Subcontractor Agreement Explained | Definition, Examples, Differences
If you ever work in the capacity of a subcontractor, then it is essential that you know exactly what sort of contractual situation you are entering into.
Most main contractors who appoint third parties to carry out work on their behalf will use a straightforward subcontractor agreement which outlines the work that is expected to be carried out. These documents operate as a contractual agreement between both parties.
In the event that something goes wrong, disputes will often only be settled according to the terms of the subcontractor agreement that has been put in place. Read on to find out more about subcontractor agreements. What should go in them, what should not and why they are important to get right.
Topics in this article:
- What Is a Subcontractor Agreement?
- What Should Be in a Subcontractor Agreement?
- Should Subcontractors Insist On a Written Agreement?
- What to Look Out for in a Subcontractor Agreement
- Disputes Between Contractors and Subcontractors – Who Has Responsibility?
- Sole Traders, Self-Employed People and Subcontracting – Construction and Other Sectors
- Limited Liability and Subcontractor Agreements
- Ending Subcontractor Agreements Early
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What Is a Subcontractor Agreement?
A subcontractor agreement is the equivalent of a contract of employment between an employer and an employee. The big difference is that the former will have a limited scope of works that the subcontractor is responsible for both in terms of time as well as job functions. The idea behind such an agreement is to detail what work is being subcontracted as well as what is not.
It should also list any materials that the subcontractor will be expected to supply and those which will be provided by the main contractor. For example, a subcontractor agreement between a training firm and an outsourced trainer may detail when and where the training is to take place. It would also outline how many people will be trained. But also who is responsible for providing the training room and the other training materials that might be needed.
In the case of the construction industry, a main contractor may subcontract electrical installation works to a firm of electricians. A subcontractor agreement between these two parties would usually include how many sockets and light fittings are to be installed and where.
It may also specify that cabling is to be supplied by the subcontracted fir. But that fittings will be supplied from the main contractor’s stock. The idea is to reduce the amount of wastage due to duplication of work while ensuring that both parties have a clear idea of the services that will be rendered.
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What Should Be in a Subcontractor Agreement?
The details of what should go into a subcontractor agreement will vary from sector to sector. Some people who subcontract to just one main contractor for individual jobs may see the same subcontractor agreement time after time with barely any changes made to it. Others will often see a highly tailored document that details all the specifics of a job.
This will often come down to the type of contract the main contractor has with the end client. The more detail that is in that agreement, then – generally speaking – the greater the level of specification will appear in the subcontractor agreement.
What are the minimums of a subcontractor agreement?
That said, the minimum you should expect to see in a typical subcontractor agreement will include the scope of the services to be provided. There will also usually be a clause detailing where and when they are to be rendered. In many cases, there will also be a clause that says the subcontractor must take reasonable steps to deal with any day-to-day alterations in the plan that may occur.
This is often the case with building firms because it puts site foremen in control and affords them some flexibility for sheer practicality. Of course, the agreed price for the service rendered should also feature so that payment disputes do not later ensue. For that matter, payment terms may also be written into the agreement.
Should Subcontractors Insist On a Written Agreement?
Many subcontractors will work with main contractors time and again on much the same basis that they have before. In such circumstances, it can be very tempting to forego the need for any sort of written agreement between the main contractor and their outsourced subcontractors. After all, proceeding on a more relaxed basis often suits both partie. And there are certainly cases where doing so has worked out fine.
However, without a subcontractor agreement that is held in writing, subcontracted firms are placing themselves in a precarious position. Often, they won’t realise they are not properly protected until something goes wrong. A shake of the hands is not the same as a written agreement. The latter which will act as a contract if a dispute ensues.
A written agreement is important for proof
So, the simple answer is that insisting on some form of written agreement is advisable. Even the most sketched out form of subcontractor agreement at least proves that the main contractor has requested works to be carried out and prevents them from denying this down the line.
The more detail that is in a subcontractor agreement, the more definition there is to deal with potential disputes. Especially about what has – and what has not – been included in the scope of works. It should also help to ensure you get paid fully on a timely basis if you work as a subcontractor. No employee should work without a contract of employment and the same principle goes for subcontractors.
What to Look Out for in a Subcontractor Agreement
Subcontractors should always check the contents of any agreement that is put before them before proceeding with works. In cases where the wording of a contract or agreement is unclear, seek professional advice from a legal expert, if necessary. Few subcontractors want to ‘rock the boat’ with main contractors by pulling agreements apar. But it is important to know what you are getting into before you start rendering services.
Of course, outsourced service providers should always check the scope of work. And that the agreed payment terms and price is correct. In addition, agreements of this kind will also often include service level agreements. These tend to cover things like how quickly you will respond to service request. Or how and where you will provide services and the timescale you are expected to finalise your work within.
Why some agreements include liabilities
Some agreements will also include a section on liabilities. This can be important in many areas of work. But it is especially so if you work in the public realm or on third-party sites. If ongoing liabilities are passed onto you for the services you render to the main contractor, then you may well need some professional liability insurance. Architects, product designers and subcontracted IT professionals may all fall into this category.
Public liability may also be an issue worth considering in a subcontractor agreement for plumbers, electricians and so on. Finally, some agreements will be open-ended and have clauses that relate to ending it. Check these for any penalty clauses that may affect you. This might include late or non-payment from the end client to the main contractor, so it is an important aspect to be aware of.
Ending Subcontractor Agreements Early
Most draughts of an agreement relating to subcontracting will specify the manner in which outsourced firms and individuals can end their agreement early. Sometimes, this will be as simple as a written notice period on either side which allows for alternative arrangements to be put in place. Unlike employees, subcontractors will not be able to expect certain benefits like redundancy payments in such cases.
That said, there are sometimes so-called ‘get-out’ clauses that state a subcontractor can quit their agreement early – perhaps to move onto a more lucrative contract – in exchange for a financial penalty. Equally, some agreements include such a clause that means subcontractors will receive a one-off payment. But only if the scope of their works is dramatically altered, such as being brought to an end early.
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Dispute resolution: What you need to know
Some clauses that relate to the ending of agreements between a main and a subcontractor also deal with dispute resolution. In cases like this, it is typical for a 30-day period to be the standard time a subcontractor can expect to be paid for even if they have effectively been immediately dismissed from their role.
IT contractors who work on year-long rolling agreements, for example, will often have this protection but not all do. In the main, ending a subcontractor agreement early usually means doing so in writing so that further disputes about how and when an agreement was ended are avoided by being able to refer to proper documentation.
Limited Liability and Subcontractor Agreements
In the UK and much of Europe, it is the main contractor which is liable for the performance of the service delivery as per the terms of the main contract with the end client. It is important to note that should an appointed subcontractor not deliver services that meet the terms of the main contract, then some subcontractor agreements may include sections that indicate compensation may be liable.
For example, if a main contractor has a contract to build a bespoke luxury yacht, then it may subcontract the design and build of the interior. If so, it is likely to appoint a subcontracted team of designers and installers. In this example, a subcontractor agreement is likely to include a section on the liability for the standard of the interior.
Compensation of a subcontractor
If the end client claims the interior does not meet the specified standard, then he or she may seek compensation from the main contractor. So long as the terms of their subcontractor agreement allow them to do so, the main contractor could be perfectly entitled to reduce this sum from the subcontracted firm’s payment.
It is also worth bearing in mind that a subcontractor’s liability may be limited according to the terms of the agreement. If the principal contractor or another of its subcontractors fails to carry out its obligations, then late or non-payment from the customer may ensue. The limited liability of the subcontractor can sometimes be invoked in such case. This prevents such late payment being passed on to it. The scope of limited liability in a well drawn-up subcontractor agreements flows both ways, helping to protect both parties.
Sole Traders, Self-Employed People and Subcontracting – Construction and Other Sectors
In many cases, main contractors appoint companies to carry out works on their behalf. These might be partnerships or limited liability companies. In such circumstances, the agreements involved operate as commercial contracts between one business and another. However, there are differences involved when it comes to self-employed individuals. These especially concerns tax purposes if they are registered as sole traders.
Freelancers are often considered to be sole traders. And they might provide their services on a piecemeal basis to a main contractor. For example, a freelance trainer might be subcontracted to provide training to an end client on a specific area of expertise while the rest of the training package is provided in-house by the main contractor. In such circumstances, the scope of the works requested should be outlined in the subcontractor agreement.
Rolling subcontractors or subcontractors who work only for one end customer
When it comes to rolling contracts or where a subcontractor works exclusively at one place for one end customer, it gets slightly more nuanced. In the UK, for example, HMRC has specific rule. It differences between who is regarded as a self-employed subcontractor. And who is considered as an employee in all but name.
This will affect whether or not they are liable to IR35 tax coding. Often the determining factor that HMRC will take into consideration is the type cans scope of the subcontractor agreement that is in place. This will affect questions of employment law as well as how National Insurance Contributions (NICs) are calculated. IT professionals working as subcontractors at one office will often need an agreement that reflects their true status.
In the construction sector, things are different, too. Main contractors must make tax deductions from even sole trader subcontractors on their behalf. They also must send them directly to HMRC each month. This is part of what is known as the Construction Industry Scheme (CIS) and it is unique among the various sectors in the UK that make frequent use of subcontracted firms and individuals.
Disputes Between Contractors and Subcontractors – Who Has Responsibility?
Although some subcontractor agreements don’t mention disputes, they will often form the basis for any legal settlement. If one party sues the other following a dispute, then it is what has been included in the agreement that will be cited for a judgement to be made. So long as the clauses in the agreement are, themselves, legally sound, their interpretation will be the determining factor.
In addition, some agreements will have specific clauses that deal with dispute resolution. These might include an agreement to go to an independent arbitration service to resolve a dispute, for example, rather than to seek recourse through a more costly court proceeding.