Managing a construction project can be a difficult task. Most people believe that a construction project is controlled and monitored by only two parties—the project owner or the property owners. However, numerous other stakeholders, including suppliers, laborers, engineers, contractors, and subcontractors, play a significant role.
For most construction projects, the property owners and main contractors appoint various third-party contractors or subcontractors who work on their behalf on the various sites or phases of the project. In this situation, a subcontractor agreement is created.
If you’ve previously worked with subcontractors or you’re starting a project where you’ll require various subcontractors, you’ll need to know how agreements work.
In a nutshell, contractor agreements include all the details needed for a subcontractor to carry out their work. Simply put, it acts as a contractual agreement between the two parties. Keep reading to learn more about what a subcontractor agreement is.
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What is a subcontractor agreement?
A subcontractor agreement is a legal agreement between a general contractor or project owner and various subcontractors on a construction project. This contract defines the terms and conditions of a job within a project that must be completed. Subcontractor agreements include project specifics, payment terms, communication protocols, and additional details.
A subcontractor agreement explains exact details, describing the pieces of equipment and materials that the contractor and subcontractor will supply.
These agreements must be fair for both parties. It’s essential that you read the terms and conditions carefully to prevent any unnecessary or unfair risk.
How does a subcontractor agreement work?
The terms and conditions mentioned in the subcontractor agreement are very different from the main construction contract.
Whenever a general contractor takes on construction work, they may not have the necessary knowledge, license, or insurance to complete the entire project. Therefore, they’ll need to hire different subcontractors to complete specific parts of the project.
A general contractor who specializes in making designs for buildings might hire a subcontractor to focus on the electrical wiring of the entire building.
A subcontractor agreement ensures that each part of the construction project is monitored and handled by an expert in that field. Using a subcontractor agreement, the general contractor can tap into the expertise of other companies. The project can be completed up to the standard requirements while ensuring that the main client receives the best work.
Key factors of a subcontractor agreement
If you’ve won a subcontractor bid, you must ensure all the necessary details of the job are correctly mentioned in the contract. Here’s the list of the crucial things a subcontractor agreement must cover.
1. Payment terms
Payment schedules are the first things you need to clarify in your subcontractor agreement, as it ensures that everyone is paid on time and according to plan.
2. Subcontractor, contractor, and client details
An essential part of the subcontractor agreement involves the names and contact details of all parties. Ensure that all information is correct.
3. Scope of work
A statement of work regarding what type of work is being contracted, any expectations from the GC or the client, and how long the project will take to complete must be included in the agreement. Additionally, information on what to do if there are changes in the project or scope of work, such as change orders, should also be included.
4. Termination details
A separate section in the agreement should include scenarios detailing when the GC can terminate the contract. Some other grounds for termination might consist of the behavior of the subcontractor, willingness to complete the project, and their ability to meet project deadlines. The termination clause must include information about any notice that might be required and how termination will affect the contract’s payment terms.
5. Change orders
Unexpected circumstances are not uncommon in construction projects. Therefore, if something does not go as planned, the agreement must include procedures that will help resolve issues quickly and effectively.
6. Dispute resolution
Legal disputes can arise at any time. Information on the steps that should be taken during such an event must be mentioned in the subcontractor agreement. It should also include an arbitration clause, indemnification clause, and dispute resolution clause.
7. Insurance license and registration
Contractors must be fully insured and have all the licenses required in their field to legally take part in a construction job. So license details and applicable insurance documents need to be included and confirmed in the subcontractor agreement.
Red flags in a subcontractor agreement
Subcontractors taking part in a project face different types of challenges in terms of the contract and payments for the project due to their position in the construction payment chain.
To get their payment for the project, the funds need to flow from the lender to the owner and then through the general contractor and some additional contractors. If you’re a subcontractor, you should note any red flag provisions on the contract before signing.
Here are some red flags you’ll need to look out for:
- No lien clauses
- Contingent payment clauses like ‘pay-if-paid’ and ‘pay-when-paid’ terms and conditions
- Subordination clauses
Remember that a subcontractor agreement does not necessarily need to be biased or unfair to any party on the project. The contract must be simple, easy to understand, and straightforward, making situations much simpler. So, it’s always advised that you check the agreement carefully before signing it to prevent any disputes in the future.