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Subcontractor Agreement: Meaning, Example, Benefits, and More

construction equipment management software

Handling a construction project is a tough nut to crack. Many people think of these jobs to be governed by only two parties – the client who wants to hire professionals for a project and those who can be seen working on a construction site. However, in reality, there are several stakeholders involved, be it suppliers, contractors, subcontractors, or workmen. 

For most construction projects, main contractors appoint third-party service providers to work on their behalf on different sites. Depending on the complexities involved in a project, everything cannot be based on blind faith or acquaintance. This is where a subcontractor agreement plays a crucial role. 

If you have ever worked with subcontractors or will most likely need to do so, it is essential to know what is included in a subcontractor agreement. It basically outlines the work to be carried out and acts as a contractual agreement between two parties. Read on to find out more about it in detail.

What is a Subcontractor Agreement?

A subcontractor agreement, as the name suggests, is a contract between contractor and subcontractor that legally solidifies the scope of work. This agreement also lay out the exact timeline of a specific construction project, communication protocols, payments, and similar other details.

The main idea behind having a subcontractor agreement is to explain in detail the specifics of work to be subcontracted along with the exclusions (what needs not to be done). In many cases, it also enlists the materials to be supplied by both the contractor and subcontractor.

For example, the main contractor may subcontract the task of electrical installation to a subcontractor having a team of electricians. Here, the subcontractor agreement between the two parties may include the number of sockets, switches, and light fittings to be installed and at which sections of the property. Similarly, it can also specify whether the cables to be used for the electrical fittings are to be supplied by the main contractor or not. As a whole, it will bring out a clear idea of the services to be rendered.

While these agreements are fair to both parties, it is important for them to read the specifics carefully and prevent any unfair risk.

7 Facts About Subcontractor Agreement for Your Perusal

  • The details included in a subcontractor agreement may vary from one sector to another. In some cases, it can be a highly tailored document containing every detail of the job to be done. Otherwise, many main contractors often use the same agreement time after time without making any changes to it.
  • A typical subcontractor agreement includes the scope of the services asked for with a clause about when and where they are to be offered. It may also include clauses that underline alterations to be made in the day-to-day plan if needed and adds the required flexibility. 
  • The agreement also features the agreed price of the service(s) to be rendered and payment terms to prevent any payment-related disputes later in time.
  • Many subcontractors who regularly work with their main contractors often choose to forego the need for having a written agreement in between and it works out fine for them. However, by not having the written agreement, subcontracted firms do place themselves in a precarious situation. They misinterpret a casual handshake to hold the same value as a subcontractor agreement. Hence, it is advisable to insist on some form of a written agreement.
  • The more detailed a subcontractor agreement is, the more definition and value there is that can help deal with possible disputes. It also helps the subcontractors in getting fully paid on time.
  • It is advisable for subcontractors to check the agreement’s content before proceeding with work. In case they find it difficult to understand certain wording, they should seek advice from a legal expert. 
  • Certain agreements may also include a separate section defining liabilities. In case liability is passed to a subcontractor firm, it would then need liability insurance. The need for insurance may vary from case to case basis.

8 Things You Must Know About Before Signing a Subcontractor Agreement

  • Specified Scope of Work

A subcontractor is mostly hired to work on specific tasks related to a construction project. A broad scope of work might be challenging for the firm to complete the assigned tasks. On the other hand, a narrow scope of work might not give them considerable revenue/profits. Hence, well-defined scope of work is crucial as a part of signing the agreement. 

  • Supply Chain Risk

Supply chain risk is another important element to be considered. In some cases, the subcontractor may not have adequate control over the supply chain. For example, the untimely delivery of raw material may result in an unexpected delay in completing a construction task. However, this should not be considered a fault on the subcontractor’s end if it has not been defined in his deliverables. In such scenarios, negotiating the agreement will help prevent the possible chaos.

  • Work Warranty

A subcontractor agreement might also cover the warranty on the work done for the main contractor. If the work has been done in the best possible manner, the warranty-related clauses won’t cause any impact on the subcontractor’s reputation. However, in case of some unfortunate accidents, these clauses also give the ability to fix the damages and save their reputation.

  • Conditional Payments

Who does not want to get paid on time? This is the reason why most of the subcontractor agreements now have conditional payment clauses included in them. Failing to go through these clauses in detail may result in unexpected delays in the subcontractor payment and risk their work. Hence, it is advisable not to leave these clauses out of the picture before signing any agreement.

  • Defense and Indemnification

You might have heard or read defense and indemnification clauses that are included in the agreements. In some cases, these clauses may lead to an undue burden on the subcontractor. The result is different depending on the state-specific indemnification laws. Hence, they should not be left untouched while going through the agreement.

  • Change Orders

In the case of unexpected circumstances, certain tasks related to construction projects do not go as planned. That is why, the agreement should include a procedure that can be used to identify changes to be made in such situations, ask for their approval, and modify the original agreement accordingly. In general, this is covered under a change order clause.

  • Dispute Resolution

Legal disputes can also arise when the completion of construction projects fails to follow the shared guidelines and timelines. Hence, it makes sense to include information about how to deal with the events of conflict as a part of the subcontractor agreement

  • Termination Details

This part of the agreement details the scenarios that can lead to the termination of the subcontractor. Some of the common grounds include the inability to meet project deadlines etc. This is added in the form of termination clauses that also cover any notice that might be required as a part of the contract.

Is a Subcontractor Agreement Mandatory?

Although having a subcontractor agreement is not mandatory, it is indeed a valuable tool for every general contractor. Through this agreement, a subcontractor is allowed to take advantage of his expertise, licensure, and labor of skilled workers who are not employed with the main contractor. When taken in the right direction and with the right intention, this agreement paves the way for mutual benefits of both general contractors and subcontractors while working on completing a construction project.

How to End the Agreements Early?

Both parties are allowed to end the agreement earlier than the due date in a specific manner. In some cases, it can be based on a written notice period on either side that allows each party to make alternative arrangements. Unlike employee-employer relationships, subcontractors cannot expect various benefits during the notice period.

What is Limited Liability for Subcontractors?

In relation to the client, the main contractor is liable for service delivery performance as per the terms of the main contract. In case the appointed subcontractor is unable to deliver the expected service quality, then compensation may be liable as per certain sections included in the subcontractor agreement. This can be done by reducing the amount from the subcontracted firm’s payment.

Handling Construction Projects with Ease Using a Construction Management Software

While there are several facets to be handled related to construction projects, it is important to delegate tasks and automate various processes. You can benefit from using reliable construction management software. Whether it is about keeping an eye on schedules, checklists, or daily reporting, you can be at peace by having project management software on your side.

Select Construction Management Software from CEM Business Solutions

CEM Business Solutions offers construction management software that helps in handling various projects. For more details, visit their website.