Most projects require the use of a contractor, subcontractors, and suppliers. On a construction project, each relationship requires its own contract.
A subcontractor agreement is a useful process that establishes expectations, manages risk, and keeps general contractors and subcontractors on the same page.
Subcontractors have the right to be paid for their work, whether or not a written agreement exists. However, documenting one’s rights and responsibilities provides an extra layer of protection that is much easier to prove.
What is a subcontractor agreement?
A subcontractor agreement is a contract for work that is performed as part of a larger construction project. In most cases, a subcontractor does not have a direct contract with the property owner.
Instead, they sign an agreement with the project’s general contractor or another subcontractor; they would then be a sub-subcontractor. A general contractor and a first-tier subcontractor, or between two subcontractors may enter into this type of agreement.
For example, suppose the client is undertaking a construction project. In that case, they will likely hire a general contractor to oversee the project and make sure the work gets done according to the specifications.
The general contractor will operate under what’s known as the prime contract. They may hire an electrical contractor to do the electrical works under a subcontractor agreement.
Why get your subcontractor agreement in writing?
Every subcontractor should have their construction contracts written down. It is important to have your agreement in writing. It explains how to deal with any issues or disputes that may arise during the project.
A well-written subcontractor agreement or contract will spell out all of the contract’s duties, responsibilities, and liabilities, as well as how they will be affected if something goes wrong. Furthermore, many states need the signing of a formal contract in order to have the ability to file a mechanics lien in the US.
Difference Between Contractor and Subcontractor
Contractors work to obtain and complete contracts. When a construction contractor requires assistance with a job or project, they will hire a subcontractor.
The contractor is in charge of the entire construction project. Subcontractors only work on a contractual basis for the general contractor, usually on a smaller work section, such as the electrical works.
Who Can Benefit from Using a Construction Subcontractor Agreement?
A construction subcontractor agreement specifies which party is responsible for which task in a clear and legally valid language. The contract specifies the scope of work and what is expected.
Subcontractor Agreement Basics
A subcontractor agreement does not have to be overly complicated or lengthy. A simple, straightforward document outlining the project and expectations will usually suffice.
Of course, you must ensure that the agreement complies with any applicable state or local laws. A subcontractor agreement will usually include several standard sections or provisions. However, there are a few clauses to be aware of:
1.Parties’ information
First, make sure that the entire contract contains all of your information. This includes your name, the name of your business, and any relevant contact information such as an address, phone number, email, etc.
The same is true for the hiring contractor’s name and contact information. Incorporating this information can help increase transparency by specifying where and how communications should be sent throughout the project.
2.Scope of work
The scope of work outlines precisely what the subcontractor is responsible for on the construction project. This section will detail all of the subcontractor’s work, including any materials or equipment that the subcontractor is required to supply.
In addition, a project schedule will be included. At the very least, the subcontract should include a schedule for the portion of work that the subcontractor has agreed to provide. This includes the contract’s effective date, the first day of work, and the expected completion date.
3.Payment terms
This is one of the more important sections of your subcontractor agreement. Most importantly, this section should include the contract price. This will not always be as simple as an hourly rate or flat fee. Payment terms are frequently determined by the type of subcontract you accept.
This section will outline when and how you will be paid, in addition to the contract price. Are progress payments made monthly or when a predetermined milestone or percentage of completion is achieved?
Any form requirements and deadlines for submitting payment applications or invoices will also be included in the payment terms.
4.Change orders
Changes to the orders will almost always occur, no matter how well-organized and carefully planned a project is. This section should explain how to submit a change order request, as well as the approval process.
No one should begin performing work outside their scope of work unless they have first obtained a written and approved change order. These requirements must be strictly followed to avoid complications and the possibility of providing extra work for free.
5.Licensing and insurance coverage
Subcontractor agreements frequently include insurance and licensing requirements. Most general contractors will require that the subcontractor not only verify that they have the proper contractor license in the state but also that any other subcontractors they may hire are licensed.
Working without a license can result in fines and other liabilities from the state licensing board, as well as jeopardizing your lien rights.
In addition to licensing, subcontractors are usually required to provide proof of insurance coverage. In general, most subcontractors should already be insured. Typically, the types of insurance required will be commercial general liability insurance and worker’s compensation insurance.
6.Claims and dispute resolution
Unfortunately, disagreements are relatively common in the construction industry. The process for handling construction claims and disputes should be outlined in your subcontract agreement.
This will frequently include written notice requirements as well as a procedure for resolving claims. Furthermore, under an alternative dispute resolution (ADR) clause, you may be required to submit the claim to arbitration or mediation.
ADR clauses are common in the construction industry because they provide a more streamlined and cost-effective solution than litigation. Another possibility is to award the prevailing party attorney’s fees and costs.
7.Termination clauses
Another important section of a subcontractor agreement is the termination clause. These provisions will outline the reasons for the agreement’s termination, as well as the notice requirements and duties.
Termination provisions may include provisions for termination for cause, convenience, or both. This section should be familiar to you. These clauses will specify the circumstances in which termination is acceptable, as well as any requirements you must meet for termination.
8.Flow-down provisions
Finally, in a construction subcontract, a flow-down or flow-through provision is common. These clauses are used to incorporate some or all of the rights and responsibilities outlined in the prime contract.
If your subcontractor agreement contains a flow-down provision, obtain a copy of the prime contract. There may be areas of your subcontract that are either silent or unclear on a specific issue. The prime contract may provide you with the information you require. You must follow any written notice or approval requirements outlined in the prime contract.
The employer’s involvement in sub-contracts
When negotiating the master contract with the main contractor, the employer will want to ensure that the main contractor will meet the performance requirements outlined in the master contract and that the subcontract costings are consistent. As a result, they will want to examine the subcontracting arrangements of the main contractor.
The main contractor should be allowed to manage the construction project’s delivery, but it is good practice for the employer not to sign the master contract until all subcontracts have been agreed upon and are ready for execution.
The following are some of the issues that the employer should be aware of:
1.Subcontracting assignment and novation
The employer will wish to keep control of the subcontractor’s ability to subcontract their work to others. For example, it will require any future subcontractor to have the necessary technical expertise and the financial strength to fulfill their obligations.
2.Liquidated damages
If the master agreement states that the main contractor must pay liquidated damages to the employer if the job is not completed on time, the employer must ensure that the main contractor will be able to recover enough under its subcontract to pay the employer. This will prevent the main contractor from being unable to pay the employer due to a lack of funds.
3.Collateral warranties
Collateral warranties establish a direct contractual link between the employer and the subcontractor that would not otherwise exist. This enables the employer to pursue a contractual claim against subcontractors if they fail to meet their responsibilities under the subcontract.
Should the employer need to step in and replace the principal contractor in the subcontract, they must verify that they are satisfied with the subcontract as a whole as well as any obligations they may be required to assume.
4.Breakage costs
Because it may be liable for various termination scenarios under the main contract, the employer should ensure that they are comfortable paying any breakage costs if the subcontract is terminated early.
What are the Important Elements of a Subcontractor Agreement?
A construction subcontractor agreement may differ depending on the needs of the contractor and the project. However, here are a few key components of a construction subcontractor agreement.
- Parties to the Agreement – Who is the general contractor, and who are the subcontractors?
- Effective Date – The date the contract will become effective
- Scope of Work – This section of the agreement is essential. The general contractor’s expectations of the subcontractor and their work product on the construction site are clearly defined in this contract provision. Suppose the general contractor is dissatisfied with the subcontractor’s work. To plan for that, the agreement should state whether or not the subcontractor is responsible for making revisions to the satisfaction of the project manager.
- Construction Materials and Equipment – This is another essential aspect of a construction subcontractor agreement. A subcontractor may be required to provide their own materials and equipment depending on the project and job site. Some projects may require the general contractor to provide the equipment while the subcontractor is responsible for the materials. Whatever the agreement is, it should be specified in the contract.
- Completion Date It is important to state the construction project’s deadline explicitly. If there is no “deadline,” the contract should state that the work will be done “as needed.”
- Compensation – The payment structure should state explicitly if the pay is set at an hourly rate and how many hours should be dedicated to the project each week or month.
- Indemnification Clause – An indemnity clause specifies which party is responsible for compensating for a loss, damage, or injury caused by the project. This clause protects the general contractor from being sued if the subcontractor makes a mistake by requiring the subcontractor to “hold harmless.” Different states have different laws regarding indemnification clauses and their scope. It is important to seek legal advice about your state’s rules and local laws on indemnification provisions.
- Warranty – A warranty provision is a subcontractor’s guarantee of quality work performed on the construction site and that the services are free of certain defects due to faulty workmanship for a specified period after the project’s completion.
- Assignment Provision – This clause specifies whether a subcontractor is permitted to delegate their obligations under the agreement to another party. Subcontractor agreements in the construction industry typically restrict subcontractors from assigning their agreements to third parties.
Disputes Between Contractors and Subcontractors – Who Has Responsibility?
Although some subcontractor agreements do not mention disputes, they are frequently used as the base for any legal settlement. If one party sues the other after a disagreement, the terms of the agreement will be cited for a judgment to render. As long as the agreement’s clauses are legally sound in and of themselves, their interpretation will be the decisive factor.
Moreover, some agreements will include specific clauses dealing with dispute resolution. These could include an agreement to resolve a dispute through an independent arbitration service rather than a more expensive court proceeding, for example.
