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.

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.

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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.

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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:

Related Parties

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.

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.

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.

Project Timeline

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.

Payment Expectations

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.

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.

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.

Disputes

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.

Change Orders

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.

Contractor Licenses

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.

Termination

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.

Final Clauses

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.

Summary

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.