandates that all construction contracts must include the contractor’s license number. This applies to prime contracts, subcontracts, bids, and advertising forms​.
  2. Statement for Complaint Procedure: A statement informing all parties that complaints against the contractor can be filed with the Contractors’ State License Board within certain time frames for patent and latent acts or omissions​.
  3. Disclosure for Suspended or Revoked License: If a contractor’s license has been suspended or revoked more than once in an eight-year period, this must be disclosed before entering into a contract for residential property work​​.
  4. Additional Provisions for Prime Contracts (Other than Home Improvement Contracts):
    A statement as required by Business and Professions Code section 7030(a), informing about contractor licensing regulations and the jurisdiction of the Contractors’ State License Board​.

In addition to those three general stipulations, there’s also some specific requirements for home improvement contractors (B-2 Remodeling Contractors and their various subcontractors).

Specific Provisions for Home Improvement Prime Contracts: Prime contracts for home improvement projects must comply with the detailed requirements outlined in Business and Professions Code section 7159. These include, but are not limited to:

  • The contract must be in writing and include the title “Home Improvement” in boldface type. No, really.
  • The contractor’s name, business address, and contractor’s license number must be clearly stated.
  • Detailed information about the contract price, payment schedule, project description, start and completion dates.
  • Clauses related to extra work and change orders.
  • Specific notices about mechanics liens, insurance, and the project owner’s right to cancel.

Construction Subprime Contracts in California

What Is A Subprime Contract?

Subprime contracts, commonly referred to as subcontracts, are those contracts between specialized contractors undertaking specific tasks within a larger project, such as electricians or plumbers – anyone with a Class C license in California.

These are the types of contracts that general contractors and subcontractors enter into. They outline what type of work is to be performed by the subcontractor, what the timelines are, what work is expected of the contractors, and what the penalties are for falling foul of what’s in the contract.

Legal Requirements

The specific legal requirements for subprime contracts are not as extensively defined in the law as for prime contracts – there’s a lot more leeway for contractors and subcontractors to shape the terms of the contract to suit both parties.

However, that doesn’t mean there are no legal requirements. The main thing that subcontracts must outline is who is performing the work, what work they’re performing, and the timelines that the work is to be delivered.

For example, under the Public Contracts Code, prime contractors must list subcontractors for specific portions of work, with penalties for improper substitution or failure to specify a subcontractor.

Standardized Prime Contracts

There are quite a few standardized formats of prime contracts. With these standardized formats, you don’t have to worry about compliance – these contracts are proven to cover all areas of contract law for construction contractors in California.

Federal Government Construction Contracts: These contracts, used by various federal agencies, contain standard provisions that are federally formulated and recognized.
American Institute of Architects (AIA) Contract: AIA contracts are another standard form, focusing on agreements between owners and contractors for construction services.

Key Differences Between Prime and Subprime Contracts

Prime contracts involve a direct agreement with the project owner and encompass overall project responsibility, while subprime contracts are agreements between the prime contractor and other specialized contractors for specific project components​​​.

Common Elements in Both Prime and Subprime Contracts

  • Scope of Work: Detailed description of the specific work or services the subcontractor is expected to perform.
  • Payment Terms: Clearly defined payment schedules, amounts, and conditions under which payments will be made.
  • Duration and Schedule: Stipulation of the timeframe for the subcontractor’s work, including start and end dates, and any scheduling requirements.
  • Change Order Procedures: Guidelines on how changes to the scope of work or contract terms are to be handled, including any necessary approvals.
  • Compliance with Laws: Requirement for the subcontractor to comply with all applicable laws, regulations, and building codes.
  • Licensing and Certification: Assurance that the contractor holds all necessary licenses and certifications required for the work.
  • Insurance and Bonding: Specifications of required insurance coverage and bonding the subcontractor must maintain.
  • Indemnification: Clauses that outline responsibilities for liabilities, damages, or losses incurred during the project.
  • Dispute Resolution: Terms for resolving disputes that may arise during the course of the project, including arbitration or litigation procedures.
  • Termination Conditions: Conditions under which either party can terminate the contract, including for breach of contract or failure to meet performance standards.
  • Safety and Quality Standards: Requirements for safety practices and quality standards to be maintained by the subcontractors.
    Conclusion

As a contractor, staying legally compliant and making sure that your business is protected from any legal issues is a 24/7 job. In fact, you will probably spend more time working on the bureaucratic side of your contracting business than doing actual contracting work – especially on larger projects.

Knowing the ins and outs of a prime and subprime contract as a contractor is critical to building and maintaining a successful contracting business in 2023. The best advice we can offer is to hire a lawyer to handle all of your contracts, or at least to look them over before you send them out.

Lawyers might cost a little money – okay, they cost a lot of money – but the amount of time, money, and energy they save in the long run means that spending upfront is well worth it.

Additional Reading

Virginia Tech – Prime Contract: Format and Major Components

  • A fantastic primer on the basics of Prime Contract law, with more depth than we can go into in this blog! We recommend this to anyone looking to learn more about this topic.
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