7 Things You Must Know Before Entering into a Subcontractor Agreement

A subcontractor agreement is a contract between contractors or project managers and subcontractors. This solidifies any agreement between the two parties and assures work. Subcontractors should read the subcontractor agreement and assure specifics to protect themselves from unfair risk.

Many subcontractor agreements layout the exact timeline of the project, scope of work, communication protocols, and even payment. Some agreements specify “pay when paid” or “pay if paid”; these phrases decide when a subcontractor is paid. Other subcontractor agreements are very fair to both the contractor and subcontractor. Depending on the subcontractor agreement, they can benefit subcontractors more than common verbal agreements.

How Does a Subcontractor Agreement Benefit Subcontractors

While an agreement seems like a way for contractors to protect themselves rather than subs, it can actually benefit subcontractors more than contractors. This is a formal written document that lays out the work, timeline, and other factors important to construction. Knowing all of these factors can protect subcontractors because they can prove what the contractor or owner was supposed to do. Subcontractors can prevent some of the more detrimental clauses by reading and not accepting unfair risk in their subcontractor agreement.And the subcontractor agreement is a place for subcontractors to assert their rights and better their business.

Things You Must Know

There are several key elements that must be in an agreement. And there are certain things that subcontractors should watch out for. These are the elements that can positively or negatively impact the agreement.

Scope of Work

A subcontractor agreement should always specify the scope of work. The scope of work is what a subcontractor is hired to perform. A broad scope of work is hard to navigate and can be hard for subcontractors to complete. Since the work isn’t well defined it is easier to say that subcontractor didn’t do the right work for the project. So a well-defined scope of work is crucial.

Supply Chain

Another crucial element to note in an agreement is the supply chain and other operational risks. The supply chain or owner specified items aren’t always within the subcontractor’s control and in those cases shouldn’t be the subcontractor’s fault. However, some contracts try to push that risk onto subcontractors. Reading and negotiating the subcontractor agreement will help prevent supply chain risk issues.

Defense & Indemnification

A common element in a subcontractor agreement is defense and indemnification. Many contractors add defense and indemnification clauses to their subcontractor agreements. However, sometimes these clauses can add undue burden to the subcontractor. Some states have passed laws to help subcontractors from unfair indemnification clauses. And other states have rulings on the books that void unfair indemnification. Subcontractors should consider defense and indemnification clauses in a subcontractor agreement.

Insurance, Bonds, & Liens

Many subcontractor agreements specify insurance, liens, and bonds. All subcontractors should know exactly what their contract specifies for insurance and bonds. But sometimes a contractor will specify whether or not a subcontractor can take out a lien in the subcontractor agreement. This prevents or limits the subcontractor’s ability to use a mechanics lien in case of non-payment or late payment.

Warranty

An agreement might specify the warranty on work; however, this is dependent upon project. This portion of the document does benefit the contractor, but it can work for the subcontractor’s benefit. If a subcontractor’s work is solid and well documented their reputation is fine. If by some odd accident there is an issue, it gives the subcontractor the ability to fix it and save their reputation.

Arbitration

Arbitration clauses in a subcontractor agreement are more common. However, they force subcontractors to pursue any claims through binding arbitration rather than a court. This denies subcontractors the ability to take contract disputes to court. Depending on your business this might not be an issue, but it is something to look over before entering into a subcontractor agreement.

Conditional Payment

A growing number of agreements have conditional payment clauses. “Pay if Paid” and “Pay when Paid” clauses are conditional payment types. The problem with this is that it delays subcontractor payment and sometimes results in non-payment. Subcontractors must know if this clause is in their agreement before signing, otherwise, they risk their business.