Do I Need a Contract to Engage Subcontractors?

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Table of Contents

• When to Subcontract
• Your Responsibility
• Other Common Subcontractor Agreement Clauses
• Disputes
• Key Takeaways

As a contractor, you may choose to engage a subcontractor when you do not have the resources or skills to complete the work you have been contracted to perform. You may assume that if there is already a contract or agreement in place between you and your client, you may not need another contract between you and any subcontractor you engage. However, it is crucial to have a written subcontractor agreement in place that mirrors your obligations under the existing agreement with your client to reduce your risk. For example, you must be clear on who is responsible for rectifying any issues that may arise from the subcontractor’s work. This article will highlight why it is essential that you have a subcontractor agreement and common clauses that will help minimise your responsibility for subcontractors’ work.

When to Subcontract

Businesses will engage contractors for a range of specialised services, such as: 

• building; 
• catering; 
• IT maintenance; and 
• marketing. 

Due to the complexity of this work, some contractors will choose to contract out work to more specialised providers. This is known as subcontracting. Deciding whether to subcontract work will depend on several factors. These include whether you have the:

• human resources to complete the work; and
• necessary skills required to perform the job.

For example, builders often subcontract work to an electrician to perform the necessary wiring and to a plumber to install the required piping. In the IT space, companies may subcontract helpdesk and support services to a third-party IT service provider.

Your Responsibility

First, ensure that you have the right to subcontract the work. This should be clearly outlined under your existing contractor agreement with the client. You may also be required to seek written consent from your client before you subcontract any work. If you are allowed to subcontract the job, you will generally be held responsible for any: 

• defects in the subcontractors’ performance; or 
• other violations of your contractor agreement. 

As you have engaged the subcontractor to act on your behalf, you will generally be held accountable for their actions.

However, it is possible to negotiate with subcontractors to ensure that you are not held accountable for their work. You can achieve this by making the subcontractor responsible to the client for their own functions. Therefore, your contract can make the subcontractor responsible for:

• maintaining the project design;
• completing their part of the project by a specified date; and
• the quality and standard of their work.

You should also pass down certain rights to subcontractors, including:

• entitlements for extension of time to complete the work; and
• being bound where some variation of the work is needed.

You should consult a lawyer before subcontracting to ensure that you have the right to subcontract under your contractor agreement and that all relevant rights and obligations are passed down in the subcontractor agreement.

Other Common Subcontractor Agreement Clauses

A subcontractor agreement will usually include provisions that outline:

• the scope of the services they will be providing; 
• their responsibilities to complete the work to a high standard within a set period;
• restraint or non-compete obligations that prevent them from directly engaging with your clients or competing with your business; 
• how and when you will pay them; 
• intellectual property and confidentiality concerns, including the rights over any materials or processes that each party owns;
• the circumstances in which either party may choose to terminate the contract; 
• who will be responsible for providing and maintaining the equipment used by the subcontractor;
• any insurance obligations; 
• any superannuation obligations you may have to your subcontractors;
• non-disclosure, confidentiality and privacy protections
• limitations on and responsibility for various liabilities; and
• whether the work can be further subcontracted.

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Disputes

Disputes may arise where: 

• there is a defect in the work; 
• there is a delay in performance; or 
• other issues arise from their work.

A dispute resolution clause should clearly outline what happens if there is a dispute, between either: 

• your subcontractor and your client; or 
• you and your subcontractor.

This process should be consistent between both your contractor and subcontractor agreements so that the process is the same between all parties. 

You may also consider whether to require your subcontractors to participate in any dispute resolution process between you and the client. Additionally, the clause may include a requirement to participate in arbitration or mediation, where an independent third party will oversee resolution negotiations before taking the matter further. 

Key Takeaways

A subcontractor agreement can help prevent misunderstandings and disputes if an issue arises due to your subcontractor’s work. Your agreement with your subcontractors must reflect your existing agreement with the client so that both parties clearly understand their obligations and the extent of their legal responsibility. You should have it correctly prepared and signed before engaging your subcontractor. 

If you need help preparing or reviewing a subcontractor agreement, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers who can answer your questions and draft and review your documents. Call us today at 1300 544 755 or visit our membership page.