Both small and large projects involve many contractors working on the project to complete it within a specified time frame, with specific costs levels and deliverables defined. Usually, there is a main contractor who is responsible for the complete project managing deliverables, costs, and timelines. The main contractor hires subcontractors to help complete these projects. They may provide additional manpower or special skills needed to complete the project that the main contractor does not have.
Subcontractor agreements are used between these parties to define how much will be paid, what they will do, and when the work or activity will be completed. Subcontractor agreements are used in many industries. For example, general contractors manage the construction of a house; however, they hire many subcontractors to complete various aspects of the work. E.g., an electrical subcontractor to complete all of the electrical wiring, a drywall contractor to install all of the drywall and complete the taping and mudding, and so on.
This post will cover many of the details of why you need a subcontractor agreement, how to hire a subcontractor etc.
What is a Subcontractor Agreement?
A subcontractor agreement is an agreement between the general contractor and a subcontractor. The agreement specifies the role the subcontractor will fill, how much they will be paid, what they will deliver, and by when. A good subcontractor agreement also covers liabilities, insurance, and responsibilities of the subcontractor and any other conditions pertinent to the industry, e.g., the subcontractor provides their insurance coverage, pays their taxes, and so on.
The agreement is a legally binding document and should be assembled by a professional using clear, concise, and legal language that is binding on both parties with specified ramifications if either party is in breach of the agreement. The subcontractor must also satisfy the IRS that they are allowed to work as a subcontractor – Form IRS Form W-9
What Is a Subcontractor Agreement Template?
There are subcontractor agreement templates available online which can assist in preparing an agreement if you are unable or do not want to use a legal firm to draw up an agreement for you. The cost is considerably less and contains all of the necessary areas that you are likely to need. You may need to add special conditions that are specific to your industry or the project that the subcontractor is being hired to help with.
Using a subcontractor agreement template is the next best thing compared to an agreement prepared by a professional legal team. The agreement saves both party’s cost and provides legal protection as well.
A subcontractor, from the perspective of the IRS, is considered to be a self-employed independent contractor, tracks all of their expenses and income, pay all taxes (IRS, State, City, and County), insurance, supplies, and training.
Subcontractor Agreement Templates & Examples
Essential Elements of a Subcontractor Agreement Template
The general contractor usually has a master contract agreement with their client. One of the clauses in the agreement should address the ability of the general contractor to subcontract some of the work to subcontractors while retaining responsibility and accountability for all aspects of the work. This is an important element for all general contractors to confirm before entering into subcontract agreements.
Clauses are included in the subcontractor agreement to avoid confusion and confirm a clear understanding of the agreement and terms.
Essential elements of the subcontractor agreement template should include the following:
- Project Scope
- Deliverable timing
- Billing and payment
- Subcontractor independence
- Assignment of ownership
- Accidental damages
- Restrictions and permissions
Project Scope – should define what is included and not included in the work and the deliverables associated with the work to be completed. This section should also describe the process to handle disagreement if the deliverables or obligations are not met, need changes, or alterations. The work may also be broken down into several deliverables so that the activity can be evaluated during the project rather than at the end. The job may also require multiple deliverables to accommodate other portions of the project and fit into deliverables included in the master agreement.
Deliverable timing – each deliverable and the completion should have a date for delivery and completion of the deliverable. Time should be allowed for review and changes or adjustments to ensure that the timeline in the master agreement is not in jeopardy. In some cases, penalties may be assigned for later delivery.
Billing and payment – can be handled in multiple ways. Payments might be due upon completion of a deliverable and acceptance by the general contractor. Is the billing by the hour, by the week, or a fixed price contract based on deliverables? Many subcontractors include weekly billing leading up to a contract deliverable with the final payment due on delivery. This helps to manage risk and cash flow for all parties. Will the final payment be held until the completion of the milestone and acceptance by the client?
Subcontractor independence – for tax purposes, the subcontractor should be viewed by the IRS as independent and not an employee. Clauses in the agreement specify that the subcontractor is responsible for:
- IRS taxes and self-employment taxes
- Preparation of a W9 form
- Preparation of a 1099 form
- Non-participation in profit sharing, pension, paid holidays, paid vacation
- Non-payment of social security benefits by the general contractor
- A subcontractor must provide their health insurance coverage
Non-disclosure – competitive information needs to be protected. Sharing of information with subcontractors should be protected by both the master contract between the general contractor and the client as well as with subcontractors. Consequences of sharing in violation of the contract are also covered.
Non-compete – the subcontractor cannot compete with the general contractor, steal clients or employees, or offer lower bids to take clients away from the general contractor. Consequences are also defined.
Assignment of ownership – all work performed by the subcontractor is owned by the general contractor and is usually also passed over to the client via the master contract. Future income from the sales or royalties is not passed to the subcontractor.
Accidental damages – covers who is responsible for obtaining insurance to cover errors, mistakes, or damage caused by the subcontractor.
Restrictions and permissions – define any restrictions and permissions necessary for the general contractor to retain control over the total project.
Indemnity – can be a complex legal issue since various states have different rules for various situations. Both contractors and subcontractors should make themselves aware of these requirements. Once the work is accepted, the general contractor may indemnify the subcontractor from any losses unless there was negligence by the subcontractor of some kind involved.
Warranties – covers any promises made by either party for the work completed. Typical terms may cover:
- Quality of the work
- The subcontractor has the resources to complete the job, including tools, knowledge, and skills
- The subcontractor will meet the specifications of the project
- Guarantee to meet and repair project defects
- Professional behavior on the job
- Promise to avoid plagiarism, copying work of others, or infringing on the work of others.
How to Write a Subcontractor Agreement?
Writing a subcontractor agreement can be challenging; however, downloading a template that is suitable for your state and your industry can save a lot of time. For specialized agreements, you may need to hire legal counsel to ensure that all of the appropriate legal wording is included.
Once you have chosen the agreement template that meets your needs, download it to your computer, save it as a template in a location set up for this project. Now resave it with a new name reflecting the contract agreement you are about to prepare. You can always reopen the template file for future agreements that may be needed.
Begin filling out the subcontractor agreement with the appropriate information in the designated locations on the agreement. This includes:
- Identify the parties, date, addresses of the client, the contractor, and the subcontractor
- Add the services the subcontractor will be providing, including deliverables, labor, materials, equipment, travel, and other items as appropriate to the subcontract.
- Include job details – primary location, start date, and completion date
- Payment schedule including dates tied to deliverables, or hourly rates or on completion
- The payment method should include how the subcontractor will be paid, e.g., weekly, monthly, on completion of a deliverable, within a specified number of days from completion of a deliverable or submission of an invoice
- Review and add boilerplate for the protection of the client, contractor, and subcontractor
- Right to subcontract
- Assignment of finished products
- Insurance coverage and type
- Resolution of the disputes process
- Termination of the contract
- Governing law
- Legal definitions
- Signatures of both parties and witnesses to the signatures
Who Needs a Subcontractor Agreement Form?
Any party performing work of some kind for another party benefits from a subcontractor agreement. The agreement covers the scope of the work, how much it will cost, and when it will be delivered. The agreement also includes a variety of legal protections for both parties should there be a disagreement about the work or the terms that are understood by both parties. Many different groups can benefit from subcontractor agreements, including:
- Commercial property owners
- Construction contractors
- Entrepreneurs and sole proprietors
- Small, medium, and large businesses
How to Hire a Subcontractor (Steps-by-Step)
Hiring a subcontractor is common in many industries. Each subcontract needs to be customized for the job in hand and the situation. Using a template can speed up the process the first time, and subsequent subcontracts can be reused many times with the appropriate changes reflecting the latest work requirement.
- Define the Scope of Work
- Find Subcontractors
- Ask for Bids
- Prepare the Agreement
- Work Begins
- Assess Completed Work
Define the Scope of Work – one of the most important elements of any contract, define the work that needs to be completed, the timeline, and deliverables. Be as specific as you can to avoid assumptions that may cause disagreement at a later time.
Find Subcontractors – talk to your friends, ask around, advertise online using one of the social media systems, talk to contractors you have used in the past. Contact them and determine if they are interested in the work and if they can accommodate the timeframe you need for your work to be completed.
Ask for Bids – ask subcontractors for bids on the work proposed in the scope section. This may take some time, depending on the size of the job and the availability of subcontractors. Define your expectations in terms of what you want the bids to include, e.g., cost, timeframe, materials provided, warranty, and other pertinent details based on the specific project.
Prepare the Agreement – write the agreement and negotiate the final terms with the chosen subcontractor. The basic items to be included are – payment, materials, equipment, travel, completion dates, insurance, and warranty
Work Begins – the subcontractor begins the work. If deliverables are scheduled during the contract, these can be monitored and delivered as per the timeline agreed to in the contract.
Assess Completed Work – all work should be assessed regarding the quality of the work and whether it meets the terms of the agreement. Changes may be requested to fully meet the terms of the contract.
Payment – once the work is completed, has been assessed, and meets requirements, payment can be initiated to the subcontractor. Payment may be made in full at the end of the contract, or there may be progress payments tied to deliverables and work performed.
The following are some of the frequently asked questions related to subcontractor agreements and subcontracting in general.
What is the difference between subcontractor and contractor?
The contractor is usually the main contractor holding a contract with the client and is responsible for all deliverables associated with the contract. Often the contractor does not have all of the resources needed to satisfy the client and will hire either additional employees or offer some of the work to subcontractors. They will be responsible for delivering a portion of the work to the contractor, who in turn combines other activities to complete the job for the client. For example, a home builder will subcontract the electrical, plumbing, roofing, framing to subcontractors and manage the timing and other portions of the job to deliver a finished home to the client.
Subcontractors are responsible for paying their taxes, benefits and providing their equipment along with any training they might need to stay abreast of industry trends.
Can I write my independent contractor agreement?
You can prepare your independent contractor agreement; however, these are complex documents covering many legal issues that, when covered properly, provide legal protection to both parties if there are disagreements during the project.
The subcontractor agreement template includes important clauses that can protect both parties and makes good business sense.
Does a subcontractor need a contract?
Without a contract, a subcontractor has no protection from a legal and business perspective. Disagreements about the work, the cost, timeframes, etc., may cause payment to be withheld. Resolving the issues and disagreements are very difficult, especially if there is no documentation supporting the positions of the contractor and the subcontractor.
Can a subcontractor work for one company?
Subcontractors can work for one company; however, they should take the necessary steps to ensure they are not viewed as employees by the tax authorities. The IRS could view the contractor as an employee if:
- There is no subcontract
- The employer pays the subcontractors taxes, benefits, and insurance
- Provides the equipment and supplies
- Provides the subcontractor with training
An independent contractor working for one company should ensure there is a clear distinction between the company and themselves. Complete a subcontract, showing different addresses, with defined deliverables, payment schedules, etc. The subcontractor must pay their taxes, benefits, insurance, equipment, supplies and provide for their training.
The subcontractor agreement can be a complex document, covering the obligations required by the contractor of the subcontractor. Using a template is one method of ensuring that protections are in place for both parties. The subcontract also covers basic communication about what will be delivered, by when, and for how much while meeting defined quality standards in the industry. Without this understanding, there can be room for disagreements leading to the withholding of payments and court filings. Preparing a subcontractor agreement makes excellent business sense at all levels – homeowners, small, medium, and large companies, entrepreneurs, etc.
Always include the scope of the work, deliverables required, dates for the work to be delivered, the amount to be paid for the work, when the funds will be paid, and warranty information. These are the basic items. State laws may require additional clauses to cover dispute resolution, insurance, liability, consumer protection, etc.
Doing your subcontractor agreement takes time and could leave you and your company exposed from a business and personal perspective. Hiring legal counsel to prepare a subcontractor agreement may be too expensive for many. Using a subcontractor agreement template for your industry can save a great deal of time, reduce your costs, and provide some legal protection for both parties.