What a Subcontractor Agreement Must Spell Out

Why this matters

The subcontractor disputes that cost you the most are the ones you never wrote down. Scope you assumed was included, a payment schedule you never fixed, insurance you thought they carried, a warranty nobody agreed to, each is a fight waiting for a bad day. A subcontractor agreement is not paperwork for its own sake; it is the control panel for the relationship, and every blank you leave is a decision you have handed to the other side. Have an attorney draft or review your template; the sections below are what it has to cover.

Scope, deliverables, and standard of work

Vague scope is the number-one source of sub disputes. Spell out exactly what is included, what is explicitly excluded, the standard the work must meet (code, spec, your own quality bar), and what "done" looks like. Attach drawings or a checklist if the trade needs it. If it is not written, expect to pay for it twice.

Price, payment terms, and protecting your cash

State the price or rate, and just as important, when you pay and on what condition.

• Tie payment to milestones or completion, not just the passage of time, so an unfinished job does not get fully paid.
• Consider retainage, holding back a portion of each payment until final completion and sign-off, so you keep leverage until the work is truly finished.
• Address pay-when-paid if you are billing a customer or general contractor: state clearly whether the sub is paid on your schedule or only after you collect.
• Require lien waivers with payment. A lien is a legal claim a worker or supplier can file against the customer's property for unpaid work; a lien waiver is the sub's signed release of that right for amounts you have paid. Collect one at each payment, or you can pay the sub and still face a lien from them or their unpaid suppliers.

Insurance, indemnity, and liability

Require the sub to carry their own coverage and to prove it before they start. Name the coverage types and minimum limits, require that you be added as an additional insured, and require a certificate of insurance on file (see the related insurance articles for what to demand and how to verify it).

Include an indemnification clause. Indemnity, also called hold-harmless, means the sub agrees to cover losses their work causes: if their mistake injures someone or damages property, they carry the claim, not you. Insurance and indemnity work together, the clause transfers the risk and the insurance funds it. Have your attorney tailor the language to your state, since some limit how far indemnity can reach.

Independence, backcharges, and changes

• Preserve independence. The agreement should reflect that the sub controls their methods and hours to a deadline, consistent with real contractor status, not employment.
• Define backcharges. A backcharge is a cost you deduct from what you owe the sub when they cause it: their damage to another trade's work, their mess you had to clean, a callback on their scope. Spell out that you can backcharge and how you will document it, or you will eat those costs.
• Require written change orders. Any change to scope or price gets agreed in writing before the work happens. Verbal changes are where "you owe me more" fights start.

Non-solicitation, confidentiality, and warranty

• Non-solicitation protects you from a sub poaching your customer or your crew, for the duration and a reasonable window after. Keep it narrow and reasonable so it holds up.
• Confidentiality covers your pricing, customer lists, and methods.
• Warranty states how long the sub stands behind their work and their duty to come back and fix defects at their cost.

Termination and dispute resolution

Say how either side can end the agreement, what happens to work in progress and final payment, and how disputes get resolved (negotiation, mediation, or arbitration, and which state's law governs). Deciding this cold, in the contract, is far cheaper than deciding it hot, in a fight.

References

• U.S. Small Business Administration (SBA), contracts and legal basics for small business
• Trade-standard practice for subcontract scope, retainage, and lien waivers
• Consult a licensed attorney to draft or review your agreement and indemnity language
• See related: The Insurance and Indemnity a Sub Must Carry; Why You Need a Certificate of Insurance From Every Sub