A subcontractor agreement is a document outlining the cooperation terms between an independent contractor and a subcontractor. In other words, this is the agreement between a general contractor hired directly by the employer or customer and a third party hired by this contractor. A subcontractor agreement is often used when a general contractor needs help with specific types of work. Therefore, it is the contractor who hires and pays subcontractors.
The terms “subcontractor” and “independent contractor” are often used interchangeably, but there is a difference between hiring either of them. That’s why before signing a subcontractor agreement form, you have to be sure that you understand all the details and requirements. As the hiring contractor, you are encouraged to use our free subcontractor agreement template along with our guide and step-by-step instructions. That’s how you will ensure that you have a high-quality document on your hand and that your project will be completed in time.
A subcontractor is a specialist who has particular expertise in the field of interest. They are hired by contractors who need some help in performing their duties. The most common services that require hiring subcontractors are:
Let’s take an example. As the contractor, you may agree with the client that you’ll complete the construction project within two years. You have a team of designers and construction workers, but you don’t have the specialists to perform the wiring or plumbing works. That’s where you need to find electricians and plumbers to subcontract the work.
Every hired subcontractor is expected to subordinate to the general project. Thus, the subcontractor agreement cannot continue longer than the general contractor agreement. Otherwise, the hiring contractor will be responsible for not completing the project in time.
Note that a subcontractor agreement should not describe the general project details specified in the prime agreement by the client. Instead, it should narrowly outline the subcontractor’s duties and responsibilities.
There is a big difference between hiring an employee and a subcontractor, such as the following:
As we said earlier, people often use these terms and related legal documents interchangeably. They do have a lot in common since these workers are self-employed and pay their taxes independently. However, you should consider the following differences between independent contractors and subcontractors:
A subcontractor agreement form is a binding written agreement that helps establish effective working relationships between an independent contractor and subcontractor. These legal documents formalize the expectations of both parties and ensure that the project will be completed as specified. Each subcontract agreement should contain the following information.
Parties Involved. Not only the contractor and subcontractor must be identified in the contract. You also need to specify the employer or client who has concluded the general contractor’s agreement.
Dates. The effective date of the contract must be indicated. You also need to state when the work will commence and end.
Prime Agreement. You have to specify the details of the original agreement between the general contractor and the client, including its name and date.
Description of the Services. The scope of the project must be clearly outlined. You need to describe the services the subcontractor will provide and, if applicable, which are excluded from the scope of work.
Subcontractor Responsibilities. The responsibilities of the subcontractor should be described in the document. The subcontractor can be responsible for bringing their own tools and equipment, labor (including agents and employees), materials, products, and goods.
Term. The contract should specify the duration of the working relationship. You can state that the contract will be on a monthly basis and may be terminated by either party with written notice in advance. The agreement can end on a specific date or automatically when the services are completed.
Actual Cost. The subcontractor agreement must contain the amount paid to the subcontractor for their services. Subcontractors usually receive payments per hour. However, it can also be a fixed or completion fee paid at the end of the contract. The contractors may also decide to pay for time and materials.
Retainer. It’s necessary to indicate whether the subcontractor will receive a retainer payment. A retainer is the amount of money paid before the commencement of services to ensure that the subcontractor will be available to provide services within the specified time frame.
Payment Terms. The agreement must define how the subcontractor will receive payments. The independent contractor can pay the subcontractor daily, weekly, or monthly. The payment can be provided in full upon completion of the services or when invoiced to the subcontractor.
Confidentiality Clause. The agreement has to clearly state that the subcontractor is not allowed to share confidential or proprietary information with third parties. If necessary, it’s possible to prepare a separate non-disclosure agreement and attach it to the contract.
Indemnity Clause. Another essential detail to specify in the agreement is that the subcontractor will indemnify and hold the contractor harmless for any loss, claim, demand, or liability resulting from the services unless they are caused by the fault or negligence of the contractor.
As the general contractor, you may have to delegate some of your tasks and responsibilities due to a lack of workforce or skills. That’s when you need to hire a subcontractor to do the job for you. A subcontract agreement formalizes the working relationships between the parties and ensures that they get legal protection. In order to hire a subcontractor that ideally fits your needs, you are encouraged to follow the next steps.
Step 1. Outline the necessary services
The first step is defining and clearly outlining the work you need to do. It will help you understand what kind of services the subcontractor must perform and what expertise they must have. Suppose a company hires a contractor to bake a cake for a corporate party. The cake has a specific design that requires certain equipment to be created, which the general contractor does not have. So, the contractor will need the help of a cake designer specializing in decorating cakes using this specific equipment. The necessary services will be later outlined in the subcontractor agreement.
Step 2. Find the subcontractor
When you know what type of work you need to be done within the project, you can start looking for subcontractors with the necessary expertise. When looking for a specialist, you can ask for recommendations from your colleagues or search online, for example, at industrial websites or job boards. If you have the subcontractor in mind, you can address them directly to understand if they would like to work with you.
Step 3. Arrange a bidding process
As a rule, you will have to provide a bidding process if you have several candidates interested in the project. This is when the contractor sends the required scope of services to the potential subcontractors, and the subcontractors submit their proposals with the price for such services. The best combination of cost and quality usually wins. It’s recommended to start the process as soon as possible since it can take months to find the appropriate subcontractor. Note that bidding is required for the public sector, while private entities can choose to address a pre-approved subcontractor.
Step 4. Create and sign the agreement
When you find a suitable candidate, you can start creating the subcontractor contract. The scope of work and compensation are likely to be arranged before this step. But you will still have to negotiate other terms, such as payment terms, subcontractor’s responsibilities, insurance terms, and liquidated damages. The parties can sign the agreement if all terms and provisions are set. Note that the contractor must require the subcontractor to file Form W-9 to collect their contact details and tax number.
Now that you know all the essential information about a subcontractor agreement, how to use it, and how it is different from other employment relationships, you can create your document. You can look for some subcontractor agreement templates online to prepare the document yourself and avoid legal fees. With our free subcontractor agreement template, it should be a straightforward process. You are recommended to follow the next steps to prepare the document.
Step 1. Identify the date and parties
First, you need to indicate the effective date and identify the parties. The effective date is when the agreement is signed and comes into effect. After indicating the date, you are expected to provide the names of the contractor and subcontractor.
Step 2. Specify the original agreement
As a subcontractor is considered a third party in the working relationships, it’s crucial to specify the details of the prime agreement between the contractor and the client. You will have to provide the agreement’s name and the date and indicate the name of the prime employer. Note that the subcontractor agreement is subject to and subordinate to the prime agreement.
Step 3. Describe the services
The next step is to describe the subcontractor’s work. You need to be as specific as possible. It’s also possible to describe what services are excluded from the subcontractor’s scope of work. It will make the agreement more comprehensive and accurate.
Step 4. Identify the commencement and completion
It’s required to specify when the subcontractor begins and ends their work. A subcontractor contract needs to outline the period during which the contractor expects all work to be completed.
Step 5. Indicate the responsibilities
Next, you need to indicate the subcontractor’s responsibilities during the project, including providing the tools, equipment, materials, products, and goods, as well as their own agents and employees.
Step 6. Specify the term
The following step is to specify the term of your subcontractor agreement. You can choose your agreement to be monthly. In this case, it will be possible to terminate the contract with an advance written notice to the other party. Also, you can state that the agreement will end on a specific date or after the completion of services.
Step 7. Define the compensation
This section needs to define how much you will pay the subcontractor for their services. You can choose between an hourly rate or a fixed fee. It’s also possible to pay for time and materials or provide a fee after successful completion of the work. If applicable, you can also specify a retainer payment paid to the subcontractor before the commencement of the services.
Step 8. Add payment terms
After you’ve specified the compensation, you must provide a payment schedule. The compensation can be paid daily, weekly, or bi-weekly. You can also select the option to make incremental payments when invoiced by the subcontractor. In this case, you need to specify the period during which the money must be paid after receiving the invoice. It’s possible to choose the payment in full upon completing the services. There is also the option to withhold a specific percentage or price from the final payment upon completion of the services and all improvements and corrections required by the contractor (if any).
Step 9. Indicate the liquidated damages
In this section of the subcontractor agreement, you need to indicate whether the agreement will contain the liquidated damages clause. If yes, it’s necessary to specify the subcontractor’s amount per day for each day of delay. Such an amount may be withheld and offset from any payment due to the subcontractor.
Step 10. Identify the insurance clause
The subcontractor agreement should specify whether the subcontractor will have to provide the contractor with appropriate certificates of insurance coverage or not. If yes, specific insurance requirements must be identified, such as general liability insurance, excess liability insurance, vehicle liability insurance, or worker’s compensation.
Step 11. Add delegation of duties
Subcontractors can delegate a portion of their duties and hire other subcontractors. That’s why the subcontract agreement should contain the specification of whether the subcontractor will be allowed to delegate a part of their duties under this agreement with or without the contractor’s approval.
Step 12. Provide additional terms
If you need to include additional details in your agreement regarding payment method, tax deductions, intellectual property, or dispute resolution, you can do it in this section. Note that this step is optional.
Step 13. Specify the governing law
It’s necessary to specify the state laws that will govern the agreement’s provisions.
Step 14. Indicate the contact details
The contact information of each party, such as mailing address and phone number, needs to be included in the document. These details are crucial for sending notices or providing other communication between the parties.
Step 15. Sign the agreement
The final step is to sign the subcontractor agreement. Both the contractor and subcontractor must sign the subcontract agreement and indicate the dates of signatures.
