When you outsource your work by hiring a subcontractor, it’s essential that all parties are on the same page. Legal business contracts, also known as subcontractor agreements, ensure all the legal parties share equal responsibility for successful project completion.
An efficient and detailed subcontractor agreement can save independent contractors and businesses significant time and money to help them avoid unnecessary complications.
In some cases, collaboration with subcontractors is not managed well, leading to severe financial and reputation loss. Without a formal agreement, you’re at risk for receiving incomplete jobs or poor performance and potentially ending up with instrumental liability.
Want more details about subcontractor agreement templates and tips? Check it out here.
What is a subcontractor agreement?
A subcontractor agreement can be defined as a formal contract between a general contractor and subcontractors. The legally binding document contains details about services or materials provided by the subcontractor. It can include pricing policies, payment details, legal terms, and conditions valid during the contract period.
Once the subcontractor agreement is signed by both parties, the actual work begins.
The benefits of a subcontractor agreement
Here are the main benefits of having a subcontractor agreement.
- Contains critical project details, including scope of work timelines, milestones, and payment information.
- Gives legal protection to both contractors and subcontractors.
- Protects from liability when your subcontractor delivers a poor or incomplete job leading to business loss.
- Keeps general contractors economically protected by lowering the chances of hidden costs during the project duration.
- Contains insurance information of the subcontractor.
- Minimizes project impact and prevents liability a general contractor could face.
- Provides legal, documented proof that you hired a subcontractor.
The essential components of a subcontractor agreement
Subcontractor agreements include several clauses to protect the contractor and subcontractor unless the task is completed. Here are the essential components of a subcontractor agreement.
1. Details of all involved parties
The first thing you should include in the subcontractor document is the details of all the involved parties in a construction project. This includes the name and contact details of:
- The parent company or the main client requesting the construction work.
- The main contractor, general contractor, or construction business agency taking up the construction work.
- Subcontractors and vendors hired by the primary contractor for outsourcing specific tasks.
2. Scope of work
The scope of work can be defined as the activities assigned to a subcontractor. A subcontractor is expected to deliver the scope of work within a stipulated timeline. The scope of work includes:
- Insightful details of the construction project activity and resources required for it.
- The start date, completion date, milestones, and important deadlines.
The scope of work clauses must be precise and crystal clear to prevent any complications during the construction project lifecycle.
3. Payment information
The subcontractor agreement should define when and how the contractor will receive payment. It should also include how much payment the subcontractor will receive for each task. Included also in the payment agreement are the corresponding tax deductions between the contractor and subcontractors as required under the Construction Industry Scheme.
If you have paid any advance payments or deposits as a contractor, ensure to include the same in the subcontractor agreement.
Finally, your agreement should include a buy-out clause if things don’t work out between you and the subcontractor. Include any applicable conditional payment terms (e.g. pay if paid and pay when paid).
Construction projects involve several dynamic components. Therefore, it can, at times, become challenging to establish and understand who has authority on which component of the project.
Hence, during project initiation, it’s essential to understand who has the authority to make legally binding decisions. For example, a contractor will have the authority to determine how and when a particular task needs to be delivered. A subcontractor will have the authority to decide which tools, machinery, and workforce will be used for completing a task.
5. Change order clause
Construction projects always have the risk of encountering unexpected circumstances without any prior warning. For example, an earthquake may end up destroying certain parts of an almost completed construction. When unplanned situations occur, a change order clause will dictate how to proceed with modifications, updating the original agreement to meet the new requirements.
6. Dispute resolution
If any issues arise during the project, the contractor and subcontractor will need to work together for successful dispute resolution and project completion. The dispute clause outlines how a dispute resolution will proceed.
Here are some terms to keep in mind.
- Binding arbitration: this involves dispute resolution in the presence of an arbitrator without going to court.
- Non-binding arbitration: any party can challenge the arbitrator’s appeal to the court if the outcome is believed to be unsatisfactory.
- Mediation: negotiation between the involved parties, generally in the presence of a legal expert.
- Litigation: both subcontractor and contractor file legal consequences and appeal directly to the court.
7. Termination clause
The termination section of a subcontractor agreement should include information about scenarios and conditions that can lead to the termination of the contract.
Some common reasons for termination include unprofessional behavior, failure to meet important project deadlines, poor quality of work, resource misalignment, or fraudulent or suspicious activities.
8. Insurance and license details
To seek and acquire work in the construction industry, subcontractors must be completely insured and have a regulated license. The relevant insurance and license details should be included in the subcontractor agreement for future reference.
9. Indemnity and defense clause
One of the most critical elements in the subcontractor agreement is the defense and indemnification clause. This clause protects contractors and project owners from the subcontractors’ intentional harm or negligent performance. The clause defends the right of the contractor to defend themselves against any lawsuits or fraudulent claims done by subcontractors.
A subcontractor agreement is beneficial for both contractor and subcontractor. It legally protects the rights and terms of service. You can use subcontractor management software with intuitive templates for drafting detailed agreements.