Subcontractor agreements help facilitate the smooth running of your construction projects.
When working in construction, it is important to follow the correct procedures at all times, and this includes the process of hiring contractors outside of your team, to help with tasks that you need specific expertise to complete.
In order to keep your clients and customers happy, it’s essential to create subcontractor agreements everytime you invite a contractor into your project to complete tasks.
This ensures that all parties are aware of what is going on, and avoids misunderstandings later down the line.
Agreeing on terms and conditions, reviewing the agreement, and getting both parties to sign, is the only way to ensure both you and the subcontractor are clear on what is being asked for, what is being offered, and how the relationship will work going forward.
Subcontractor agreements are central to hiring a subcontractor, so this blog post explains exactly how they are useful for you, and includes a step-by-step guide on how to write a subcontractor agreement, and get the process underway.
What is a Subcontractor Agreement?
As a contractor you may find you need help from other independent contractors to complete parts of your job.
Before hiring another contractor to help it is essential that you mutually create a subcontractor agreement, so both parties understand the work that is expected to be carried out, and the fee that will be paid for this work.
A subcontractor agreement is a legal agreement between an independent contractor (you), and another independent contractor (known as a subcontractor). This sets out the terms and conditions of the relationships and goals, based on the obligations of the main contract of the entire project.
The customer or client that you are working with, is generally obliged to agree to this work as long as the work carried out by the subcontractor is under the subcontractor agreement.
In this agreement both independent contractors need to agree on what work the subcontractor will carry out, and what the terms of this work are.
This includes aspects such as:
- The scope of work
- Payment terms and Compensation
- Dispute resolution
- Policies and procedures
- Licensing and Insurance Coverage
Within this subcontractor agreement, you will usually offer a fee or payment for the work that is performed by the subcontractor, which is subject to the other terms.
For example, this depends on whether the agreement is terminated before the work has been completed or, if the work has been completed to a high standard.
What are the Benefits of Using Subcontractor Agreements?
There are multiple benefits to hiring a subcontract worker, including sharing your workload and delegating jobs to other parties, saving costs, and getting specific expertise in a certain area.
Delegating jobs to other parties is particularly common in construction, for example hiring a plumber or electrician if you need their skills and expertise for certain tasks within your projects.
This is also a benefit of using contractors from outside of your business as subcontractors provide their expertise to specific areas of your projects.
Full time employees may not provide this knowledge, or be able to carry it out over the short period of time given within the contractual agreement.
Entering into subcontract agreements with other contractors can also help to save costs, as you are able to bring them onto your team for a shorter period of time, to carry out specific jobs.
This means their labour is generally cheaper than that of a full-time employee, as they can work for a flat upfront fee, and don’t receive the extra company benefits.
Now that we have outlined what a subcontractor agreement is and the benefits that come with it, let's get into how you should begin writing one.
Writing a Subcontractor Agreement
If you find that you enter into sub-contractual agreements with the same contractor regularly due to working in construction, it’s useful to have a master subcontractor agreement.
This can make things easier as everytime you work with that specific contractor, you already have a template of the terms and conditions that both parties have reviewed and agreed on.
This can save you a lot of time as all you need to add is the specific job to be carried out, the agreed fee and any updated changes since the last agreement, for example changes to site policies and procedures.
If this isn’t the case, you need to enter into a new subcontractor agreement for each job you hire an outside contractor to do within your project.
Therefore, you need to know the process of writing a subcontractor agreement, so you can maintain your relationships with outside contractors, and keep all parties informed and satisfied.
1. Inform and Discuss with your Client
As outlined earlier, before hiring a subcontractor your client or customer must agree to another contractor carrying out part of their project.
This is to ensure that:
- All parties are informed and understand their roles and responsibilities
- Your client is happy with the work completed at the end of the project
When hiring a subcontractor, it is important that you ensure they agree to the scope of work you have agreed with your client, and that the work they carry out will satisfy the clients expectations.
Once your client is informed that a subcontractor will be carrying out a specific part of their project, it is time to negotiate the terms and conditions of your subcontractor agreement.
2. Negotiate Terms and Conditions of Subcontractor Agreement
There are multiple terms and conditions that must be included in your subcontractor agreement to ensure that the work is completed correctly, and both parties understand every aspect of the project.
Therefore, we have offered a range of terms and conditions below that should be pulled together to create a professional and fair legal agreement, before any construction work begins.
The Scope of Work
The first priority when creating a subcontractor agreement is to outline and agree on the amount of work or size of the job that the subcontractor will be responsible for.
As the main contractor of the project it is part of your job to specify precisely and accurately exactly what is expected of the subcontractor. For example, including a bullet point list of the main tasks with detailed explanations underneath, including materials, equipment and skills needed.
This helps to avoid confusion when it comes to the subcontractor beginning their part of the project. If any party becomes uncertain about what tasks were agreed, you will then have the subcontractor agreement to refer to.
Within this section it is important to include the duration of work, as construction projects usually work according to deadlines.
It is a good idea to set the deadline for the subcontractor tasks a few days before your official project deadline, to allow for any issues or delays.
This section of the agreement is based on the outcome of the project and performance of the subcontractor.
Indemnification ultimately ensures that the subcontractor is obligated to compensate for any loss of expenses.
Take extra time for example, if the subcontractor requires more than the agreed amount of time stated in the agreement to carry out tasks, they are expected to compensate for this.
This clause of the agreement is to ensure that your back is covered if something occurs that wasn’t originally agreed, or if the subcontractor hasn’t completed the tasks to your standards or satisfaction.
It is important that your projects are still up to a high standard when hiring a subcontractor, therefore this clause ensures the subcontractor will deliver professional work that they are qualified to do.
The warranty clause additionally holds the subcontractor accountable to redo any jobs or tasks that aren't up to standard, haven't been completed, or haven't been carried out correctly.
Payment Terms and Compensation
Every subcontractor agreement will differ in terms of payment terms and compensation.
It is important that every subcontractor you bring into your project is paid fairly for the work they complete, therefore there are several aspects to consider when writing this clause.
Depending on the financial standing of your construction business it may be that you wish to pay a flat upfront fee to the subcontractor you are hiring, or an hourly rate may work better for you.
There is a third option of payment which is a rate of pay based on the work that is carried out, or deliverables.
Once this fee or rate of payment has been agreed upon, the payment schedule determines if or when the subcontractor will be paid. If the financial standing of your business is comfortable and you choose to pay a flat fee upfront to the subcontractor, this process should be smooth and simple.
However, if this is not the case you may wish to implement the ‘pay when paid’ term, which ensures that the subcontractor will be paid for their work once you have received payment from your client or customer.
The payment and compensation term is very important to avoid issues or financial disputes as the project comes to an end.
This brings us to dispute resolution, which the subcontractor agreement will help to manage and keep to a minimum.
While working alongside another contractor there may be disagreements for example, about materials, methods used or the timeframe that were previously agreed.
This dispute resolution term usually includes arbitration or mediation clauses to handle circumstances like this, as an independent party will hear the dispute and offer solutions.
This avoids both parties going to court for the dispute, and helps to settle issues in a professional, reasonable manner with the best interests of the project in mind.
Policies and Procedures
The policies and procedures you follow on your construction site apply to everyone who comes to work for you.
This includes subcontractors, as they are working alongside you and your team, with access to materials and equipment sourced specifically for this project.
Therefore, it is important to outline the procedures and policies followed on your site to avoid any confusion about the way subcontractors should be working while employed by you,
Licensing and Insurance Coverage
Generally, subcontractors will have the adequate documentation to prove their qualifications and experience required to carry out the tasks expected of them.
This is important to include within the subcontractor agreement, for example defining what licence they require and outlining they need to provide insurance for themselves.
This helps to cover your back, as subcontractors are legally required to be fully insured and licensed to work in their field, under a contract.
If you are required to terminate the contract with the subcontractor at any stage of the project, it is vital to outline this in the agreement under Termination.
This clause will explain on what grounds termination can occur, for example, if your project has lost funding and isn’t able to continue until further notice.
Outlining these circumstances that could possibly occur, allows both you and a subcontractor to understand that termination may be required during the project and this agreement gives the grounds to do so.
The termination clause will also outline the rights of each party if termination does occur, for example the rate of pay for the subcontractor may decrease if the whole project isn’t completed.
3. Draft the Contract in Writing and Send for Review
Once you have decided on your terms and conditions, you must draft up your contract in more detail.
This doesn't have to be over complicated but it must be clear, you should outline every clause and the main points that are important to both parties.
All necessary information must be included and explained. For example, specifics about payment or termination need to be clearly stated so that there is no confusion when you get to the reviewing stage.
Both parties must be distinctly identified, ensuring you use the same title for each party every time, naming yourself as the main contractor and the other party as the subcontractor.
Now your agreement is ready to send to your subcontractor for review.
4. Review, Sign and Execute
Now the subcontractor has reviewed and agreed on the final terms and conditions, you must review the agreement one final time to ensure all information is agreed and correct, based on the discussions held previously.
This must be done before signing, as once signed this agreement is legally binding.
Both you and the subcontractor must sign this agreement to confirm your acceptance and that you are both ready for work to begin.
How To Write a Subcontractor Agreement
Subcontractor agreements are essential when employing outside contractors to carry out tasks within your projects.
As we have outlined above, there are several terms and conditions to take into consideration when drafting up your agreement
It is important that both parties agree, review and sign off the subcontractor agreement before any on-site work can begin, as the agreement is legally binding and both parties may end up liable.
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