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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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At Evans Law, our experienced real estate lawyers offer strong representation in construction, real estate, and land use matters, along with settlement and brokerage services. Our attorneys understand how real estate can help build wealth and communities. While the markets may fluctuate, our focus never wavers. We are devoted to problem-solving, getting the deal done, and assisting our clients in achieving their goals.

Clients are the primary focus at our firm, and we are keenly aware of the details of our clients’ legal issues. We focus on protecting and preserving the best interests of our clients. We foresee any potential issues and fix them before transactions are affected or result in litigation. But when litigation is unavoidable, we offer strong, effective, and sophisticated representation. To schedule a consultation with our real estate lawyer, call today at (410) 626-6009.

 

How to Protect Your Construction Business from Risks Involving Subcontractors

A unique situation confronts general contractors and builders in terms of risk management. The law holds them liable to the owners for the actions and omissions on the part of their subcontractors. Therefore, it is vital for you to take the appropriate steps to protect yourself and your company as you work on job sites and engage subcontractors to perform work.

Sufficient Insurance Coverage

Before bringing a subcontractor on-board, it is essential to make sure that your subcontractor agreements have strong requirements for insurance coverage. You should then ensure that these contract provisions are enforced.

The provisions for insurance should include the need for subcontractors to maintain various kinds of insurance coverage (such as PL, worker’s comp, CGL, and automobile insurance) at minimum coverage levels.

In case a subcontractor signs a contract stating that they will get insurance, ask them to submit a Certificate of Insurance. If they are unable to provide this certificate, take them off the job. While this may require a few additional steps and more documentation, it is undoubtedly a worthwhile risk management initiative.

You should consult your insurance agent about more details on the types and amounts of insurance coverage necessary for your subcontractors.

Allocation of Risk

In your subcontractor agreements, there should be specific provisions to shift the risk and liability from you to the subcontractor undertaking the job in terms of that subcontractor’s work.

This aspect is more straightforward in commercial construction, where a majority of projects involve AIA or other subcontractor agreements specific to the project. But when it comes to residential construction, this is not always the case.

If you are involved in residential construction, it is best to have your lawyer prepare a master/standing subcontractor agreement detailing risk allocation and other general provisions. This agreement should be signed by every subcontractor you engage in working for you. A best practice in this area is to attach an addendum/contract document with the scope and price of work details.

Consult your attorney about what provisions are suitable for your master/standing contracts and for your project-specific agreements to make sure that the liability is equitably spread among parties, and is reasonable and fair, including but not restricted to, adequate indemnification provisions, insurance coverage provisions, equipment license provisions, flow down/conduit provisions, remedy provisions, and others.

Loss Prevention

Loss prevention can be summarized as various best practices concerning your relationship with your subcontractors. It can certainly be tempting to select the lowest cost subcontractor to work with you. But this can have adverse outcomes.

As a best practice, only engage reputable, well-operated, and well-qualified subcontractors. Instead of price, the primary consideration should be the quality of work. Besides, do not hesitate to end a subcontractor relationship, no matter how long or short, if the current employees and crew of the subcontractor are not working in an optimal and safe manner.

If the owner complains about an aspect of the subcontractor’s work during the project, it is vital to give notice to the subcontractor as soon as possible. In the course of following your loss prevention plan, you should make sure that the subcontractor understands and respects the significance of the process. Consult your lawyer about possible insurance claims.

Some possible options that your lawyer may recommend are:

  • Inform the insurance company of the subcontractor of an owner complaint
  • File a claim with the insurance company, if you are also insured under the plan
  • Demand a tender of defense from the insurance company of the subcontractor on the basis of your additional insured status or contractual indemnification language

Safety of the Subcontractor

Lastly, a majority of general contractors are not aware that there are circumstances in which they may be held responsible for job site accidents and injuries sustained by a subcontractor’s employee(s). Under state law, general contractors are not liable for the safety of the subcontractor’s employees. But there are certain exceptions, such as:

Control Exception

Courts have determined in some cases that a general contractor is accountable for injuries that a subcontractor’s employee sustains when the general contractor has substantial control over the means and manner of work, i.e., sufficient control over daily work and the ways and techniques of the subcontractor.

Sufficient control in this regard does not include general oversight, inspection, and coordination of the subcontractor and their work.

Hazardous Conditions Known to the General Contractor

Sometimes a court has held a general contractor responsible for subcontractor injuries sustained due to hazardous conditions that were known to the general contractor but were not apparent to the subcontractor.

Other Exceptions

There are other exceptions under the law, such as where the contractor allows liability and where the construction work involves an unusual, unreasonable risk of injury.

Consult a Skilled Attorney for Subcontractor Agreements

The attorneys at the law offices of Evans Law have extensive experience handling cases related to real estate, construction, and land use. A skilled and knowledgeable lawyer at the practice can guide you on the correct measures to protect your business when working with subcontractors. Call today at (410) 626-6009 to schedule a consultation with a dedicated real estate attorney.