When a business hires a professional to complete a project, it’s important that all parties are on the same page from a legal standpoint. Businesses use professional contracts and agreements to ensure all parties are legally held responsible.
One of these contracts is a subcontractor agreement. Businesses create a subcontractor agreement when they decide to hire an additional independent contractor to help complete work for their client.
In this article, we’re going to talk about what subcontractor agreements are, why they’re important, and everything you should include in your contract.
By the time you’re done, you’ll be able to confidently draft an agreement that protects you from liability on the next project you hire out.
What Is a Subcontractor Agreement?
A subcontractor agreement is a legal document that explains the responsibilities of a subcontractor or freelance consultant. The subcontractor is legally required to perform the duties outlined in the agreement as well as follow any rules explained in the master agreement.
In some cases, a primary contractor will have a master agreement or contract with their client. If stated in the master agreement, then the independent contractor is able to hire out work to a subcontractor in order to complete the project.
For example, a construction company may have an agreement to renovate a home for their client. It’s very common for construction companies to hire subcontractors, like electricians, painters, and roofers to complete specialized work on behalf of the company. In this scenario, the company would draft up a subcontractor agreement to make sure the subcontractor completes the construction project.
Subcontractor agreements are also very common in the gig economy. If you’ve ever hired freelancers or have been hired by another general contractor, you’ve likely come across a subcontractor agreement.
But why is it important to have a subcontractor agreement in place?
Why Businesses Need a Subcontractor Agreement
Subcontractor agreements include critical project details like what work will be completed, a milestone schedule for when each part of the work will be done, and payment information. With a sound subcontractor agreement, a company and subcontractors can legally protect themselves if obligations are not met from either party.
If a company doesn’t have a legally binding contract for workers they hire, then they can be liable for the subcontractor’s work, like property damage or missed deadlines.
It’s good practice to always have a contract drafted up as it will save you money and time if a problem were to ever arise or there was a breach of contract.
So what exactly is in a subcontractor agreement?
15 Clauses of a Subcontractor Agreement
Subcontractor agreements can take many forms and are customized for each job and business. Depending on the nature of your work, your subcontractor agreement may include some or all of the following clauses.
Each one of the clauses below may be covered in detail in their own section of the agreement, or they may be combined and summarized together.
1. Scope of Work
The scope of work section of an agreement lays out all of the project details and what’s expected from the subcontractor. This will cover things like the name of the project, who the project owner is, and what tasks the subcontractor is responsible for.
This section is absolutely crucial since it explains pertinent project information that all parties agree on and understand.
2. Duration of Work
If there are deadlines attached to the project, it should be explained in the duration of work section. Any due dates, the effective date of the contract, and the structure of the project can be listed here.
This will also include the date by which the project must be completed. If you’re the project owner, then you should set your due date a few days before your own deadline in case you run into any issues.
3. Payment and Billing
There are several aspects of the payment and billing section that you should account for.
First, the rate that you will pay to the subcontractor and how you will make the payment is required. This will detail if it’s an hourly rate or a flat fee for the entire project. You can also choose to set a performance-based wage that will pay based on deliverables.
Second, you should explain how you will make payment and the exact pay schedule. Lastly, there should also be a buyout clause to protect yourself if things go badly.
4. Clarify Status
The status of the subcontractor should be set in stone. This means clearly identifying that they’re an independent subcontractor.
This will clarify that the worker isn’t a full-time employee and that they’re responsible for reporting and paying their own taxes.
If the project at hand has sensitive information that can’t be revealed and shared with others, you need a non-disclosure agreement (NDA).
This should take into account the master agreement that you made with your client to make sure the subcontractor abides these privacy requests.
The NDA should also lay out what is considered confidential information.
The non-competition clause will ensure that the subcontractor doesn’t cut you out of the deal and work directly with your client.
This clause will protect you from any competition now or in the future. You should also explain the time frame during which competition isn’t permitted.
When you hire a subcontractor, you have the right to ownership of any work they produce. Since you’re hiring them, the subcontractor must waive all rights to work ownership and anything they create is now your intellectual property.
Similar to clarifying a worker’s independent contractor status, the insurance coverage clause states that the subcontractor is responsible for paying all of his or her insurance and other related coverage.
This will include commercial general liability insurance, errors and omissions, and worker’s compensation insurance.
9. Prohibition of Assignment
This clause prevents subcontractors from hiring subcontractors of their own. Since you’re already hiring a subcontractor for your client’s project, you want to avoid going one layer deeper as it can blur the lines of the project. By including this, you can ensure that nobody else will be working on your project.
The indemnity clause will ensure that the subcontractor is responsible for the quality of work they produce. This will make sure you’re not liable for what they produce in case any legal situations arise.
For example, if a subcontracted graphic designer completes work for a business and commits copyright infringement, the original hired graphic designer may be responsible for costs incurred defending against a lawsuit unless they’re protected by an indemnity clause.
11. Promises and Warranties
The promises and warranties section is very much like the scope of work section. This highlights that the subcontractor will deliver professional work that they’re qualified to do. It also states that this work is all original and if they need to make any edits or corrections, they’re responsible for doing so.
The arbitration clause explains how legal disagreements will be resolved. Ideally, you’d prefer to have third-party binding arbitration to settle any issues that arise before taking the matter to court.
13. Termination or Modification
In some cases, you may be required to cancel the contract with your subcontractor. This section will explain when termination can occur and on which grounds. It will also explain what the subcontractor’s reduced earnings will be if they don’t successfully fulfill their promises.
Lastly, there should be a written termination notice that’s agreed upon in order to officially end the contract.
The jurisdiction section will list which state’s local laws the project and contract will follow. The state where your company is located should be the governing body for the contract.
Therefore, if your business is based in California, the contract should follow the laws of the state of California.
15. Entirety of Agreement
The final section that you should include in a subcontractor agreement is the entirety of agreement clause. This states that only the details listed in the contract are covered by the entire agreement. This means that anything that’s not included cannot be implied or assumed.
Protecting Yourself From Liability
By creating a legally sound subcontractor agreement, you’re protecting your business if things ever hit the fan (or if your subcontracted electrician accidentally breaks your client’s fan). Always employ these types of contracts to ensure that all parties are on the same page.
It’s important that your business adequately explains the details of your project, like what needs to be completed, when it should be completed by, and how the work should be done. It’s also crucial that the subcontractor is completely aware of what’s expected from them so they can fulfill any obligations of the project.
If you’re just getting your business off the ground, we’ve also gone into greater detail on legal business matters, like filing your company’s articles of organization, creating an operating agreement, and getting set up with your business licenses for contractors.