While we may long for the days of handshake deals, in the modern era they are both impractical and risky, particularly in the construction industry. Most projects require a variety of contractors, subcontractors, and suppliers. Each relationship on a construction project requires its own contract. A subcontractor agreement is an essential tool that help establish expectations, manage risk, and keep GCs and subs on the same page.
Subcontractors have the right to get paid for their work, often whether or not they have a written agreement. But getting the rights and responsibilities down on paper provides another level of protection that is much easier to prove.
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What is a subcontractor agreement?
A subcontractor agreement is a contract between a contractor and a subcontractor to perform a portion of work that is part of a larger construction project. A subcontractor doesn’t have an agreement with the property owner directly. Instead, they sign a contract with the general contractor or a subcontractor on the project. This type of agreement may be between the general contractor and a first-tier subcontractor, or between a subcontractor and a sub-subcontractor.
For example, if a homeowner is undertaking a kitchen remodel project, they will likely hire a general contractor to oversee the project and make sure the work gets done according to the specifications. The GC will operate under what’s known as the prime contract. They may hire an electrical contractor to install wiring under a subcontractor agreement.
Free subcontractor agreement template
Download a simple subcontractor agreement, prepared by construction attorneys with the provisions generally needed on most projects.
Free Subcontractor Agreement Template
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 or 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
A subcontractor agreement doesn’t need 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. Generally speaking, a subcontractor agreement will contain several standard sections or provisions. But there are also a number of clauses to watch out for.
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 hiring contractor’s 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 the subcontractor must provide to the project.
Additionally, this will include some type of project schedule. At the very least, the subcontract should include schedule for the portion of work the subcontractor is agreeing to provide. This includes 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. Payment terms often depend on the type of subcontract you agree to.
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?
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
Insurance and licensing requirements are also commonly included in subcontractor agreements. Most general contractors will require that the subcontractor not only verify that they hold the proper contractor license in the state, but also that any other sub- subcontractors they may hire are also licensed.
Performing work without a license can result in fines and other liability from the state licensing board, and it can even jeopardize your lien rights.
In addition to licensing, subs will also usually be required to verify their insurance coverage. Generally speaking, most subcontractors should already have insurance. The types of insurance required will typically be limited to commercial general liability insurance and worker’s compensation insurance.
Unfortunately, disagreements are relatively common in the construction industry. Your subcontract agreement should detail the process for construction claims and disputes.
This will often include a written notice requirements and a procedure to resolve the claims. Furthermore, you may need to submit the claim to for arbitration or mediation under an alternative dispute 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. These clauses will detail the situation under which termination is acceptable, and will detail any requirements you will. need to follow.
Lastly, a flow-down or flow-through provision is a common inclusion in a construction subcontract. These provisions are used to incorporate some or all of the rights and responsibilities from the prime contract.
If your subcontractor agreement includes a flow-down provision be sure to get 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. You’ll need to comply with any written notice or approval requirements included in the prime contract.
Subcontract terms to look out for
Subcontractors face different challenges when it comes to their contract and payments on a project, due their position in the construction payment chain.
For subs to collect payment, the money will need to flow down from the lender (if there is one), the owner, and then lastly through the GC. That means the money needs to pass through 3 sets of hands before the subcontractor sees it.
In addition to understanding the basics of subcontracting, there are a few provisions you will need to look out for. You may find these in the terms of the subcontractor agreement or in the prime contract’s flow-down provisions.
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
A subcontractor agreement doesn’t need to be overly complex or unfair to any party on a project. A simple, straightforward, and easy to understand subcontract will be just fine in most situations.