A lot of folks, from the construction business and from other industries as well, long for the good ‘ole days of handshake deals. As it’s often said – “It was a simpler time.” But gone are those days.
Now, even the most run-of-the-mill construction projects require collaboration from a number of different, independent businesses. Accordingly, the agreements to perform construction have also become more complex and specialized. So, while we may long for the days of handshakes, in today’s society they are both impractical and, particularly in the construction industry risky. Written contracts are a must for any construction business. This article will breakdown the essential information you need, along with a free downloadable template, for a standard subcontractor agreement.
Table of Contents
Why get your subcontractor agreement in writing?
It’s important for every subcontractor to get their construction contracts in writing. Having your agreement in writing is crucial. It explains how to deal with any potential issues or disputes that may arise throughout the project. A well-drafted subcontractor agreement (subcontractor contract) will outline all the duties, responsibilities, and liabilities under the contract, and how they are affected when things go awry. On top of that, many states require a written contract to be executed in order to have the right to file a mechanics lien.
Subcontractor agreement basics
Just because you should have a written subcontractor agreement, doesn’t mean it needs to be overly complicated or lengthy. A simple, straightforward document outlining the project and expectations will generally be all that you need. Of course, you will also need to be sure that the agreement complies with any state or local laws. However, generally speaking, there are a few things that should be included along with a few things to look out for when preparing to sign a subcontractor agreement.
What should be included?
Again, construction contracts don’t need to be long, detailed agreements. But there are essential clauses and information that you should ensure are included in order to protect your rights to payment.
First, be sure that the contract includes all of your information. This includes your name, your business name, and any relevant contact information such as address, phone number, email, etc. The same goes for the general contractor name and information as well. Including all of this information can help increase transparency by providing exactly where and how communications should sent during the course of the project.
Scope of work
The scope of work is a guide to what exactly you are responsible for on the construction project. This section will detail all of the subcontractor’s work. Including any materials, or equipment that are expected to provide to the project. Additionally, this will include some type of project schedule. If not the full project’s schedule. At the very least, the schedule for the portion of work the subcontractor is agreeing to provide. Including the effective date of the contract, the first date work is to be performed, and the expected completion date.
This is obviously one of the more important sections of your subcontractor agreement. Most notably, this section should include the contract price. This won’t always be as simple as an hourly rate or flat fee. This will be determined based on the type of subcontract you agree to. Whether it be a time and materials contract, lump sum contract, or any other payment structure. For more on the difference between these, you can read a full breakdown of the 5 Most Common Types of Construction Contracts.
In addition to contract price, this section will also outline when and how you will be paid. Are progress payments made monthly or upon completion of a predetermined milestone or percentage of completion? Payment terms will also include any form requirements for payment applications or invoices should be submitted; along with when and where they should be sent.
No matter how organized and carefully planned a project is, change orders will almost always pop-up. This section should outline how a request for a change order can be made. Along with the approval process for doing so. No one should begin to perform work outside their scope of work without first obtaining a written and approved change order. These requirements should be strictly complied with the avoid any complications and the potential of providing extra work for free.
Licensing and insurance coverage
Another common inclusion in most subcontractor agreements, are any insurance, and licensing requirements. Most general contractors will require that the subcontractor not only verify that they are licensed to perform work in the state, but also that any other sub- subcontractors they may hire are also licensed. Performing work without a license can not only jeopardize your lien rights. But can also lead to potential fines and other types of liability from the state licensing board.
In addition to licensing, subs will also usually be required to verify their insurance coverage. Which, generally speaking, most subcontractors should already have. The types of insurance required will typically be limited to commercial general liability insurance and worker’s compensation insurance.
Claims and dispute resolution
Unfortunately, disagreements are relatively common in the construction industry. Your subcontract agreement should detail the process on how claims and disputes are made and handled. This will often include a written notice requirements and a procedure to resolve the claims. Furthermore, you may be required to submit the claim to for arbitration or mediation under an alternative disputes resolution (ADR) clause. ADR clauses are commonplace in the construction industry, as they provide a streamlined, and cheaper solution than litigation. Another potential inclusion is the award of attorney’s fees and costs to the prevailing party.
A termination clause is another important section in a subcontractor agreement. These provisions will outline the reasons, notice requirements, and duties for the termination of the agreement. The termination provisions can include a clause for termination for cause, termination for convenience, or both. Familiarize yourself with this section. How you are terminated and if you’ve complied with the requirements can determine what you are entitled to in the case of termination.
Lastly, a flow-down (aka flow-through) provision is a common inclusion in a construction subcontract. These provisions are used to incorporate some or all of the rights our responsibilities of the prime contract. If a flow-down provision is included in your subcontractor agreement, be sure to get your hands on a copy of the prime contract. There may be areas of your subcontract that are either silent on a particular issue, or are unclear. The prime contract may provide the insight you need. Not to mention that you’ll need to comply with any written notice or approval requirements included in the prime contract.
Subcontract terms to look out for
Subcontractors are faced with different challenges when it comes to their contract and payments on a project. That’s because of their position in the construction payment chain. For subs to get paid, the money will need to flow down from the lender (if there is one), the owner, and then lastly through the GC. That means there are potentially 3 sets of hands the money needs to pass through before you get paid.
In addition to understanding the basics of subcontracting, there are a few provisions you will need to look out for. Not only those that are included in the terms of this agreement. But also the terms incorporated from the prime contract through a flow-down provision. Here is a list of a few clauses to look out for, with links to more detailed discussions of each:
- Contingent payment clauses: “pay-if-paid” & “pay-when-paid” clauses
- Indemnification clauses
- No-lien clauses
- No damages for delay clauses
- Subordination clauses
Free subcontractor agreement template available for download
As you can see, there are a number of different things that can be included in a subcontractor agreement. But there doesn’t always have to be. We at Levelset believe that a simple, straightforward, and easy to understand subcontract will be just fine in most situations. Our Levelset attorneys have created a simple subcontractor agreement template that has been used by thousands of contractors across the country to ensure they get paid what they’ve earned. To download your free Subcontractor Agreement template (as an editable Word document), simply click the box below.