Subcontractors provide an important function and help assist in the effective and efficient completion of projects. Subcontractors make up a significant part of the construction industry, as well as a number of other industries and can assist in highly specialised work. Drafting a subcontractor agreement requires more than replicating the head agreement. Specific terms in relation to the subcontractor must be clearly defined for each party’s protection.
It is important to note that whether a worker is a contractor or an employee is determined by the nature of the relationship, not what you call the arrangement. Furthermore, the employer-employee arrangement will have different legal requirements to the contractor-sub-contractor arrangement.
Employee or Contractor?
Independent contractors have different rights and obligations to employees.
Do I Need a Subcontractor Agreement?
Yes. Subcontractors can perform numerous specialised tasks, even for a minor job. Therefore an agreement should be in place. In addition, subcontractor agreements are essential to ensure both parties are aware of their obligations and suitably protected from any legal issues arising from the job or the agreement.
Continue reading this article below the formWhat Goes in a Subcontractor Agreement?
The subcontractor agreement should address a variety of important points. You should clearly describe these points to avoid ambiguity and misunderstanding regarding either party’s responsibilities.
A subcontractor agreement should include:
- clear start and finish dates;
- a detailed scope of work;
- fees;
- indemnity; and
- licencing.
Let us explore these terms in further detail below.
Timing
Timing is an important aspect of the agreement and helps contractors quantify expectations. A fundamental aspect of being a subcontractor, rather than an employee, is the high level of control over how you perform work. Therefore, a subcontractor and head contractor should be able to negotiate the subcontractor’s hours, work location, and how they complete work. Once negotiated, timing should be as specific as setting:
- working days and working hours;
- identifying start and finish dates of the project; and
- outlining any relevant deadlines that will occur during the timeline of the project.
You may also consider overtime provisions to meet project deadlines.
Scope of Work
The scope of work in the agreement should be clear, easy to understand and unambiguous. The more specific and detailed the scope of work, the better for both parties, as each party is aware of their expectations and responsibilities.
Additionally, the scope of work should include any material or equipment necessary to complete the project. It may also refer to a commercial project schedule or annexure to the contract providing more specified project details and requirements.
If you are a contractor, you will want the subcontractor to provide performance warranties. Conversely, if you are a sub-contractor, be aware of the performance warranties you give and whether these will void your professional indemnity or other insurance.
Payment Terms and Fees
The agreement should provide specific requirements relating to invoicing or payment terms. This means that the agreement should clarify whether subcontractors will receive an hourly rate or flat fee for the work they complete. More defined agreements will also specify whether:
- payment will be upfront or at completion;
- one payment; or
- payment at milestones or agreed times throughout the project.
Payment clauses should clearly state how and when you will make payments and what is required of subcontractors to submit invoice applications. A specific feature of a subcontractor is that they must withhold their own tax and GST from payments. This responsibility also extends to superannuation. However, in some arrangements, contractors may be entitled to superannuation contributions.
As an employer, understand your essential employment obligations with this free LegalVision factsheet.
Defence and Indemnification
Indemnification clauses are essential to mitigate risk for both parties. These clauses outline what parties are responsible for and indemnified against. To ‘indemnify’ means one party protects the other against damage and harm. Suppose a subcontractor indemnifies the head contractor for any harm occurring from subcontractor actions. In that case, the subcontractor is ensuring that the head contractor is not responsible for any damage created by the subcontractor.
Licensing and Insurance
It is extremely important that subcontractors have the appropriate licences and insurance when completing projects. It may be the head contractor’s liability if a subcontractor does not have the correct licence, or if a properly drafted licencing and insurance clause does not exist. The contractor must ensure that the subcontractor is properly licenced and registered in the relevant state in which the work is occurring.
The easiest way to be sure of this is to include provisions that put the responsibility on subcontractors to ensure they are properly licensed and registered. The agreement may also require that subcontractors agree to indemnify the contractor for any legal action and liability arising out of licencing and insurance issues.
Additional Terms
In addition to the above, consider the unique circumstances of your business to determine whether you require additional measures. The agreement may also account for standard terms regarding:
- how to resolve a dispute;
- intellectual property;
- confidentiality; and
- privacy.
Why Do I Need a Subcontractor Agreement?
Suppose the relationship between a contractor and subcontractor break down, or a client raises an issue regarding the work performed. A well-drafted subcontractor agreement can assist in mitigating liability and harm. You can address any dispute that arises by specific resolution methods. Alternatively, a robust agreement may already account for the predicament you find yourself in. Where one party may deviate from their obligations under the agreement, there is a potential that the other party may become entitled to receive potential damages for breach of contract.
Key Takeaways
For this reason, having a clear and easily understood subcontract benefits both the head or main contractor and the subcontractor. In addition, well-drafted subcontractor agreements protect against uncertainty and can save both parties significant time, money and stress.
If you need help with subcontractor agreements, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
No, subcontractors can be engaged for any aspect of the project or works to be completed, no matter the size or cost.
No, each subcontractor agreement will be different according to the services needed. Each subcontract should be drafted specifically to the services provided.
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