The Basics of Subcontractor Agreements in Construction

The importance of an effective contract with a subcontractor cannot be overstated. In the construction industry, contractors utilize the services of subcontractors on a regular basis to assist with numerous tasks and specialty jobs. An effective contract with a subcontractor can save contractors a tremendous amount of time, money and frustration. Unfortunately, far too often dealings with subcontractors are handled informally and, as a result, may even end up exposing the contractor to significant liability.

It is imperative that contractors have a written contract with each and every subcontractor they use regardless of how small the services the subcontractor is providing. Certain critical elements must be contained in the contract in order to provide the contractor with maximum protection. The main issues that should be in a subcontractor agreement are licensing, job and payment, timing, and defense and indemnification.

LICENSING

Assume that a contractor is going to hire a subcontractor to handle the installation of a complex electrical system for the client. The contractor needs to make sure that the subcontractor is properly licensed and registered pursuant to state and local laws. The easiest way to do that is to insert a provision into the subcontractor agreement that essentially states that the subcontractor is properly licensed in accordance with all state and local laws and that the subcontractor agrees to defend and indemnify the contractor and others for any damages or legal action arising out of licensing issues. Larger contracting companies may perform a more thorough screening of their subcontractors, which may include licensing and background checks.

In today’s litigious society, it simply is not enough to ask if a subcontractor is properly licensed. The subcontractor must acknowledge that it is licensed, in writing, in order to protect the contractor from liability.

SCOPE OF WORK AND PAYMENT

The job and scope of work that the subcontractor is being hired to perform should be explicitly stated in the subcontract. The scope of work should not be “broad brushed” Instead, it should state, with specificity, the tasks required to be performed by the subcontractor and the due dates, deadlines and other requirements. The more specific the scope of work is, the better.

The same holds true for payment options. The subcontract should explicitly state when the subcontractor will get paid. For example, “subcontractor will receive payment once the electrical system is installed, tested and approved by contractor and all punch list items are completed and signed off on by client or contractor.” Make certain to include in the contract any prepayments already made to the contractor. If the payment agreement consists of multiple payments throughout the course of the job, it is a good idea to include a payment table in the subcontract or as an exhibit or addendum to it.

TIMING

It is very important that the subcontract sets forth all deadlines for the project. It should be as explicit as possible. The subcontract should contain language stating that the subcontractor understands and acknowledges that time is of the essence. It also should include a provision stating that the subcontractor must inform the contractor immediately if delays are anticipated.

DEFENSE AND INDEMNIFICATION

Finally, and perhaps most importantly, the subcontract must include a section addressing defense and indemnification of the contractor by the subcontractor. Essentially, the paragraph should state at the very least, “subcontractor, agrees to defend and indemnify the contractor (and others if applicable) against any claims, lawsuits and damages arising out of the subcontractor’s negligence or intentional acts.” It also should include language concerning the subcontractor’s agreement to defend and indemnify the contractor for any misrepresentations, whether made knowingly or unknowingly, including misrepresentations of licensing, corporate status and other relevant issues.

A contractor can avoid liability and other unpleasant situations with a well-thought-out subcontractor agreement. Contractors should never be hesitant to tell a subcontractor that refuses to sign the subcontract that their services cannot be utilized. Finally, it is always a good idea to have all contracts, including subcontracts, reviewed by an attorney.

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