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Subcontractor relationships are commonplace in many industries, including construction, IT and catering. Suppose you are running a project and need to engage another business to help complete it. Likewise, this other business wishes to further engage a third-party entity for their specialised skills and expertise to work on different parts of the project. In this scenario, your business would be known as the ‘principal’, and the other business is the ‘head contractor’. The third-party entity would then be a ‘sub-contractor’. Indeed, the management of this relationship is a crucial element in completing a project successfully. This article will explore subcontractor relationships and essential considerations when subcontracting and using subcontractor agreements.

What is a Head Contractor?

A head contractor refers to the company or individual engaged in the initial contract with the client. For example, a catering company is the head contractor with a client to provide hospitality services for a function. The catering company may then hire staff through a subcontractor to perform waiting services at the function. 

Important Considerations in a Subcontractor Relationship

A Right to Subcontract

When a head contractor intends to engage another business and form a subcontractor relationship, they must first establish that a right to subcontract exists under the head contract. 

Head contracts will often include express terms or provisions that cover rights to subcontracting. These clauses may prohibit subcontracting entirely, or provide a right to subcontract in certain circumstances. These clauses may also require written permission from the principal before you can subcontract. If you have any doubt concerning the ability to subcontract, it is best to have your lawyer review the contract to determine your rights and avoid any possible breaches of the contract.

A breach of contract is when a party to a contract fails to follow or comply with a contractual obligation. For example, a failure to pay for services within the agreed time frame is a breach of contract.

Obligations to the Principal 

If a head contractor is allowed to subcontract, they must be aware of their ongoing obligations to the principal. Generally speaking, the head contractor is accountable for the subcontractor’s performance as they are engaged on their behalf. Therefore, it is best to negotiate these details as part of the subcontractor agreement’s terms.

Determining Whether Subcontractors are Employees or Contractors

When engaging subcontractors, it is critical to determine whether they are an employee or a contractor. This is to ensure you provide your subcontractor with the correct entitlements and avoid any sham contracting.

Sham contracting is the practice of engaging a worker as an independent contractor when they should, in fact, be treated as an employee. The issue of sham contracting often arises when a contractor believes they are an employee and are owed the relevant entitlements. This is common at the end of a contractor’s engagement.

Once you confirm the right to form a subcontractor relationship and the principal grants any necessary permissions, a subcontractor agreement is the best way to validate this relationship. 

What Should I Include in a Subcontractor Agreement?

A subcontractor agreement formalises the relationship between the head contractor and the subcontractor. It is a crucial element in the subcontractor relationship. 

Likewise, the subcontractor agrees to provide their services to the head contractor in exchange for a fee. The services may be provided as a one-off for a set fee or could be provided in an ongoing arrangement over a set time period.

Additionally, subcontractor agreements can include provisions making the subcontractor responsible for the quality of their work and following time frames and overall project designs. Other clauses regularly found in subcontractor agreements include:

  • the scope of the services provided;
  • restraints or non-competition obligations;
  • payment terms;
  • intellectual property and confidential information obligations;
  • termination;
  • insurance obligations;
  • liabilities;
  • warranties and representations;
  • privacy obligations; and
  • the ability to further subcontract work.

Types of Subcontractor Agreement

Notably, there are different types of agreements that you can use to engage a subcontractor. Generally speaking, the most common options include:

Type of contract Description
Back to back subcontract A back to back subcontract will essentially mirror the head contract. It is most appropriate when the scope of the work that is being subcontracted makes up a considerable portion of the scope of the head contract.
Pass-through subcontract This contract involves a lawyer reviewing the head contract and then drafting a subcontract that includes the relevant obligations that are to be passed through.
General subcontract attaching a copy of the head contract A lawyer will draft a general subcontract and attach a copy of the head contract. The subcontractor will then have a broad obligation to comply with the head contract while carrying out the subcontract.
General subcontract which does not mention the head contract This particular subcontract will not reference the head contract. This is only advisable for low risk and low-value contexts, or if the head contract prohibits it from being shared with subcontractors.

What Type of Subcontractor Agreement Should I Use?

Ultimately, the type of agreement you use will depend on a case-by-case basis and certain factors like:

  • the industry you operate in; 
  • any risk factors; 
  • the value of the work;
  • certain requirements of the head contract; and 
  • the principle. 

To ensure you use the most appropriate subcontractor agreement for your business, it is best to get advice from a lawyer. Obtaining legal advice can help minimise your risk and make an informed decision.

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Key Takeaways

Subcontracting is a key part of business in many different industries. It is important for a head contractor to understand their rights and obligations when looking to subcontract. It is equally important to have a clear subcontractor agreement in place to formalise the subcontractor relationship.

If you need help understanding your obligations when looking to form a subcontractor relationship, our experienced employment 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

What is a head contractor?

A head contractor refers to the company or individual engaged in the initial contract with the client. For example, a catering company is the head contractor with a client to provide hospitality services for a function. 

What is a subcontractor relationship?

Subcontracting describes the relationship between a head contractor and a third-party business. To use the previous example, the catering company may then hire staff through a subcontractor to perform waiting services at the function.

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