As a contractor in the service industry, it is not uncommon to need the services of subcontractors when you take on new projects. When you hire these subcontractors, all parties need to be on the same page from a legal standpoint. An effective way to accomplish this is through the use of subcontractor agreements. 

With a subcontractor agreement, you can spell out what is expected from both parties and what should happen if something goes wrong. However, for a subcontractor agreement to deliver on these promises, it has to be crafted appropriately. 

This article discusses what a subcontractor agreement is, why it is vital for your business, and what you should include to get your desired outcomes. 

What is a subcontractor agreement and how does it benefit you as a contractor? 

A subcontractor agreement is between a principal – a contractor or project manager – and a subcontractor. The contract explains the responsibilities of both parties and the rules that govern the transactions between them. Subcontractor agreements are legally binding on all parties concerned and protect from unfair risks. In addition, they spell out the project’s timeline, the scope of work, payment schedules, and the preferred dispute resolution method. 

As a contractor, a subcontractor agreement protects you from legal liability if a subcontractor does not meet their obligations to the project. Because the contract will include critical project details and clearly state what happens if obligations are not met, you will be free of liability if your subcontractor defaults. So what should you include in your subcontractor agreement? 

Understanding project-based cooperation 

Traditionally, the construction industry is regarded as being notoriously adversarial. Many construction teams consist of strangers who have never worked together before and come to the team with varied work cultures and competing interests. The typical results with this type of combination are delays, conflicts, and disputes – all of which negatively impact projects. 

One way to combat the crippling effects of an adversarial construction project is by implementing project-based cooperation. Project-based cooperation is defined as a meaningful partnership between two or more companies who desire to merge resources for a given period or project. This type of cooperation is used when the parties considering the cooperation are interested in leveraging each other’s resources and capabilities but do not want to commit to a long-term relationship or partnership. 

Ideally, each organization on the project team—architect, engineer, general contractor, subcontractor, or supplier—makes an optimal contribution based on its knowledge and capabilities. Then everyone commits to the timely resolution of problems and completing the project according to the owner’s expectations. 

With this type of cooperation, each project team member contributes optimally to the project based on their knowledge and capabilities and generally commits to resolving problems and completing the project timely. 

With the project-based cooperation model, you can head off conflicts on your construction projects instead of getting more value than you would have gotten without the model. 

What should be included in a subcontractor agreement? 

The exact elements you should include in your subcontractor agreement depend on the nature of your project and the sector in which you are working. However, the following elements are generally included in subcontractor agreements, and depending on your project; you may include some or all. 

1.    Scope of Work 

The scope of work section explicitly states what tasks the subcontractor is expected to complete. You must take the time to give detailed descriptions of the subcontractor’s responsibilities, even if it feels tedious, to do so. Details like the project’s name, owner, the contractor, and the subcontractor should also go here. Yes, the subcontractor already knows these details; however, you cannot go wrong with writing them down. The more specific the scope of work is, the better for you both. 

2.    Projected timelines 

Here, you should include any deadlines attached to the project. If the work is supposed to be completed in stages, ensure that you state when each step is expected to be completed. You should also include a provision stating that the subcontractor must inform the contractor immediately if a delay is anticipated. 

3.    Payment and Billing 

Here, you should state what you will pay to the subcontractor and how you will make the payments. For example, you should say whether you want to pay an hourly rate, a flat fee, or a performance-based wage. You may want to consider including a payment table either as an exhibit or addendum to the agreement. Also, if you have made any deposits or prepayments to the subcontractor, be sure to include those as well. 

4.    Status declaration 

Declaring the status of the subcontractor is non-negotiable. Here, you clarify that they are an independent subcontractor and not full-time staff. Thus, they are responsible for reporting and paying their own taxes. You should also include the subcontractor’s licensure and insurance status. A subcontractor cannot legally contribute to a construction job unless they are fully insured and licensed. Thus, if you are drafting a subcontractor agreement for a construction job, it must include the applicable insurance details such as commercial liability insurance, errors and omissions, and worker’s compensation insurance.   

5.    Confidentiality 

A non-disclosure clause is essential if the project for which you are bringing the subcontractor onboard has sensitive information. This section of the agreement should explain what you consider to be confidential information. 

6.    Non-Compete 

Including a non-compete clause ensures that the subcontractor does not go around you and deal directly with the client or compete with you for the job. However, you should set a reasonable timeframe for the non-compete to be enforceable, e.g., for the project’s duration or some months after the project is completed. 

7.    Intellectual property rights 

Here, you state what happens to any work the subcontractor does while working with you. Legally, you have the right to ownership of any work they produce, and they must waive all rights to it, as it is now your intellectual property. 

8.    Indemnification 

An indemnity clause ensures that the subcontractor takes responsibility for the quality of work they produce. The paragraph should say something like, “subcontractor, agrees to defend and indemnify the contractor (and others if applicable) against any claims, lawsuits, and damages arising out of the subcontractor’s negligence or intentional acts.” This way, you ensure that you are not held liable if a legal situation arises due to the subcontractor’s work.    

9.    Arbitration 

In the event of a legal disagreement, an arbitration clause explains how the disputes will be resolved, especially without going to court. 

10.  Termination or Modification 

As unpleasant as it may sound, there are instances where you may need to terminate the contract with your subcontractor. The termination section should detail what scenarios will warrant terminating the subcontractor’s contract. Common scenarios that present grounds for termination include improper behavior, inability to meet project deadlines, or an unwillingness to carry out required duties. In addition to the scenarios that can lead to termination, the section should also explain how a termination might affect the subcontractor’s payment. 

11.  Change Orders 

It is not unusual for unexpected circumstances to occur while working on contract projects. Your subcontractor agreement should prepare for this by including a procedure for identifying adjustments that need to be made to the project, getting the changes approved, and modifying the original agreement. This procedure is called a change of order clause. 

12.  Jurisdiction 

The jurisdiction section typically lists the state’s local laws pertinent to the project and the subcontractor agreement. 

13. List of supplements

Although supplements are not always needed, it may be necessary to include the following documents:  

• Detailed technical requirements about the project 

• Contract between client (actual owner of the property) and principal 

• Limited power of attorney