What You Need to Know about a Subcontractor Agreement

A subcontractor agreement is a contract between the primary contractor on a project and the people they hire to help them. This agreement formally establishes the relationship between the two parties and puts the responsibilities that both will have in writing. 

Typically, a subcontractor agreement will have a lot in common with a construction project contract. The document will often lay out the scope of work, expected work timelines, pay and how both parties will communicate or resolve disputes. Well-written subcontractor agreements can protect both project managers and subcontractors more than a simple verbal agreement would. 

What to Look for in a Subcontractor Agreement

A standard subcontractor agreement will usually have a few core provisions. These sections will lay out essential information on responsibilities and protections for each party.

• Term or schedule of work: When the subcontractor will start and finish the job.
• Scope of work: What the subcontractor is doing. A more specific scope of work offers better protection for a subcontractor.
• Payment or compensation: How the subcontractor will get paid, and when. Subcontractors have a lot of flexibility when it comes to this section. It’s not uncommon for contractors to pay their subcontractors based on an hourly rate, in a lump sum or per deliverable completed. 
• Customer contact or non-compete clause: Whether the subcontractor can have direct contact with the customer or project owner. If this section allows direct communication between the subcontractor and the project owner, it may forbid or regulate that the subcontractor takes on follow-up work without first discussing it with the main contractor.
• Indemnification: This clause specifies that a subcontractor takes full responsibility for their work, and that they’ll be liable for any legal problems that might arise.
• Arbitration or dispute resolution: How the contractor and subcontractor will manage disputes.
• Insurance: What insurance is necessary and who must pay for it.
• Termination: Whether and how either party can end the agreement if they desire.

Some agreements will also include a validation provision. This provision states that the rest of the contract will remain valid, even if one or more conditions of the contract are unenforceable. Many agreements will also include a section that forbids sub-subcontracting.

How to Read Subcontractor Agreements

When reading a subcontractor agreement, you’ll want to make sure it aligns with your expectations about the work. The entire document is crucial, but a few sections will be worth reviewing especially closely.

Payment, scope and project timeline are some of the essential parts of an agreement. Familiarizing yourself with common terminology for payment and work scope will help ensure any legal language doesn’t confuse you. Even subtle differences in word choice can have significant implications. For example, “pay-when-paid” and “pay-if-paid” are only different by one word, but are two very distinct payment terms.   

Sections on insurance, dispute resolution and project termination will further lay out your responsibilities and protections under the contract. 

While legal counsel isn’t always necessary, you should consider seeking it if you’re concerned about the wording of a specific section. Advice from an attorney may not be practical for every project, as it’s typically an additional expense you’ll have to consider. However, counsel can help ensure you know exactly what you’re agreeing to. 

The Potential Benefits of an Agreement

A subcontractor agreement can provide you with much better protections and understanding of your responsibilities than a verbal agreement alone. However, these arrangements are binding. If you’re not careful, you may end up signing a contract with terms that put you in a difficult position. 

Familiarity with the fundamental components of this document can help. If you’ve drafted or reviewed a construction contract before, many of the terms and provisions should already be recognizable.