Navigating Subcontractor Agreements: What You Need to Know

You rely on your workforce to handle most aspects of a construction project, but some tasks are best for others. Perhaps it’s some specialized electrical work, and none of your crew has the expertise for that job.

Or maybe you’re pressed for time and need hired guns to do some masonry work while the bulk of your team works on getting some time-sensitive labor done in another part of the project.

Subcontractors help many general contractors fill in the gaps, but they’re often a challenge to deal with. It’s hard to come up with a construction estimate when you have inconsistent subcontractors, some of whom perform well and others who either don’t get the work done right or take forever to complete it.

Anyone involved in construction management needs to know how to handle subcontractors, and a subcontractor agreement will get things under control.

Here’s everything you need to know about a subcontractor agreement, and how you can draw one up to increase the chances of a successful subcontractor relationship.

Overview: What is a subcontractor agreement?

A subcontractor agreement is the contract you enter into with a professional or company to do work that your crew isn't qualified to do -- or work you don't want them to do because you have more important tasks for them.

Subcontractors help general contractors pick up the slack on a construction project, filling in labor gaps and allowing the construction manager to ensure the project finishes on time and on schedule.

A good subcontractor agreement is a vital part of good construction resource management as it spells out in detail what work the subcontractor is expected to do, how much they will be compensated, what deadlines they must meet, what quality standards must be adhered to, what the consequences are for not meeting the terms, and so on.

What terms should you include in a subcontractor agreement?

Your agreement will vary depending on your circumstances and what work needs to be done, but generally it should cover these issues:

• Licensing: The subcontractor should have all required permits and be licensed according to state and local laws to perform the work required.
• Scope: The agreement should thoroughly and clearly describe to the subcontractor what work they must complete.
• Deadlines: The subcontractor should know the construction schedule and when the work needs to be completed.
• Quality: The agreement should stipulate the quality standards the subcontractor must adhere to.
• Consequences: If the subcontractor cannot perform the work according to the standards of the contract or the work is delayed, the agreement should stipulate the consequences. For example, the subcontractor may forfeit a bonus if work is finished after a certain point.

6 considerations when entering a subcontractor agreement

All agreements should deal with the five issues listed above. However, here are six additional things you should consider when you draft your agreement.

1. Is the subcontractor financially healthy?

Yes, your subcontractor’s finances matter. The agreement should require the subcontractor to provide documentation indicating they are financially stable. A subcontractor barely hanging on may not place an order for materials, causing a domino effect that leads to major disruptions for your project.

The subcontractor should fill out a company information form with information on subcontractor taxes, performance history, safety history, and references. They should provide financial statements that a CPA firm could review.

2. Is the subcontractor insured and bonded?

A subcontractor should be properly insured and bonded, so if anything happens, the general contractor can collect. With a workplace accident, lawsuit, or property damage, both you and the subcontractor would be protected from significant financial harm.

3. What if the subcontractor fails to perform up to the agreement?

It should be clear to both you and the subcontractor what happens if the subcontractor either doesn't meet the standards set by the agreement or can’t adhere to the construction timeline. A conditional payment is one way to do this, withholding part of the final payment until the work is completed to your satisfaction.

However, this may create financial issues for the subcontractor and therefore bad blood between you and the subcontractor, so consider carefully before including this clause.

4. Who is responsible for materials?

Sometimes, a general contractor may place the onus on the subcontractor to order the materials, which obviously affects the price of the contract.

This creates an additional layer of risk for you in terms of making sure the project gets done on time because someone else is in complete control of one aspect of your project, and you can't simply have another subcontractor come in and do the work with your own materials if things go awry.

However, you may save money by negotiating a discount on the materials with the subcontractor and forcing them to worry about negotiating a good price with a supplier. Having a good relationship with a subcontractor and knowing what they can handle will help you decide which option to choose.

5. Can I terminate the subcontractor for any reason?

Agreements that limit the general contractor to fire the subcontractor for specified reasons may constrain a construction manager struggling to get a project done on time and dealing with an underperforming subcontractor.

By putting a clause in the contract allowing the general contractor to dismiss the subcontractor for any reason, you will have more control over the project. However, you likely will not get this clause into the contract unless you also agree to pay for labor and materials contributed up to the point of termination.

6. Do I own materials and equipment left behind by the subcontractor?

If you terminate the subcontractor, the agreement should stipulate who owns any materials or equipment left at the site. It's wise to include a clause stipulating that these materials or tools belong to you.

That way, a replacement subcontractor can immediately pick up where the previous subcontractor left off, reducing a costly delay. You will be expected to compensate the previous subcontractor if it was their responsibility to order the materials and equipment, however.

Subcontractor agreement template you can use to hire subcontractors

Always consult with a lawyer before drawing up a subcontractor agreement. Everything in this article is for informational purposes only and does not constitute legal advice. However, you can take advantage of online templates to get started before you have a lawyer finalize things.

For example, this simple subcontractor agreement template lays out the parties, a description of the services provided, a list of subcontractor responsibilities, and the location. The template is best suited for companies subcontracting out simple jobs that can be described in just a few lines of text.

Here's an example of a more detailed subcontractor agreement template, which goes into definitions, task orders, term, compensation, invoices, change orders, intellectual property rights, and many other aspects. This template is useful for more complex jobs.

Manage your subcontractor relationships with software

Construction management software will help you handle your relationships with subcontractors. You can use it to keep a contact list of subcontractors and score them based on their performance.

The software typically has document management tools that allow you to keep track of every contract agreement for construction work. Software will also help you perform other tasks, like construction planning and scheduling, organizing bids, managing construction workflow, and handling your budget.