Residential Contracting 101: The “Flow Down Clause”

A “flow-down” clause provides that a subcontractor assumes toward the builder all the duties and obligations the builder has assumed toward the homeowner. Flow-down clauses can create a number of problems. If the clause is interpreted broadly, the subcontractor may have agreed to build the entire home. If the intent of the clause is to impose on the subcontractor only the technical requirements of the contract that apply to the subcontractor’s scope of work, an overly-broad flow-down clause obviously will not accomplish this intent.

In a Nevada case, a contract clause stated that the risk of loss of completed work remained with the builder until final acceptance by the project owner. The clause was incorporated into a subcontract by a flow-down clause. The subcontractor ultimately bore the risk of loss until final acceptance of the home.

And in a Washington State case, a prime contract required the builder to name the owner as an additional insured on the builder’s liability policy. The court held that a general flow-down clause did not impose this obligation on a subcontractor since it was not sufficiently precise to put the subcontractor on notice that this was required.

A few Indiana courts have interpreted flow-down clauses, often with mixed results. In one Indiana case, a contract required the builder to provide the owner with lien waivers prior to receiving payment. The subcontract contained no such requirement, but a flow-down clause incorporated the lien waiver requirement into the subcontract. The lien waiver was held to be a necessary condition to the subcontractor’s right to get paid.

In a 2002 case, the court considered the standard flow-down clause contained in the contract forms promulgated by the American Institute of Architects. The court noted that “a flow through provision is intended to incorporate into the subcontract the provisions of the prime contract which related to the subcontractor’s performance.” The court found that an acceleration claim submitted by the subcontractor was barred by the failure to provide written notice of the claim within the time required by the contract between the owner and builder.

Conversely, the court refused to flow-down for the benefit of a subcontractor a preferential interest rate contained in the prime contract in a 2002 Indiana case. The court determined that the flow-down clause only pertained to the “work” provisions of the prime contract applicable to the subcontractor “and as such do not include the payment provisions” of the prime contract. The court also recognized “a public policy interest in allowing subcontractors to negotiate a price without being constrained by the contractor and owner’s negotiated price and method of payment.”

“Builder beware”!

By: J. Greg Easter