Successful Subcontractor-Contractor Agreements

By Christopher G. Aiello

A subcontractor - contractor agreement is used when a contractor hires someone else (known as a subcontractor) to help with a specific task on a  project. For example, an HVAC expert may be brought in to replace the central heating for a home under renovation.

Sub-contractor agreements are formal written documents that outline the terms and scope of work for the sub-contractor in a project. They spell out the duties of the contractors and subcontractors and how they should relate with each other until the project is concluded.

These documents are useful in case a dispute arises, to prove what the contractor and subcontractor agreed on. The agreements save subcontractors time and money, helping to work out difficulties formally.

When committing to such agreements, a subcontractor should keep the following pointers in mind.

What should be in a Subcontractor - Contractor agreement?

1.  The scope of work

Details of work a subcontractor is expected to do are included in the scope of work section of the agreement. This includes;

• A clear description of the project’s tasks and the materials needed for it.
• The date work is expected to start as well as the completion date.
  

The scope of work clauses must be short and to the point.  Complicating this part of the contract can expose a subcontractor to problems that will interfere with the project's successful completion.

2. Payment details

The subcontractor agreement should also include payment details for;

• Labour charges 
• Materials 
• Insurance, and, 
• Personal allowance covering transport and other miscellaneous costs during the project.

A subcontractor may look at the master contract between the main contractor and the general contractor to ensure his terms align with those in that contract. For instance, will the specified payment in the master contract cover his fee, and does the timing of making payments work.

If the master contract indicates payment details that do not tally with those in the sub-contractor agreement, it will lead to financial disputes.

Other clauses to pay attention to are those that allow the general contractor to withhold payment. There are also payment terms like "pay if paid" and "pay when paid" that determine when a subcontractor is paid, which they should be careful about.

These payment terms should be looked at before a contract is signed to ensure the subcontractor is fully compensated for work done.

3. Resolving disputes

In case of a problem, the contractor and subcontractor must resolve the issue for the successful completion of the project.

They can decide beforehand how to do that by including a clause in the agreement in the "Resolution of Disputes" section that indicates how they will tackle such matters.

For example, they can opt for:

• Binding arbitration, which will require them to resolve disputes in front of an arbitrator instead of going to court and the arbitrator's word is final. 
• Non - binding arbitration gives a subcontractor the chance to appeal an arbitrator's decision in court if not satisfied with it.
• Mediation, which involves negotiations between parties, and,
• Litigation, where the disputing parties go to court.

Subcontractors should ensure the method they choose to resolve disputes in the contract does not expose them to lengthy legal and financial problems in the future.

4. Terms of termination

The terms of terminating a subcontractor - contractor agreement should also be included in the contract.

The contractor and subcontractor may choose:

• "No right to terminate", which means the agreement will only end once the project is done. 
• "Contractor only has the option to terminate," and, 
• "Subcontractor only has the option to terminate," which, when signed, gives only the subcontractor a right to terminate the agreement.

5. The law

Subcontractors must abide by set laws and regulations.

Their agreements with contractors should be made under the governing laws of the state they work in. They also have the Department of Labor laws to adhere to, for example, those that exempt them from getting benefits because they are not regular company employees.

6. Defense clauses in a subcontractor agreement

While many subcontractors are often forced to sign contracts unfair to them to avoid losing business, it's always better to negotiate a fair contract that will protect your rights.

For example, state laws protect subcontractors against unfair indemnification.

Subcontractors should also watch out for "hold harmless" clauses or indemnification clauses in their contracts. These clauses can expose you to liability as they give general contractors the option of transferring expenses, losses, or risks, such as those pertaining to property damage.

If you don't protect yourself against such clauses, you may end up reimbursing the general contractors for losses unnecessarily. Employee rights consultants can help subcontractors avoid such liabilities by creating a clause that only exposes them to liability if the losses are caused by their negligence.

7. Insurance

There is a common mistake among contractors of thinking that indemnity clauses completely protect them from losses on a project. Additional protection using adequate insurance is required.

A subcontractor - contractor agreement must be appropriately worded, including the insurance requirements of the work they are committed to completing. Insurance is essential as things don't always go smoothly on a site.

A subcontractor needs to know that any losses from accidents will be reimbursed by the insurance company.

This means getting the proper insurance and including the correct coverage details in the subcontractor - contractor agreement. This prevents the general contractor from pushing any losses on to the subcontractor that they are not liable for.

8. Liens

A subcontractor can protect payments by using liens.

Payment problems such as delays are common, and if unprotected, a sub-contractor can lose their hard-earned income after finishing a project.

Mechanic liens are legal claims filed by subcontractors against general contractors to protect payment for work and materials supplied. Subcontractors do not require the permission of the general contractor to file a lien.

These legal claims are attached to a contractor's property to ensure they cannot refinance or sell  before settling any claims attached to it. Therefore, a subcontractor can use a lien to secure payment for work done on a project knowing they are unlikely to lose their money.

Every state has laws protecting the rights of subcontractors to file liens. All subcontractors should look up such laws before entering into an agreement.

9.  Bonds

A subcontractor may also find a clause in the agreement that requires them to be bonded. Sub-contractor performance bonds are used to ensure they complete a project on time.

They are an agreement made by the general contractor, the subcontractor, and a surety company that commits to helping the subcontractor complete a project should they experience difficulties.

In case of a problem, the surety company may find another subcontractor to finish the project. Some states require a bond for a project while others don't.

As a subcontractor, it's up to you to ensure you meet any bond requirements by the state or your general contractor. Bonds often make it easier for subcontractors to get projects because owners and general contractors know they have been well-vetted before getting them.

To get a performance bond, a subcontractor must provide documents such as a list of completed projects, references, and bank statements.

Conclusion

Subcontractor - contractor agreements protect the rights of subcontractors, ensuring they do not work under unfair terms or lose their dues to unscrupulous general contractors. They also protect them from taking unfair risks.

If you are a sub-contractor about to enter into an agreement with a general contractor, use the services of a lawyer to ensure the agreement is fair and protects you fully.

Christopher G. Aiello has a reputable 30+ year trajectory in law practice. Having been selected for multiple recognitions and awards, he practices in the Superior Court of New Jersey in both the trial court section and the appellate divisions, the Workers’ Compensation Court, and Municipal Courts. He has appeared in dozens of televised, print and internet media. Now, he’s dedicated in full to his law firm Aiello, Harris, Marth, Tunnero & Schiffman P.C.