Subcontractor Rights and Obligations in Multi-Tier Construction Projects

By Degnan Horne Construction Law

Understanding Multi-Tier Construction Projects

In the construction world, many projects are structured in tiers: an owner hires a general contractor, who in turn hires subcontractors, and those subcontractors may hire lower-tier subcontractors. In such multi-tier construction projects, subcontractors must navigate a complex web of contractual and statutory duties. Yet they also enjoy certain rights — particularly in the state of Arizona, where Degnan Horne regularly advises on construction law disputes.

Because multiple layers separate the owner from the lower-tier subcontractor, contractual relationships and legal protections differ depending on whether a subcontractor contracts directly with the general contractor (first tier) or with another subcontractor (second tier and below). Below, we explore the obligations and rights subcontractors must understand — and how legal counsel like Degnan Horne can help protect those rights in Arizona.

Core Obligations of Subcontractors in Multi-Tier Projects

Contractual Performance Duties

First and foremost, each subcontractor must perform per their subcontract agreement. That includes:

Delivering work consistent with plans, specifications, and industry standards
Meeting deadlines and coordinating with upstream contractors
Complying with safety, permitting, and building code requirements
Addressing change orders, defects, and warranty obligations

A subcontractor’s failure to meet these duties can trigger breach claims, withholding of payment, or termination by an upstream party.

Notice, Documentation, and Proper Claims

Subcontractors must often follow strict notice and documentation procedures to preserve claims for payment or dispute resolution. For example:

Submit proper invoices or billing consistent with the contract
Provide change order requests in writing and in timely fashion
Ensure written claims or delays are documented and submitted as required
Where permitted by statute, serve preliminary notices or stop-payment notices

Failing to comply with these procedural steps can be fatal to a legal claim, especially in layered settings where upstream parties rely on the contract chain to pass notice downstream.

Bond, Lien, and Statutory Compliance

One of the trickier areas in multi-tier projects involves payment bonds, liens, and statutory rules:

On public construction projects in Arizona, statutory “Little Miller Act” provisions require general contractors to post payment and performance bonds. Subcontractors (even those not contracting directly with the general) may make claims under those bonds, subject to notice rules.

On private projects in Arizona, mechanics’ lien laws may permit subcontractors to place a lien on the property if unpaid. But lower-tier suppliers or subcontractors (those who supply to a subcontractor rather than to a contractor) frequently lack lien rights under Arizona law.

Arizona law also restricts how a contract may alter statutory rights: for instance, A.R.S. § 34-221 prohibits material alterations of a subcontract that would deprive a subcontractor of statutory payment protections.

Thus, subcontractors must monitor whether upstream contracts or statutes grant or negate rights like lien or bond claims.

Retainage and its Release

Retainage — withholding a portion of payments until project completion — is common. In Arizona:

For private projects, an owner may withhold a “reasonable amount of retention,” tied to costs the owner anticipates for potential defects or completion issues.
For public projects, retainage is typically capped (e.g. 10%) and may reduce when the project is half complete.

After substantial completion, subcontractors may submit an estimate or billing for the release of retainage; the owner must act within statutory time frames.

Subcontractors should assert their right to prompt release and be wary of upstream parties unduly delaying retainage release to manipulate leverage.

Key Rights of Subcontractors in Multi-Tier Construction

Right to Payment and Prompt Compensation

Perhaps the most critical right is to be paid for work done. This includes not only the base contract price but also approved change orders, extra work, and interest or penalties if stipulated. In multi-tier settings:

First-tier subcontractors hold a direct contractual right against the general contractor
Lower-tier subcontractors may have to route claims through upstream subcontractors, or rely on bond or lien rights if available
Some statutes (e.g. prompt payment acts) may vest rights for subcontractors to demand payment within defined deadlines

Degnan Horne often assists subcontractors in enforcing these rights when general or upstream contractors delay or refuse payment.

Right to Bond Claim / Surety Recovery

On public or bonded private projects, if the general contractor fails to pay, subcontractors may make claims against:

The payment bond posted by the general contractor
A performance bond, under certain defaults

However, lower-tier subcontractors must carefully comply with notice deadlines and statutory requirements to preserve bond claims. Delay or misstep can forfeit the claim.

Right to File Lien (Where Permitted)

On private real property projects (not owner-occupied homes), subcontractors may record a mechanic’s lien to secure payment:

They must provide proper preliminary notice (in Arizona, typically within 20 days of first supplying labor or materials).
They must record the lien within the statute’s deadline (often 120 days after completion) and serve required parties.
The subcontract cannot strip these rights by materially altering them. (Statutory protections limit that possibility in Arizona.)

For lower-tier subcontractors, however, lien rights may be unavailable if they supply to another subcontractor rather than the general.

Rights of Suspension, Termination, or Stoppage

Subcontractors may, under contract or statute, suspend performance or terminate their subcontract in certain scenarios:

If upstream parties materially breach, subcontractors can often suspend or stop work until cure.

Also, Arizona regulation anticipates that subcontractors may preserve the right to suspend or stop work under certain circumstances

Exercising these rights must be done carefully — notice and procedural compliance is critical to avoid liability

Indemnity, Insurance, and Fault Allocation

Many subcontract agreements include indemnity provisions requiring a subcontractor to defend and indemnify general contractors or owners. In multi-tier settings:

The subcontractor may owe defense or indemnification for claims arising from their work.

However, doctrine like active/passive negligence may limit indemnity in Arizona: courts may refuse indemnity for losses caused by the indemnitee’s own active negligence.

Parties should negotiate clear, fair allocation of risk and always maintain proper insurance coverage.

Challenges and Pitfalls for Subcontractors in Layered Projects

Chain of Credit Risk

A subcontractor’s direct counterparty may default, leaving the subcontractor with limited leverage against upstream parties. In many cases, upstream subcontractors act as financial “filters,” absorbing delays or insolvencies.

Statutory Strictures and Deadlines

Statutory requirements (e.g. preliminary notices, lien filing windows, bond claim deadlines) are unforgiving. Losing the deadline often means losing the right. In multi-tier scenarios, subcontractors must understand which deadlines apply to them (especially when they are second or lower tier).

Contractual Clauses that Erode Rights

Some upstream contracts may attempt to waive or limit statutory protections, carve out rights, or require arbitration, which can hinder litigation options. Under Arizona law, a contract may not materially alter a subcontractor’s statutory rights. Subcontractors should scrutinize these clauses before signing.

Proof, Accounting, and Back-Charge Disputes

Disputes often arise over the amount due: differing accounts, back-charges for remedial work, or offsets. A subcontractor must maintain detailed records, receipts, daily logs, correspondence, RFIs, and change order documentation to support its claims.

Practical Steps to Protect Subcontractor Rights

Negotiate clear contract language that preserves legal protections (bonds, liens, notices)
Include mutual indemnity and limitation clauses and ensure insurance coverage is adequate
Comply strictly with notice, billing, and documentation procedures
Monitor upstream financial health and qualify or condition work pending payments
Seek bond and lien information early and demand copies of bonds or contracts
Engage legal counsel early, like Degnan Horne, to review your contract or assist in claims

Securing Your Position in Layered Projects

Subcontractor rights in multi-tier construction are intricate and often constrained by contract, statute, and procedure. However, subcontractors need not be powerless. With vigilant contract review, procedural compliance, and early legal guidance, subcontractors can enforce their payment rights, protect against nonpayment, and manage their risks.

At Degnan Horne, our construction law team routinely represents subcontractors, general contractors, and owners in disputes over nonpayment, bonds, liens, change orders, and enforcement of contractual rights. If you are involved in a multi-tier construction project and want to safeguard your subcontractor rights, reach out for a consultation.