Contractor-Subcontractor Agreement: Ways to Protect Yourself
As a subcontractor, a contractor-subcontractor agreement is commonplace. Like all contracts, it’s important to carefully review the language to ensure you’re not getting the short end of the stick. Remember, RISK needs to be properly assigned and shared among the contractor and subcontractor.
What is a Contractor-Subcontractor Agreement
A contractor-subcontractor agreement is a contract between contractors and subcontractors. A contract usually requires the subcontractor to be licensed in their field, and requests the subcontractor to provide proof. A good contract will state the scope of the project, regardless of the size of the project. And it should also include payment options. The contract should explicitly state the amount and timeline of payments, as well as any prepayments. All contracts should always include the project deadline, as well as who is responsible for any related permits.
Sometimes a contractor-subcontractor agreement will also include indemnity provisions, surety bonds, and insurance requirements. Indemnity provisions allocate risk because it is a way of securing or protecting against loss or financial burdens. They can make a subcontractor financially responsible for and obligated to defend the owner or contractor. It’s important to read the indemnity clauses, insurance requirements, and other clauses to ensure that the contract doesn’t place all responsibility on the subcontractor.
Supply Chain and Operational Risks
Sometimes a contract or agreement will require the subcontractor to be accountable for operational risks. These risks aren’t always within the subcontractor’s control. Things like supply chains and owner specified items can become an issue later on. A subcontractor could be penalized if the owner specified item is more expensive or takes longer to arrive than expected. This is why it’s important to know what the exact wording of the contract is, and even find a way to mitigate the risk.
There are two ways to try to mitigate the risk. One way is to purchase insurance in order to cover any financial issues if there is a supply chain error. The other way is through supplier contracts. Supplier contracts, supplier-subcontractor agreements, or contractor-supplier agreements are a way of protecting yourself from supply issues.
This way if there are supply issues, it’s not on you. It’s the legal and financial responsibility of the supplier to deliver the products to the specifications and on time. Regardless, supply chain and operational risks aren’t within the control of a subcontractor. Therefore, it shouldn’t be the responsibility of the subcontractor.
Some sample contractor-subcontractor agreements show contractors requiring the subcontractor to obtain permits. Contractors contract subcontractors to complete tasks. Owners, architects, or stakeholders hire contractors to complete a project. So asking a subcontractor to the procure the building permits shouldn’t sound right.
In fact, most states require either the owner or contractor to get the building permits. Though most states prefer for the contractor to obtain the permit. Because the contractor generally has to provide a bond stating that all work will be done to code and in a timely manner. The whole point is that the bond can be used to pay someone to redo the work if it isn’t done correctly. If an owner obtains the permit, they’re responsible for finishing the work to code. So if a subcontractor gets the permits, then they’re responsible for the project. This is why permits shouldn’t be a part of the contractor-subcontractor agreement.
“Pay when paid” or “Pay if paid” clauses are common in contractor-subcontractor agreements. Like the name suggests, these clauses stipulate that a subcontractor will receive payment when a contractor receives payment. Across the United States, some of these clauses aren’t enforceable because the wording is unclear. However, more states are moving towards making them all enforceable. Some courts have interpreted these clauses to mean that a contractor is responsible for payment after a reasonable delay if an owner doesn’t pay. But other courts believe it to mean that a contractor is excused from payment if the owner doesn’t pay.
As a subcontractor, it’s vital to watch out for conditional payment clauses. These clauses could excuse a contractor from any payment depending on where you live. The wording of the clause should reflect that the contractor will pay you for any work or expense you incur on the job. Contractors get surety bonds in order to ensure payment to subcontractors and suppliers. Subcontractors can make claims on the bond in order to guarantee payment. Which is why conditional payment and conditional surety bonds are things to avoid in any contractor-subcontractor agreement.