What is a subcontractor agreement
Many jobs, whether they are large or small, will need varying degrees of expertise, skill, licensure, techniques and special requirements. A single contractor will likely not be able to perform all these tasks and meet all these requirements on their own. In those cases, a subcontractor will need to be hired to complete those specific tasks – this is done using a subcontractor agreement. The incentive to use a subcontractor agreement is to mitigate project risks, reduce costs, and help contractors focus on what they do best.
Subcontractor agreements establish strong working relationships by setting a clear understanding of costs, expectations, timelines, scope of work and payment terms. This takes all guesswork out of the project responsibilities. Handshake agreements will only take you so far. A formal agreement, even amongst friends or trusted partners, will help protect all parties involved and foster better working relationships.
What’s included in a subcontractor agreement?
At the bare minimum a subcontractor agreement should include price, scope of work, and specific details associated with the scope of work. The agreement does not have to be extensive but it should be extremely detailed where possible.
Providing an itemized breakdown on every task will ensure all contractors are on the same page. Subcontractor agreements need to be carefully crafted depending on the project, industry, and local laws and regulations. With that said an effective agreement will include the following:
First things first, who is the agreement between? It’s important to include basic business information on all companies involved. The contractor and subcontractor provide names, addresses, and any relevant contact information. This ensures transparency and clarity around the involved parties.
Scope of work
Considered one of the most important components of a subcontractor agreement is the scope of work. A scope of work document is a contractual agreement used to define the work a subcontractor is to perform. It should make clear to all parties involved what a contractor is being paid to complete, when they will complete it, and any specific methods and techniques used. On a high level the SOW should allocate responsibilities and set clear expectations.
The scope of work can be included in the agreement or a separate document attached to the agreement but should be included in all circumstances.
A scope of work will provide:
- Work required including objectives and deliverables
- Who is taking on the responsibility and risk
- Schedule and timelines
- Extra requirements and project details such as admin and management processes
Detailing price and payment terms is crucial here. Coming to an agreement and signing off on price is crucial for kicking off the project on a positive note. It will also help streamline future jobs. The contractors, should they decide to work together again, will know the set rates and terms that they each other operate under.
The most important part of this section is to define payment terms with no room for misunderstanding. Detail hourly or flat fees, specific line items and associated rates, and any specific terms such as progress payments or payment applications.
Even with a detailed scope of work, things will need to be adapted or changed from the original SOW. A change order will serve as a formal amendment to the contract specifying a change to the scope of work. A change order will detail what the change is, how it affects the scope of work, price, and timeline.
As it relates to the subcontractor agreement some important questions need answering. Who is responsible for handling change orders? Who should request them and what is the process for submitting and fulfilling them? Detail this information in this section to ensure a smooth process for future change orders.
Licenses and insurance requirements
The agreement should state any specific requirements on insurance or licenses needed by the subcontractor to complete the job. Detail local laws and regulations in this section as well. It’s crucial to adhere to these laws and license requirements and note them in the document.
Similar to the need for a clear roadmap for handling change orders, a plan should be detailed for handling claims and disputes. Deciding beforehand how to handle these situations will further protect both parties and help ensure a successful project. Contractors should opt for methods that provide enough protection without lengthy or costly legal proceedings.
Options might include binding arbitration, non-binding arbitration, mediation, or litigation.
A Termination clause will structure the reasons or scenarios that would result in the contract terminating. This is important to include so that all parties involved are held accountable. This also allows contractors to understand the notification requirements or duties needed for ending the contract. These terms and conditions can vary depending on the contractor’s needs and the specific project. Terms may include specific clauses such as a “no right to terminate” clause in which the contract cannot be terminated until the job or task has been completed.
Other clauses that contractors might include deal with terminating the contract before the project even begins. If for example a contractor is still locking in bids with subcontractors and waiting for the property owner to sign off on the project, that contractor may want a provision in place that would allow the contract to terminate if the project is not awarded to them.
In short, it’s essential to understand what termination clauses are included in the contract and to describe all specific details and scenarios that would result in the contract terminating.
What to be aware of
Whether the subcontractor agreement is for roofers, hvac specialists, or concrete specialists, there are some industry specific provisions and clauses that may appear in a subcontractor agreement.
Pay when paid
A subcontractor may run into a “pay-when-paid” clause when negotiating with another contractor. This type of clause is when a contractor, for example the prime contractor, has a provision that they will only pay the subcontractor after they themselves have been paid by the property owner or customer. Similarly a “pay-if-paid” clause is a provision that states that the prime contractor will only pay the subcontractor if they are paid first.
It’s a clause that serves to mitigate against risk in case the project falls through, is delayed, or cannot be completed.
It’s worth noting that not all states see pay-when-paid clauses as enforceable so it’s crucial that you know the laws and regulations around this in whatever state or city the contract will be signed.
Lien rights refer to a protection specific to the construction industry in which a contractor can file an action against a property owner.
For example, if a contractor is not paid for work, materials, or completion of a project, a lien can be used to force payment through legal means. Liens rights are specific to the state and local authority in which you are conducting business so it’s important to know the liens rights of your local jurisdiction.
The basic function of a flow-down clause is to tie in the terms and conditions of the general or prime contract to any subsequent subcontracts. In other words a flow-down clause will make certain terms and conditions apply to both contracts. When this is the case it’s crucial to request access to the prime contract so all obligations and responsibilities can be understood. There are many aspects and dimensions to flow-down clauses so it’s highly encouraged to learn more.
The subcontractor agreement will need to fit the specific needs and requirements of the contractors who are structuring it. The main goal is to protect both contractors and ensure that expectations, rates, and terms are understood and agreed upon to ensure a healthy and productive working relationship.
There are many specific scenarios or provisions that can arise such as pay-when-paid clauses or non-lien clauses that need to be examined, understood and negotiated before a contract can be confidently signed.