As the primary service provider subcontracting some of your work, you must make sure that your subcontractors do things right according to the main contract. However, any subcontractor you outsource work to is not legally bound by the contract you signed. Therefore, it’s essential that you put a subcontractor agreement in place.
The subcontractor agreement ensures compliance with the terms of your contract and protects you in case a subcontractor fails to do their job or performs poorly. It clearly and simply outlines the process that other individuals or firms providing services must follow.
The subcontractor agreement is meant to protect both parties to the contract and should not include any unfair clauses. It should not be too complicated. The idea is to create a straightforward agreement that ensures that the subcontractor meets the project requirements t and receives their dues in full.
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What is a subcontractor agreement?
A subcontractor agreement is a contract between a contractor or project manager and a subcontractor. This document is a legally binding agreement that delegates some or all of the contractor’s work to the subcontractor. A subcontractor agreement is necessary because subcontractors do not have any agreement with the client or property owner.
A subcontractor agreement works just like a contract of employment between an employer and an employee. However, a subcontractor agreement defines a limited scope of time and work expected from the subcontractor. It explains what work is being subcontracted and what work is not.
For example, the main contractor may outsource a firm of electricians to do the electrical installations in a building. The subcontractor agreement between these two parties would detail how many sockets and light fillings to install, where to install them, and the timelines for installation.
The subcontractor agreement must indicate that the contractor intends to supply some materials where applicable. Such details help reduce wastage of time and materials by avoiding duplication of work.
What to know about subcontractor agreements
One or more contracts may govern a construction project. These contracts define the roles, responsibilities, and rights of each party. In most cases, the main contractor and the property owner sign a direct agreement called the prime contract.
The main contractor outsources some work to subcontractors and creates separate agreements with each subcontractor. The subcontractor agreement must comply with the provisions in the prime contract through flow-down clauses.
Flow-down clauses can hold the subcontractor accountable for things not explicitly stated in the subcontractor agreement. Therefore, a subcontractor should not assume their subcontractor agreement is entirely separate from the prime contract.
If the subcontract includes a direct reference to the prime contract, then the subcontractor has the right to request a copy of the prime contract from the main contractor.
A contract is rarely a single document; it typically includes several project documents covering specific work details. A complete construction contract is the total of all the project documents.
What a subcontractor agreement should include
Every subcontractor agreement is different depending on the nature of the work it is attached to. However, there are certain minimums that every subcontractor agreement should include. A subcontractor agreement must include the scope of work and details of when and where the subcontractor will render services.
Such an agreement may also include a clause explaining that the subcontractor is responsible for day-to-day alterations in the work plan. This clause is standard in construction because forepersons need some degree of flexibility.
Another minimum is the rate of payment to reduce payment disputes. Payment terms must be clearly defined in the agreement. Other things that must be included in a subcontractor agreement are:
Business information
Transparency and communication are vital in any business relationship, and a construction project is no different. The subcontractor agreement must include both parties' names, business names, and contact information: the subcontractor and main contractor. Both parties have a right to know who they agree to work with and how to reach them.
Scope of work
A subcontractor agreement cannot achieve its objective if it does not include the scope of work that the subcontractor should complete. A broad or unclear scope of work is hard to navigate and may lead to unfulfilled expectations.
Including the scope of work ensures that each party is aware of the other party’s expectations. If the scope of work is not well defined, there is always a higher chance that the subcontractor will assume liability for not doing the good work.
A subcontractor agreement should provide a clear scope of work detailing all the materials and equipment the subcontractor will provide and all the work they are to do.
Duration of work
This section details all the deadlines attached to the project. A project schedule is a vital part of the agreement; the agreement must include the start date and expected completion date. This part of the agreement should also detail the contract effective date.
The project owner or main contractor should set the subcontractor deadlines a few days before the main deadlines to provide a buffer in case of any issues.
Price and payment
Subcontractors deserve to be paid for their work regardless of whether there is a contract in place or not. However, having a subcontractor agreement ensures the payment terms are clear.
There is no one-size-fits-all approach to this section of the contract; what matters is transparency and accuracy. The hiring contractor must define the rate and mode of payment. Payment rates are defined in terms of an hourly rate or a flat fee. The hiring contractor must also specify the exact payment schedule explaining how and when they will pay.
The hiring contractor may choose to set a performance-based wage based on deliverables. The contract must define how they will measure these deliverables in this case. It is also crucial that subcontractors know how to submit payment applications.
Finally, this section of the agreement should include a buyout clause to protect the hiring contractor if things do not work out.
Clarify subcontractor status
The status of the subcontractor should be crystal clear. There must be a clause that clearly defines them as independent subcontractors, not full-time employees. The subcontractor is responsible for declaring and paying their taxes, which must be clear.
Insurance
Subcontractors are typically responsible for paying their insurance and other related coverage; this must be defined in the agreement. The subcontractor is responsible for general liability insurance, workers’ compensation insurance, omissions, and errors.
Termination
Sometimes the hiring contractor may have to cancel the contract with a subcontractor. This section of the agreement defines grounds for such termination. It also explains any changes to the subcontractor’s pay if they do not meet all their expectations.
It should be clear to both parties when and how the contract may be terminated before completion. The termination clause should also define the number of days within which the hiring contractor will pay any remaining dues.
Some agreements may include “get out” clauses that allow the subcontractor to quit early in exchange for a financial penalty. Subcontractors may choose to terminate the contract because of a more lucrative opportunity.
Similarly, some agreements define a one-off payment if the contract ends early or the scope of the subcontractor's work shifts dramatically. This scenario may happen if the hiring contractor’s agreement with the client or project owner ends abruptly.
The agreement only terminates officially when both parties agree upon written notice.
Quality assurance
This section stipulates the quality of work that the project demands. The subcontractor agrees to deliver professional work and promises that they are qualified to do it. The subcontractor is responsible for providing original work and making modifications where necessary to ensure quality.
Limited liability
If the client is not satisfied with the quality of work delivered, they may seek compensation from the main contractor. Therefore, a hiring contractor may include a clause that allows them to pass this liability on to the subcontractor.
Sometimes, the hiring contractor or other subcontractors may fail to deliver and cause late or non-payment. The subcontractor may then invoke limited liability to prevent the contractor from passing on late or non-payment from the client to the subcontractor.
Safety
Since accidents are common in construction projects, the agreement must include a section on safety. The hiring contractor is generally responsible for ensuring the safety of everyone involved in a project. However, the subcontractor is also responsible for identifying and reporting or mitigating risks associated with their work.
Summary
It may be tempting to forego a written contract, especially between parties that have worked together. However, a subcontractor agreement is essential when hiring subcontractors to work on a project because it protects the hiring contractor in case things do not work out.
A subcontractor agreement ensures transparency between both parties and defines each party's roles, responsibilities, and rights. It also sets out clear payment terms, ensuring that subcontractors receive the pay they agreed to for their work.
A subcontractor agreement helps reduce wastage by preventing duplicate work and protects the hiring contractor if the subcontractor does not deliver as expected.
