An Overview of Agreements with Subcontractors
A subcontractor agreement is an essential type of contract in the construction industry. It is a legally binding contract between a contractor and a subcontractor which outlines the obligations that each have for the duration of the project. Essentially, this type of agreement describes the obligations of the subcontractor to the contractor. A subcontractor is a third party, hired and under the supervision of the general contractor , that helps to comply with the contracts and subcontracts they have entered into. If the subcontractor fails to perform its duties, or otherwise does not fulfill the obligations of the agreement, the contractor may be liable for any damages to the property owner that results from a breach. Subcontractor agreements are just as essential to protect the subcontractor, who may also be held liable for deficient or no performance of the terms of the subcontractor agreement.
Crucial Components of an Agreement with Subcontractor in Construction
The details within a construction subcontractor agreement are significant. Without them, there is a greater chance for disputes to arise and for both parties to suffer financial and other losses. Whether you’re a GC going over your template or a sub looking for tips on what to look for, the following are key components that should be included whenever possible.
Scope of Work
The scope of work refers to the tasks the sub (or other party) will be required to do. When creating or reviewing your template, make sure to include the most common tasks you (or your subs) perform. If there are a large number of standards, see if they can be referenced via a hyperlink as a footnote. It’s also a good idea to explain the method behind how you build the template. For example, if tasks are not mentioned in detail, it could mean that they are following AIA format, meaning that the sub can obtain specifications by using the appropriate AIA document.
Schedule
There are a few different options for how the schedule could be laid out. It could be listed like a construction timetable, or it could provide a general time of when the sub will be performing the work. It is common for this element to also provide information on the process of changes from the Owner and/or GC.
Payment
One of the more important elements of the subcontractor agreement, details on payments could vary significantly. As such, it’s critical that you review the template carefully, making sure it matches your preferences and needs. For example, payments could be provided on a schedule, date or milestone, or simply upon completing the work.
Dispute Resolution
It is not uncommon for the subcontractor agreement to provide information on the procedure for litigations or claims that may arise. It is also likely that this will include the requirement for the parties to seek mediation before pursuing litigation.
Indemnification
In many cases, the contract will include an indemnification clause, indicating that the party receiving indemnification (usually the GC) is not responsible for certain issues that may occur. It essentially requires the other party to cover certain issues on their own. There could also be related insurance requirements for subcontractors to cover, which should be noted separately and/or referenced.
Default Clause
A default clause details what happens if one or both parties do not fulfill their obligations under the contract. In most situations, this will involve the aggrieved party being able to pursue damages.
Termination
Under most agreements, the GC will have the right to terminate the contract. Common reasons for termination include the sub’s failure to perform, death or incapacity, and bankruptcy.
Merger Clause
A merger clause provides that the agreement contains the entire contract and that there are no other agreements between the parties that are not expressly stated elsewhere.
Procedure and Time of Giving Notice
As with many other aspects of an agreement, it’s important to not only have a procedure and time of giving notice, but also that this information is reviewed every so often. If you need more time for a specific action required by the other party, you might be spending more time than necessary proofing the agreement if it does not allow for the proper time to do so.
There may be other items that are critical depending on the state and/or type of project.
Advantages of a Template
One of the biggest advantages of using a construction subcontractor agreement template is that it saves time, money and energy. By clearly defining all of the appropriate terms and conditions, as well as providing a starting point for any updates needed, templates can function as both a reliable planning and drafting guide. Instead of starting from scratch each time, effective templates speed up the entire process. Templates also tend to be more cost-effective for this same reason: a company may only need to consult an attorney a couple of times, and they will likely only be working off the contract for a short period of time, reducing the amount of billable hours the company attorney spends on the contract. Another benefit team templates is that it offers consistent communication. For every project. For every subcontractor. Last but certainly not least, by laying everything out in terms of deadlines, parameters of the work and payment terms, it avoids miscommunication that creates more problems. Having a clearly defined subcontractor relationship, spelled out in black and white, protects all parties in case any type of dispute arises.
How to Adapt the Template to Your Project’s Needs
When it comes to customizing your subcontractor agreement template to meet the needs of a specific project, there are a number of factors to consider. In addition to addressing more specific terms related to the scope of work to be completed, you will also want to consider the following:
● The availability and capabilities of potential subcontractors. It can be difficult to complete a project while missing key subcontractors – but the available talent in your area may limit your options, in terms of what you can include in the subcontractor agreement template. You will also need to consider what is cost-effective for your situation. For example, adding subcontractors that have specific certifications may add an expense that puts the project over-budget.
● The construction industry standards that apply to the type of work the subcontractor will be completing. Whether the project is a residential or commercial construction job, the standards for the work to be done are likely set by the International Building Code. Anything that is in contradiction with this code could cause either you or the subcontractor to be liable in the event of a legal dispute after the project is completed.
● Timelines for hiring the subcontractor and completing the project. The subcontractor agreement template in its basic form will not have timelines applied, but these should be adjusted to meet the needs of the particular project. While some subcontractors may have the ability to deliver products or services more quickly than others, be careful about assuming that you can make up lost time late in the project. This assumption may end up causing delays.
These are just a few customization tips to help you adjust a subcontractor agreement template to meet the needs and limitations of the specific project for which the agreement is being used.
Legal Considerations and Compliance
Beyond the basic information and standard clauses, there are legal considerations that must be taken into account when drafting a subcontractor agreement. In addition to compliance with any general construction guidelines, local building codes and regulations are important legal considerations. State and federal employment laws also come into play in the relationship between contractors, subcontractors and employees. Because subcontracting is often cross-jurisdictional , when subcontractors come from outside the immediate area or jurisdiction, such issues as licensure in the state where the work is performed, workers compensation insurance, employment practices and miscellaneous local requirements must all be addressed in the agreement. Another consideration in subcontracting can be compliance with tax codes, such as those that mandate the withholding of income tax on payments made to employees or subcontractors. Legal review of the subcontractor agreement will help to determine any such tax obligations.
Common Mistakes to Avoid
The most common mistake when drafting a construction subcontractor agreement is providing the subcontractor with too much latitude to make decisions without the approve of the general contractor. The less specificity you give your subcontractor, the more leeway they have to make decisions without your approval as the general contractor. Especially in a project that requires strict adherence to plans and specifications, or other top-down oversight, providing a subcontractor with too much leeway can be expensive for the general contractor. In addition, we have seen too many times a general contractor provide a subcontractor with an agreement which provides for a flat fee to the subcontractor, regardless of how long the work actually takes. Such an agreement represents a gamble by the general contractor that all of the work will be done on schedule. When a subcontractor is exceptionally slow, sometimes general contractors may hope for the best and do nothing. This approach normally risks the schedule and is therefore unwise. The other alternative is to terminate all or portions of the agreement with the subcontractor and hire someone else to get the work back on schedule. This is normally necessary to secure a viable completion date for the project.
Best Practices for Handling Agreements with Subcontractors
Once the subcontractor agreement template has been created, managing and executing it becomes just as important in ensuring that both parties are protected at all stages of the project. Regular on-site communication between the general contractor and the subcontractor lets both parties know that their expectations and needs are being met. In the event a subcontractor encounters an issue, communicating it to the general contractor before it becomes a problem can be beneficial to both parties. If a subcontractor fails to meet an expectation, the general contractor can often work with the subcontractor before a problem becomes too expensive to fix. For both parties , regular communication means that there will be fewer surprises and a stronger working relationship can develop, which invariably leads to a more efficient management of costs, schedules, and expectations. Managing subcontractor agreements is an inevitable facet of the construction process. Comprehensive subcontractor agreement templates are invaluable tools should a contract dispute surface. Nevertheless, a successful contract management strategy goes beyond creating an airtight subcontractor agreement; regular communication also plays a pivotal role.