Creating And Interpreting Subcontractor Agreements
Back in the ‘good old days’, you could rely on a handshake deal and be reasonably confident the job would get done right. If there were bumps in the road, you knew they’d get taken care of amicably. Indeed, in some tight communities, contractors still work on a handshake basis, but that’s quickly changing.
The problem with this kind of agreement is that there’s no point of reference to turn to when things go wrong. A typical construction project has many moving parts with many different suppliers and subcontractors. To mitigate the risk of errors, everyone needs to be on the same page from the outset, and that is most easily accomplished with a subcontractor agreement.
In this article, we’re going to take a good look at subcontractor agreements. We’ll review what they are and why you need one, and then we’ll discuss what elements a good agreement should include and we’ll provide examples along the way that can guide you in creating your own subcontractor agreement document. When relevant, we’ll include additional things to consider.
IMPORTANT LEGAL NOTICE:
By reading this blog post you are agreeing that this resource, and any text within this resource, is provided to you (the reader) free of charge for educational purposes only: To serve as an example in creating and understanding subcontractor agreements. It has been researched thoroughly and created on a best effort basis. We must emphasize that we are not legal professionals, nor are we providing this resource to be used directly or indirectly as a binding legal template for your business. As such we the publisher will not be held responsible for any liabilities arising from the use or misuse of this provided resource.
Sorry, we felt we had to add that part ^. I'm sure you guys can understand why! After all the time we spent researching and creating example clauses, we suddenly got a little scared of publishing something that could be mistakenly considered a legal document, so we figured better to be safe than sorry. If anything this further emphasies the need for formal agreements in this day and age! Anyway, let's continue.
What exactly is a subcontractor agreement?
When a general contractor takes on a new project, one of the first things they do is sit down with the project owner to define and sign what’s called a Prime Contract. This is the top level document that lists out the responsibilities of each party, and the full specifications of the project to be completed. It gives the general contractor total control, and accountability for the entire project.
Once the prime contract is signed, the general contractor allocates project tasks within their own team and to external resources called subcontractors. They might hand off foundation work, plumbing, electrical, or even decoration. In some cases, those subcontractors can then hire their own sub-subcontractors.
To keep everything in order, and ensure everyone is on the same page, the general contractor provides subcontractors a tightly focused version of the prime contract, detailing their specific responsibilities in relation to the project, including task specifications, timelines, payment details, and liabilities. Subcontractors who hire other subcontractors also need to sign a similar agreement.
In short: A subcontractor agreement is a legal contract that lays out all the details pertaining to the subcontractor’s role in a construction project.
What elements should be included in a subcontractor agreement?
The more detail you add to the agreement the more risk you will mitigate. Nothing should be ambiguous; the objective is to ensure that both parties are 100% aligned on what is expected of them from project start to finish. At a minimum, the agreement should include each of the following elements:
To begin with, the agreement should identify each of the interested parties (the client, the GC, and the subcontractor). Include personal names, company names, and physical addresses.
I. The Parties. This Subcontractor Agreement (“Agreement”) made on April 13 2021, between a business entity known as Jackson Construction with a mailing address of 803-432 MAIN ST E, HAMILTON, Arizona, 991002 (“Contractor”) and a business entity known as Joe's Painting with a mailing address of 123 Anywhere Street, Montgomery, Alabama, 050021 (“Subcontractor”) both of whom agree as follows:
Things To Consider: It’s a good idea to list all of your contact information in an addendum in case something goes wrong and your subcontractor needs to reach you or vice-versa. It’s also smart to clarify how communication should occur - whether and when you will schedule touchpoints, regular reviews, etc.
Scope of Work
The Scope of Work may be the most important element of any subcontractor agreement. It communicates the contractor’s expectations for the subcontractor (the services), laying out exactly what needs to be done, what techniques should be used, and if necessary, what evaluation criteria will be used to assess the completed work.
The Scope of Work also lists any labor, materials or equipment that the subcontractor is responsible for providing, along with transport costs, and it specifies the location work will occur. It’s crucial to ensure every element you want completed is included in the Scope of Work. Any items missing will require a change order, which will almost certainly increase the project’s cost and timeline.
II. Services Provided. Subcontractor agrees to furnish all labor, materials, equipment, and any other facilities required to complete the following: The subcontractor is required to paint the wooden exterior of the house. Hereinafter known as the “Services”.
III. Responsibilities. Costs and responsibility related to the Services shall be as follows:
• Labor, including, but not limited to, employees, subcontractors and any other individuals or agents shall be the responsibility of the Subcontractor;
• Materials, including, but not limited to, all supplies and products shall be the responsibility of the Subcontractor;
• Equipment, including, but not limited to, machinery, accessories, or devices needed in order to complete the Services shall be the responsibility of the Subcontractor;
• Travel, including, but not limited to, ensuring that any labor, materials, and/or equipment are provided at the Location stated in Section IV and shall be the responsibility of the Subcontractor; and
Subcontractor shall not be liable for any other costs in connection to the Services ("Responsibilities").
IV. Location. The primary location for the Services completed by the Subcontractor shall be performed at 2104 Prince Charles Road, Montgomery, Alabama, 36013 or any other location as agreed upon by the Contractor and Subcontractor (“Location”).
Things To Consider: Contractors often include supply chain in the Scope of Work, shouldering subcontractors with the risk of supplies availability, but that’s not altogether fair; such operational risks should not be borne solely by subcontractors.
Timing is a major element in any project, and in construction especially. Delays can lead to all sorts of problems and affect the on-budget completion of the project. The subcontractor agreement should contain a schedule demonstrating when the work will begin and when it should be finished along with any milestones or deliverables along the way. It’s also a good idea to identify communication expectations in the event the subcontractor anticipates delays, and to clarify the consequences of such.
V. Commencement Date. The Subcontractor shall be permitted to begin the Services on August 11 2021 (“Commencement Date”).
VI. Completion. The Subcontractor will be required, unless otherwise stated under the terms of this Agreement, to complete the Services in accordance with Industry Standards.
Completion, as determined under this Section, may be changed if the Services cannot begin or end due to circumstances beyond the control of the Contractor, including but not limited to, lack of readiness of the Location, unavailability of building materials, or any other issues considered outside the control of the parties in this Agreement.
VII. Delays. Should the Subcontractor delay the Contractor, or any other contractors, subcontractors, suppliers and/or materialmen on the entire project, Subcontractor will indemnify the Contractor and hold Contractor harmless for any damages, claims, demands, liens, stop notices, lawsuits, attorneys' fees, and other costs or liabilities imposed on the Contractor connected with said delay by the Subcontractor. Among other remedies for Subcontractor's delay, the Contractor may supplement the Subcontractor's work and deduct associated costs at Contractor's election.
Time is of the essence of this Agreement. Subcontractor shall provide the Contractor with scheduling information in a form acceptable to the Contractor and shall conform to the Contractor's progress schedules, including any changes made by the Contractor in the scheduling of Services. Subcontractor shall coordinate its Services with that of all other contractors, subcontractors, suppliers and/or materialmen so as not to delay or damage their performance.
The subcontractor agreement should explicitly define when the subcontractor will receive payment and for what. In the case that there will be multiple payments made, the agreement should include a schedule, or payment table, and if an initial payment has already been given, that too should be included. Finally, this section should include any requirements for forms to be completed, and/or applications to be submitted.
Contingent Payment Clauses
It is becoming more and more common for construction agreements to contain contingent payment clauses that remove financial risk from GCs. ‘Pay when paid’ and ‘pay if paid’ are each contingent on the project owner paying up. In the former case, it’s simply a question of timing - the GC will eventually pay the contractor, when they get paid by the owner. The latter, ‘pay if paid’ is much more aggressive, erasing the need for a GC to pay a subcontractor at all, unless they themselves get paid by the project owner.
VIII. Payment. Subcontractor shall be paid for their Services and Responsibilities in the amount of $1,860.00 ("Payment").
IX. Payment Method. Once the Subcontractor completes the Services to the satisfaction of the Contractor, the full amount of the payment shall be payable immediately.
Things to consider: By adding a contingent payment clause, you’re effectively shifting all payment risk onto your subcontractors’ shoulders.
Liability and Insurance
Unfortunately, things don't always go as planned and on occasion, negligence can lead to damages, or non-performance, and loss of profit. To avoid liability, the agreement should include indemnification provisions which can help mitigate risk by forcing the subcontractor to accept responsibility for financial burdens.
However, it’s important that risk is allocated properly. It wouldn’t be fair to allocate the risk of structural design errors to the drywall subcontractor as that isn’t their field of expertise. You would however allocate them risk for human error and/or injuries, as it is within their purview to ensure their team, and/or their sub-subcontractors are properly trained and are working in a safe environment.
Something to keep in mind is whether the indemnitor (in this case the subcontractor) has sufficient financial resources to satisfy their indemnification obligations. For this reason, the subcontractor agreement should require the subcontractor to have sufficient insurance coverage. At a minimum, a subcontractor should have commercial general liability insurance along with workers compensation insurance, and there should be a provision that prevents their cancellation without written notice.
X. Insurance. The Contractor shall require the Subcontractor, along with each of its subcontractors, to have insurance set forth in this Section under the following terms and conditions before commencing Services:
• General Liability Insurance. Subcontractor shall carry minimum primary General Liability Insurance for the following amounts:
$800,000.00 Combined Single Limit: Bodily Injury + Property Damage;
$500,000.00 Personal Liability Injury;
• Maintenance/Cancellation of Insurance. There will be no cancellation or reduction of coverage of any required insurance without thirty (30) days’ written notice to the Contractor. Such notice may be sent by the Subcontractor’s insurance carrier, insurance broker, or the Subcontractor.
XI. Indemnification. To the fullest extent permitted by law, Subcontractor shall defend, indemnify and hold harmless the Client and Contractor along with any of their agents, employees, or individuals associated with their organization from claims, demands, causes of actions and liabilities of any kind and nature whatsoever arising out of or in connection with the Subcontractor’s Services or operations performed under this Agreement and causes or alleged to be caused, in whole or in part, by any act or omission of the Subcontractor or anyone employed directly or indirectly by Subcontractor or on Subcontractor's account related to Subcontractor's Services previously listed.
Things To Consider: Many states have legislation limiting subcontractor indemnification, so you should consult an attorney in your region to ensure you’re running above-board.
No matter how much planning you do in advance, no construction project runs exactly as expected and these days, disagreements are fairly common. To avoid costly litigation, it’s a good idea to include an ADR clause in the agreement. Alternative Dispute Resolution provides a way to quickly and privately resolve disagreements without going to court. These are the most common ADR methods:
• Mediation: This is the simplest ADR method. Each party sits separately with an unbiased, third-party media tor who listens to their claims and helps each side reach a working compromise. Mediation is non-binding so if either party is not satisfied with the outcome, they can still take the case to court.
• Arbitration: This method is much more formal than mediation, and is generally quite a bit more expensive. In this case, arbitration is handled by a professional arbitrator (often a retired judge) who listens to each side, reviews the data, and comes to a conclusion one way or the other, awarding for liability and damages. Unlike mediation, arbitration is binding and often cannot be reversed in court.
• Dispute Resolution Board: DBRs are composed of unbiased industry experts who understand the challenges inherent in construction and can help achieve a much fairer result that suits both parties. However, DBRs are extremely costly and are generally only leveraged for massive, multifaceted projects.
Most commonly in general contracting, mediation is the solution of choice followed by arbitration.
XII. Resolution of Disputes. Mediation as regulated under the laws in the State where the Services are being performed. The parties agree to enter into negotiations, in good faith, and through a neutral mediator in an attempt to resolve the dispute. If a resolution to the dispute cannot be made by mediation, the parties agree to enter into binding arbitration.
If the parties have a dispute, regardless of aforementioned dispute remedies, the Contractor may, before, during, or after any arbitration or mediation, take any steps required by law to preserve or secure any lien on the property to enforce payment of monies due.
No matter how much planning you do in advance, there are almost always changes needed to the original agreement. Clients can be extremely fickle, deciding at the last minute they want changes to the original plans, perhaps an extension here, or a different material there. Sometimes too, suppliers are unable to provide the right materials and you need to change the original plan.
It is imperative that subcontractors understand and acknowledge that a signed and approved change order is mandatory before any additional work can be done. Within the subcontractor agreement, you should have a section that specifies this requirement along with exactly what the subcontractor should do in the case that a change is requested or needed.
Moreover, in the event of a change, there will almost certainly be an adjustment to the project cost and therefore the subcontractor’s payment. The contract must state what steps should be taken to rectify such a claim.
XIII. Change Orders. Any alteration or deviation from the Services mentioned or any other contractual specifications that result in a revision of this Agreement shall be executed and attached to this Agreement as a change order (“Change Order”). All changes, no matter how insignificant, must be approved by the Client in writing.
XIV. Claims. If any claim is made by the Contractor or Subcontractor in connection with a Change Order or regarding any related issue with this Agreement or the performance of Services and/or Services to be provided, either party shall have the right to submit written notice of such claim through certified mail with return receipt. After receipt of a written claim by either party of this Agreement, the parties shall have 7 business day(s) to correct the claim prior to seeking a resolution under the instructions in Section IX.
It is imperative that subcontractors can prove they have the necessary contractor licensing and certifications to get the work done properly, and legally, and that they have duly registered themselves in local and state registries. Failing to have the proper licensing can lead to huge fines and worse - imagine having a building collapse because the subcontractor you hired failed to install the proper structural supports.
There should be verbiage in the agreement that specifically requires the subcontractor to acknowledge that they do in fact have all the necessary licensing and that it is up-to-date and active. Here is a list of licensing requirements for general contracting at the state level.
XV. Required Licenses. All parties of this Agreement, including but not limited to, Contractor, Subcontractor, other subcontractors, and all parties' direct or indirect employees, and agents shall be licensed in accordance with respective State laws where the individual is performing their trade or service. All individuals under this agreement shall be regulated by their respective licensing board which has jurisdiction to investigate complaints made by any third (3rd) parties.
Every contract needs a termination clause. In construction, there are many reasons to terminate; most commonly they are related to non-payment, non-performance or excessive delays. In the agreement, stipulate who can terminate, how much notice is required, and whether it must be written, and finally, the terms of payment.
XVI. Termination. Contractor or Subcontractor may, at any time and for any reason, terminate this Agreement for convenience with at least 5 business day(s) notice. In the event of termination for convenience, Subcontractor shall recover only the actual cost of work completed to the date of termination in approved units of work or percentage of completion.
Severability ensures that, in the case that one or more terms of the agreement are deemed invalid, the remaining terms will remain intact and valid.
Force Majeure removes liability from either party in the event of an unforeseen situation that is beyond their control that prevents work from progressing. Examples include power outages, hurricanes, or floods. The agreement should state what steps must be taken in such an event.
Governing Law defines which law should be used in the evaluation of the terms of the agreement.
XVII. Severability. If any term, covenant, condition, or provision of this Agreement is held by a court of competent jurisdiction to be invalid, void, or unenforceable, the remainder of the provisions shall remain in full force and effect and shall in no way be affected, impaired, or invalidated.
XVIII. Force Majeure. Neither party shall be liable for any failure to perform under this Agreement when such failure is due to causes beyond that party’s reasonable control, including, but not limited to, acts of State or governmental authorities, acts of terrorism, natural catastrophe, fire, storm, flood, earthquakes, accident, and prolonged shortage of energy. In the event of such delay, any date stated herein shall be extended by a period of time necessary by both Contractor and Subcontractor. If the delay remains in effect for a period in excess of thirty (30) days, Contractor has the right to terminate this Agreement upon written notice to the Subcontractor.
XIX. Governing Law. This Agreement shall be governed under the laws in the State where the Services are being provided.
IN WITNESS WHEREOF, this Agreement was signed by the parties under the hands of their duly authorized officers and made effective as of the undersigned date.
Contractor's Signature _____________________ Date ___________
Print Name _________________________
Company Name: Jackson Construction
Subcontractor’s Signature _____________________ Date ___________
Print Name _________________________ Company Name: Joe's Painting
Keep in mind too that the clauses contained within the subcontractor agreement form the basis of any future legal proceedings in the event of a dispute, so it’s imperative they have been well thought out and that they have been reviewed by an attorney experienced in construction contracts.