Subcontractor Agreements: An Introduction
A subcontractor agreement, sometimes known as a subcontract, is used when one company hires another to complete a portion of services or deliverables under a larger contract. Subcontractors often cover a smaller scope of work as part of a project for which a larger contractor is responsible. Since many industries use contractors and subcontractors on a routine basis to complete work, having a clear subcontractor agreement can protect both the contractor and the subcontractor.
For example, assume Company A contracts with Company B to remodel an office building. Company B has expertise in office remodeling and hires Company C as a subcontractor to perform plumbing work as part of the overall renewal contract. Using a subcontractor agreement , Company B and Company C could clearly set forth their respective rights and responsibilities, payment terms, and other parameters related to the plumbing work. Any disputes between Company B and Company C would likely be governed by their subcontractor agreement.
Subcontractor agreements can also have a degree of flexibility depending on what the parties contractually agree. For instance, Company B and Company C may include a provision detailing how many days Company B must notify Company C before beginning the plumbing work. Other subcontractor agreements may cover warranties, dispute resolution, or payment.
Understanding the Elements of a Subcontractor Contract
Although every subcontractor is different, all contracts for subcontractor work should include the following elements:
I. Scope of Work
The first section of your subcontractor agreement should detail what the specific scope of the work is, including any particulars that the subcontractor should adhere to.
II. Payment
The exact terms on which your subcontractor will be paid should be outlined, down to the payment methods and intervals that will be used, not just the total amount of pay.
If the subcontractor is being paid a flat rate, what day will the money change hands? If the subcontractor is being paid an hourly rate or by commission, what days will they be paid on? What payment methods will be used? Anything less than clear will bring about dispute.
III. Liability and Disputes
It’s important to identify who is liable for what, and how any disputes will be handled. Does the subcontractor have to pay for repairs to your company property if they break something? How will other damages—damage to customer property, for example—be resolved? What arbitration methods does your company use for settling disputes?
IV. Effective Date
When does the subcontractor agreement become effective? The answer to this question should clearly be stated so that there’s no ambiguity in the matter.
Subcontractor Agreements: Legal Aspects
A subcontractor agreement must abide by local and state laws, as well as federal laws. For example, this means that the agreement should be compliant with any applicable wage and labor laws, OSHA regulations, and federal tax regulations. Further breakdown of this area of the law is outside the scope of this blog. We recommend that businesses using subcontractor agreements understand the laws that apply to them and seek advice as necessary. Beyond basic compliance with the law, however, one important question when it comes to subcontractor agreements is liability. Who will be liable in case of a dispute with the subcontractor, or with a third party based upon the work done by the subcontractor? Similarly, you must think about the liability incurred by the subcontractor itself. Most subcontractor agreements will put some limits on liability or place caps on damages. There may also be indemnification language in the contract. Finally, you must consider whether you are going to provide insurance for the subcontractor, and if so, how extensive it will be. This is important primarily if someone is hurt while working on the job site, as you need to address who is responsible for paying out of pocket expenses for anyone injured there. Dispute resolution is another crucial area of subcontractor agreements. What steps must the parties take in case of a dispute, and what venue will be used to resolve the dispute? These days, many businesses include mandatory arbitration clauses in their contracts. Mandatory arbitration has both pros and cons, so we will not give you our opinion in this blog as to the wisdom of including an arbitration clause here. You must make a strategic choice, however, as to whether to include these clauses in your subcontractor agreements.
Mistakes to Avoid in Subcontractor Agreements
Common mistakes and issues to look out for when creating Subcontractor Agreements include:
Names. Sequence of names and ensuring proper spelling of names are very important. Subcontractor agreements are legal documents that will be reviewed in the event of a dispute. Having a whole bunch of different deal terms and player names and acronyms with misspellings in the mix do not help the business relationship between the subcontractor and the contractor. Names should be clearly spelled out and be included in a definition section at the start of the agreement.
Termination without cause. Everyone in construction knows that there is heartburn when it comes to cashflow and sometimes this leads to people either terminating for cause or terminating without cause. You need to be careful with termination without cause as this has implications for payment, provision of materials still on site, and other items such as insurance. If you don’t spell it out properly in the subcontractor agreement then this whole issue can lead to a court deciding what a work without cause means.
Performance. Performance refers to how one is performing on a particular job or contract. In a subcontractor agreement, you should be careful to avoid language that can be construed as arguing that, if your performance is not satisfactory, you will be liable for the complete costs involved with the performance of the contract. This can often lead to liability for damages in the millions. In the absence of clear language to the contrary, an award of damages for the loss of a contract or loss of future profits on other contracts could leave a subcontractor holding an irresponsible bag.
Dispute resolution. Disputes happen, but they do not have to. Your agreement should contain dispute resolution procedures detailing how to deal with potential disputes, so that they can be resolved before they become serious problems. Including items such as a tendering system and dispute resolution meetings in the subcontractor agreement will mitigate against protracted and costly disputes.
Covenants. Covenants are requirements; while they are often difficult to fulfill, one must be aware that they do not operate like conditions precedent. They are not conditions in the strict legal sense of the word. While conditions precedent are actionable in the sense that they can be enforced in a court of law, covenants are not actionable in that way. In simpler terms, you can’t sue on a covenant. When you see the word covenant used in a subcontractor agreement, make sure that this is what you want to have in your agreement and that you are not trying to impose a condition and relying upon that condition as a condition precedent.
Best Methods to Draft an Effective Subcontractor Agreement
Effective subcontractor agreements are critical for protecting all parties involved from future conflicts. When crafting contracts, it’s important to keep in mind that the goals should be to:
1. Have clear and concise expectations for both parties. A subcontractor will likely also have vendors with which they require contractual agreements. Leaving too much room for interpretation could lead to confusion or disagreements in the future. For example, if you require that a subcontractor have certain insurance policies, then specify the types of policies to be carried, including possible deadlines for renewal. Similarly, if you require performance bonds, indicate how they will be generated and the circumstances under which they’re required. Under what conditions would you file a claim against performance bonds? If your agreement requires inspection of a job before payment is released, then define the criteria by which you will inspect the work completed. Specify the parties involved in the contract and exactly what aspects of the project they are responsible for. Do they include any subcontractors? Will outside vendors be used? If so, are the subcontractors permitted to use their own subcontractors?
The main goal is to prevent any surprises in the future by heading off possible conflicts before the project begins. When drafting contracts, take a collaborative approach-especially with subcontractors. At the outset , point out areas of the contract that may raise questions for the subcontractors or could cause them confusion in the future.
- Thoroughly document everything. After each phase of your project is complete, ask your subcontractors for documentation of their compliance with your contract. This may include copies of invoices from suppliers, receipts for tools and equipment, or photographic evidence of a completed stage of work. Additionally, subcontractors should keep copies of their contracts with your business as well-certain contractual obligations may carry over from one stage to the next.
- Regularly review contracts. There’s no such thing as a contract that is truly final. Instead, contracts should be reviewed every time there is a change in personnel or policies that may impact a contractual agreement. Have your contracts been reviewed by an attorney and updated with the latest legal requirements? Without regular reviews, your information could quickly become outdated. Another time to review any contracts would be when there is a dispute between the parties, or in the event of an accident.
- Use a lawyer who is familiar with these types of agreements. Contract law isn’t the same as other types of law. Each party in a construction contract needs to be appropriately represented and have the best possible chance of success in the case of a costly conflict down the road. An attorney who has experience working with subcontractor agreements will be able to guide your business through complex legal terrain.
Changes and Additions in Contracts for Subcontractor Agreements
Not all projects go according to plan and, at times, there may be a need to amend or revise an existing contract with a subcontractor. When the situation occurs, it is important to understand both the process and necessity for such a change in the contract.
No project stays the same from start to finish. As an employer, you need to be flexible enough to amend and even modify contracts with your subcontractors. When it comes down to the nitty gritty, you may need to revisit a contract and ask for a change. Sometimes, the timeline for a project can change. Or maybe the scope of the project will grow or expand. This may mean that the subcontractor will need more hours in the day. In turn, they will have to be paid for those hours worked. These are the reasons why an employer may ask a subcontractor to amend their contract. It is equally important to understand the process of revising a contract. An existing subcontractor may rise up and refuse to abide by a contract that has no final revision. You have to be sure that any changes to a contract are filed correctly. A contract amendment is a simple document that is stated in writing. Essentially, it amends a prior contract in part or whole. When a contract is amended, this affects the contract’s terms or performance in some way. A list of terms and condition changes should be issued as well. This is a part of state laws regarding contract management. Some states have strict guidelines for amending a contract. Once an amended contract is drawn up, it must be agreed to by both parties involved. It can then be signed and dated or documented electronically. At that point, a copy of the amended contract is given to each party.
Subcontractor Agreements: The Conclusion
In conclusion, the role of well-crafted contracts for subcontractor agreements cannot be overstated when it comes to maintaining and fostering successful working relationships between general contractors and subcontractors. These contracts are not merely formalities; rather, they are essential elements that guide the business relationship and provide a safety net for both parties.
Implementing a detailed contract is a proactive measure that general contractors can take to mitigate potential disputes. Such contracts clearly outline expectations, responsibilities, payment schedules, and specific job details that subcontractors need to fulfill. This is crucial in minimizing misunderstandings and providing recourse in the event of a disagreement. Clear communication through well-defined contractual terms leads to effective project management and timely completions – two aspects that benefit both subcontractors and general contractors alike.
On the other hand, subcontractors are encouraged to review the contracts thoroughly and voice any concerns before signing. Doing so will not only clarify their responsibilities but also afford them an understanding of their rights , including their entitlement to prompt payments and appropriate recourses in the event of unjustified withholding of payments. Such knowledge allows them the opportunity to address any ambiguities or provisions that may be burdensome or limiting. Moreover, well-understood contracts can help subcontractors in managing relationships with third parties and ensuring compliance with relevant industry regulations.
In summary, both general contractors and subcontractors should rely on well-structured contracts for subcontractor agreements to lay a solid foundation to successful collaboration. These documents can significantly reduce the possibility of misunderstandings and help in the effective management of expectations and resources in the course of a project. However, it is not uncommon for disagreements and disputes to arise despite the implementation of such agreements. The scope and complexity of this work make it impractical for either party to represent themselves when faced with issues. A qualified Georgia construction attorney can be relied on to navigate through issues arising from the agreements or the project itself.