When a subcontractor agrees to take a job from a contractor, it’s important to set up an agreement. It’s for the protection of both parties, and the subcontractor actually has more to gain by defining the job precisely.
A subcontractor agreement can keep subcontractors from being called upon to do work that’s outside their expertise, or from being blamed for poor workmanship on aspects of a job they weren’t responsible for.
We’ll explain what a subcontractor agreement is and provide a template for you to build your own.
Table of Contents
- What Is a Subcontractor Agreement?
- Why Would I Need a Subcontractor Agreement?
- What Is Included in a Subcontractor Agreement?
- Subcontractor Agreement Template
- Subcontractor Agreement Terminology
What Is a Subcontractor Agreement?
A subcontractor agreement is a legal document that defines subcontractor responsibilities clearly. It sets forth things like timelines, terms of payment, licensing, insurance coverage, and how disputes are to be handled.
The hiring contractor draws up the contract documents, but it’s important for the subcontractor to read them carefully. Here is a free subcontractor agreement contract template you can use as a general guide when creating or assessing contract documents.
Why Would I Need a Subcontractor Agreement?
A subcontractor agreement is necessary to specify a general contractor’s and subcontractor’s responsibilities toward each other on a host of issues. Without a written agreement, expectations aren’t clear, misunderstandings may occur, work may not get done, and projects may be put in jeopardy.
A subcontractor agreement can benefit both parties by creating deadlines, ensuring timely payment, and clearly identifying responsibilities. Such a contractor agreement can help ensure that a project gets done on time and to the proper specifications. In addition, it can set forth requirements under federal, state, and local laws for subcontractor permitting and licensure.
What Is Included in a Subcontractor Agreement?
A subcontractor agreement can include a variety of clauses tailored specifically to the job and the requests or needs of the principals (the contractor and subcontractor). But some topics will be addressed specifically in any basic construction contract.
- The subcontractor.
- The general contractor.
- The project owner/client.
Any sub-subcontractors will fall under the subcontractor’s purview and would not be included directly in the agreement.
- The subcontractor.
- The general contractor.
- The project owner/client.
- Time(s) of payment.
- Payment amount.
- Conditions of payment linked to performance/successful completion of the project.
- Any conditions of payment to the subcontractor linked to the contractor receiving payment from the project owner/client.
Scope of Work
- What specific tasks is the subcontractor being hired to perform?
- Where do the subcontractor’s responsibilities end, and where do the responsibilities of the general contractor or other subcontractors begin?
- Can the scope of the work change during the project and, if so, what conditions need to be met for this to happen? (For example, with change orders — see below.)
Permits, Insurance, and Licensure
- Insurance coverage should be verified for subcontractors; specifically, an insurance policy should include workers’ compensation insurance and commercial general liability insurance.
- The subcontractor and any sub-subcontractors should be properly licensed to do the work required. This includes licenses obtained through safety training for various pieces of equipment and procedures, as required by OSHA and other regulatory bodies.
- Performing work without a license can be not only dangerous but costly: It can result in government fines and can make it more difficult for a contractor to file a mechanic’s lien. Contractors can file a mechanic’s lien against property in the event of nonpayment for work done on a construction project.
- All the proper permits should be in place to conduct the project.
- A performance bond ensures that the project will be completed if a subcontractor is terminated or quits.
- Change orders are written notices of changes in a project’s scope that require additional work.
- It is common for a subcontractor agreement to stipulate that both the contractor and subcontractor agree in writing to any change orders or amendments to the contract, to ensure that the subcontractor gets paid for any additional work performed.
Terms of the Agreement
- The contractor and subcontractor must agree to the terms of the agreement by signing.
- Various clauses allow them to terminate the agreement because of a dispute or when it is deemed acceptable.
Disputes are not uncommon when it comes to construction projects, so it’s important to have a clause in your agreement detailing how those disputes will be resolved. An alternative dispute resolution clause, or ADR, may require that claims go to mediation or binding arbitration. Other contracts may require good faith attempts to resolve a dispute before either party considers litigation, and may contain language that requires the losing party in any court action to cover the prevailing party’s attorney fees.
A termination clause outlines the conditions under which the contract may be terminated. Such a clause may include the notice required in the event either party seeks to terminate the agreement. It may also address whether the contract may be terminated for cause, such as if a serious issue arises that damages, significantly delays, or jeopardizes the project.
It may also allow for a termination of convenience, under which one party decides to terminate the contract based on the simple desire to do so. Terminations of convenience must be specifically stated as an option in the contract in order to be considered.
Subcontractor Agreement Template
Please note that this template is an example of what can be included in a subcontractor agreement, but you’ll need to adjust it to fit your project. Consider exactly how you want to handle disputes, what drawings and documentation are required, and how project changes or delays will be handled.
Subcontractor Agreement Terminology
A few terms may be found in a contract that stipulate the conditions and timetable for a subcontractor to get paid, and that address what occurs in the event of a project delay or if liability is incurred by the subcontractor. Here are a few of those:
No Damages for Delay Clause
A “no damages for delay” clause is exactly what it sounds like. It simply means that, under such a clause, a subcontractor is not allowed to submit any claim that would recover financial losses that result from construction delays.
Some states do not allow NDFD clauses to be included in contracts. Where such language is allowed, it should address specific types of delays. It’s also important to address whether and how the delays might cost the project money.
A pay-if-paid clause links compensation for the subcontractor to payment from the client/project owner. In other words, payment from the contracting party is a precondition for the contractor paying the subcontractor. If the general contractor doesn’t get paid, neither does the subcontractor or supplier.
A pay-when-paid clause sets up a specific time frame from when the client/project owner pays the contractor to when the contractor pays the subcontractor. For instance, a contract might call for the subcontractor to be paid within a certain period of time, such as 10 days, from the time the contractor receives payment.
An indemnification or indemnity clause may be included in the contract, under which the subcontractor is obligated to “indemnify” the general contractor for any future liability that may occur. This is also known as a “hold harmless” clause because the subcontractor agrees that the general contractor is not responsible — is held harmless — for any such liability.
When you work as a subcontractor, it pays to have a solid agreement and a good understanding of what you’re signing. Subcontractor agreements are put in place to protect both parties, but they can benefit a subcontractor in particular. Before you sign, be sure all the clauses you need to protect your interests are in place. That way, you’ll be paving the way for a smooth working relationship and a successful project, too.