How to Generate a Successful Subcontractor Agreement

Second tier and first subcontractors shaking hands after signing a subcontractor agreement

If you work in an industry that requires you to bid on and win projects, then you know that contractor agreements are vital to getting paid the right amount on time. However, in the construction industry, working contracts between primes and subs can quickly get confusing. To ensure everyone gets paid properly, it’s crucial to understand the varied relationships between contractors and subs, as well as how a subcontractor agreement works.

Contractors, Subcontractors, and Sub-Subs

Before you examine written contracts, it’s a good idea to have a firm understanding of your tier in the contractor/subcontractor chain. While the property owner or project manager ultimately covers the cost of the project and supplies, that doesn’t mean they’ll pay you directly. The person who pays for your products or services depends on who awarded you the project (your position in the chain). Here’s how the chain works:

General or Prime Contractors

Any construction project begins when a property owner decides to alter a property and hires an architect to create a plan for the project. The property owner and architect hire a general contractor (also referred to as the primary or prime contractor) to take the steps required to complete the entire project. This usually requires the general contractor to hire subcontractors and suppliers to complete parts of the job.

First-Tier Subcontractors

A prime contractor who wins a project may have a company with multiple employees. However, there may be parts of the contract that the prime contractor’s employees won’t complete. So instead, the prime hires subcontractors to complete these portions of the project. Subcontractors hired by the primary contractor are first-tier subs who will be paid by the prime contractor.

Second-Tier Subcontractors

Similar to the prime contractor, the company that works as a first-tier contractor may not complete every step of the work included in their contract. For instance, they might hire a painting crew to take care of finishing details. When first-tier subs hire additional subcontractors, these second-tier subs become ’employees’ of the first-tier company. First-tier subs then pay second-tier subs from the funds received as listed in their contract with the prime.

Third- and Fourth-Tier Subcontractors

Yes, the subcontractor chain can keep extending. Many construction projects span months, and a variety of teams carry out different the tasks in the project. It’s important to note that each tier of subcontractor should have a contract with the contractor who hired them for the job. With each contract, money goes down the line. If a third-tier sub goes to the prime contractor to discuss a late or missing payment, then money gets lost; the payment has already been awarded to the first and/or second tier.

How the Chain Affects a Subcontractor Agreement

Two subcontractors identifying their separate tasks in a project

It’s no surprise that you should know who will write your paychecks. As a subcontractor, the contractor or subcontractor who hired you (or awarded you a contract you bid on) will pay you. As a paying prime or subcontractor with next-tier subs, it’s important to understand the terms of your own payment contract and clearly outline the contract for your subs. Whether you’re preparing contracts for your subs or carefully examining your own contract, it’s vital to explore these details.

Scope of Work

This is the part of the subcontractor agreement that describes the amount of work that will be completed. The scope of work described in the prime contract will cover the entire scope of the project. However, a contract between the prime and subs or first-tier and second-tier subs will be limited to the scope of work required by that specific contractor for an agreed-upon price. The scope of the subcontractor agreement should include a clear description of the expected work and also have an expected start and finish date.

Payment Details

In an industry where slow payments happen frequently, how, when, and how much money you receive is an important part of your contract. So payment details in any contract may include details for payment concerning:

  • Labor
  • Materials
  • Insurance
  • Travel and miscellaneous costs
  • Conditional payment: A clause in the subcontractor agreement that states subcontractors will be paid if or when the contractor above them is paid. 

Dispute Resolution

When project details and payments must be passed down a chain of command, disputes can occur. While you hope to avoid these disputes with a series of clearly outlined contracts that follow the same details, it’s important to have a plan if disagreements arise. Dispute resolution for a subcontractor agreement may include arbitration, mediation, or litigation.

Indemnity or Defense Clauses

Clauses in your contract that refer to injury and who is responsible are called indemnity clauses. These clauses can shift blame for injury down the contractor/subcontractor chain. Indemnity clauses may be full, partial, or limited. So it’s crucial that you understand the terms of your indemnity clause and negotiate a fair contract that avoids leaving you responsible for the negligence of other contractors or the property owner.

Termination Terms

Contractors and subcontractors who work under contract aren’t in the same position as employees with a traditional job. In many cases, contractors expect payment upon completion of work. These agreements can make termination a messy business. Every contract should discuss details of termination if necessary. You can categorize the termination clause as:

  • No right to terminate
  • Contractor has the option to terminate
  • Subcontractor has the option to terminate

Insurance, Bonds, and Liens

  • Insurance is essential in the construction industry. Your contract will provide important details about insurance provisions and your insurance requirements.
  • Some states require subcontractor performance bonds. These ensure the bonded party will complete the job on time. Your contract will state when you must have a performance bond to work on a specific job.
  • Liens are a way to help subcontractors avoid missed payments. When a subcontractor doesn’t receive payment for completed work, they can file a lien against the owner’s property. Each state has laws protecting the rights of subcontractors to receive payment. Your contract should outline these rights.

The terms of your subcontractor agreement are one part of successful relationships between primes and subs. Learn how Flashtract can help you use additional tools to improve these relationships throughout every step of each project your construction company accepts.

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