7 Things to Know Before Entering into a Contractor / Subcontractor Agreement
A contract between contractors or project managers and subcontractors is known as a subcontractor agreement. This contract legally solidifies the terms between the two parties and helps ensure that the terms are honored by both sides. On their part, subcontractors should review the agreement and confirm specifics to ensure protection from unfair risk.
In general, subcontractor agreements detail the project’s precise timeline, communication protocols, the scope of work, and payment. Some agreements contain specifics such as “pay when paid” or “pay if paid.” Such phrases decide when the subcontractor will get paid.
Other subcontractor agreements are fair to both the subcontractor and contractor. Subcontractor agreements can be more beneficial to them than common verbal agreements, depending on the contract’s specific terms.
Advantages of Subcontractor Agreements to Subcontractors
A subcontractor agreement may seem like a way for contractors to protect their interests rather than subs. Still, it can actually be more advantageous to subcontractors rather than contractors. This formal written document contains essential aspects of the construction project, such as timelines, work, and other factors.
It can be beneficial for subcontractors to know all these factors as they can show what the owner or subcontractor was supposed to do. Also, subcontractors can prevent unreasonable clauses by reviewing and not accepting unreasonable risks in their subcontractor agreement. These agreements offer subcontractors an opportunity to uphold their rights and create more favorable business terms.
Elements of a Subcontractor Agreement
A subcontractor agreement must contain various essential elements. In addition, there are some aspects that the subcontractors should be wary of. Such features can affect the agreement in a positive or negative manner.
Scope of Work
The work scope, which the subcontractor is hired to undertake, should always be clearly laid out in a subcontractor agreement. If the scope of work is broad or vague, it can be difficult for subcontractors to complete. As the work is not adequately defined, it is easy to allege that the subcontractor did not perform good work on the construction job. Thus, it is critical that the scope of work is well-defined.
Supply Chain
The supply chain and other operational risks are another critical aspect to note in a subcontractor agreement. All to often, the supply chain or owner-specified materials are not within the control of the subcontractor. In such cases, the subcontractor should not be held at fault. But some agreements hold subcontractors accountable for such risks. Supply chain risks can be minimized by reviewing and negotiating the subcontractor agreement.
Defense & Indemnification
Defense and indemnification are a common element in a subcontractor agreement. In many subcontractor agreements, contractors add defense and indemnification clauses. But these clauses can sometimes be unfair towards the subcontractor. Certain states have passed regulations to protect subcontractors from unjust indemnification clauses. Other states also have laws that void unfair indemnification. Subcontractors should be mindful of defense and indemnification clauses in a subcontractor agreement.
Insurance, Bonds, & Liens
Insurance, bonds, and liens are specified in many subcontractor agreements. A subcontractor needs to understand the exact provisions in their contract for insurance and bonds. However, at times, a contractor will specify in the subcontractor agreement whether or not a subcontractor can take out a lien. Such a clause limits or prevents a subcontractor from using a mechanics lien in the event of late payment or non-payment.
Warranty
Depending on the project, a subcontractor agreement might detail the warranty on work. This part of the agreement is beneficial for the contractor, but it can also be advantageous to the subcontractor. If the subcontractor provides solid, well-documented work, their reputation is untarnished. Also, it offers the subcontractor the opportunity to fix any unexpected issues and save their reputation.
Arbitration
Arbitration clauses are more common in a subcontractor agreement. But they force subcontractors to pursue claims via binding arbitration, instead of through a court. This prevents subcontractors from taking any potential disputes to court. This might not be a problem, depending on your business. Still, it is something you should review before signing a subcontractor agreement.
Conditional Payment
An increasing number of subcontractor agreements have conditional payment clauses, such as “Pay if Paid” and “Pay when Paid.” Sometimes, this clause can cause delays in subcontractor payment and even result in non-payment. Subcontractors must understand whether or not the agreement contains this clause before signing. Otherwise, they may risk their business.
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