What Is A Subcontractor Agreement And How To Write One?

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Date published: 24 Dec 2020
by DocPro Legal
Last Update: 29 Dec 2020

In brief, a subcontractor agreement, or subcontractor contract, is an agreement which sets out the terms and conditions of the relationship between a contractor and subcontractor for the provision of services to a third party.

 

To write a subcontractor agreement, you should follow these steps:

  1. Negotiate and finalise all terms and conditions of the subcontractor agreement. Terms to be included in the subcontractor agreement include:

    • Scope of work

    • Indemnification

    • Warranties

    • Dispute resolution

    • Payment terms

    • Compensation

    • Policies and procedures

    • Termination

  2. Draft the agreement in writing and send it to the subcontractor for review

  3. Review the agreement, sign and execute 

 

All of these aspects will be explored in more detail below.

 

 

What is a subcontractor agreement?

 

A subcontractor agreement, or subcontractor contract, is an agreement which sets out the terms and conditions of the relationship between a contractor and subcontractor for the provision of services to a third party.

 

A subcontractor agreement is a separate contract entered into by a party (contractor) to a contract (main contract). In a subcontractor agreement, the main contractor agrees with another person (the subcontractor) that the subcontractor will perform some of the contractor’s obligations under the main contract. In exchange for this undertaking by the subcontractor, the contractor will provide the subcontractor with consideration of some kind – usually a fee or payment of some kind.

 

The other party to the main contract (the customer) is generally obliged to accept performance by the subcontractor, so long as the subcontractor has done everything agreed to by the contractor.

 

Subcontracting is effectively a way to delegate contractual obligations to another party and is especially common in the construction, manufacturing and transportation industries.

 

Subcontracting obligations offers many benefits to contractors, including cost-savings and access to expertise.  

 

Firstly, engaging subcontractors can lead to cost-savings. Subcontractors can be brought on for a short period of time to help when the contractor is working on a large project. Subcontractors are cheaper to bring in for these shorter periods than full-time employees.

 

Secondly, subcontractors also often have substantial expertise in a particular niche or in providing a particular service. Subcontractors can therefore offer superior service and provide expertise that contractors cannot get from their staff.

 

If a subcontractor is regularly engaged by the contractor, the subcontractor and contractor should have a subcontractor master agreement. A master agreement is a written repository of the terms based on the subcontractor will provide services each time they are engaged by the contractor.

 

Instead of writing a whole new contract each time the subcontractor is engaged by the contractor, the parties can merely execute a purchase order or job order and incorporate the terms of the master agreement, therein. Entering into a master agreement is a useful way to consolidate two or more agreements into one harmonised agreement.

 

DocPro offers various comprehensive subcontractor master agreement templates. Each template differs based on which party it is drafted to favour: the subcontractor, company, or neutral.

If a subcontractor is not regularly engaged by a contractor, then the subcontractor and contractor can enter into a subcontractor agreement for a single job.

 

DocPro offers various comprehensive subcontractor agreement templates for single jobs. Each template differs based on which party it is drafted to favour: the subcontractor, company, or neutral.

 

When can a contractor subcontract obligations?

 

Before thinking about writing a subcontractor agreement, a contractor should check his/her agreement with the customer (the ‘main agreement’) to check if it permits the contractor to use subcontractors to fulfil particular obligations.

 

Generally, the customer to the main contract must accept a subcontractor’s performance of any obligations so long as performance is complete. This is unless the main agreement – between the contractor and customer - restricts subcontracting of the obligation at issue.

 

If the main agreement is silent as to subcontracting and does not permit nor restrict it, this is generally treated as consent to subcontracting of the obligations stated therein.

 

Broadly, common law provides that subcontracting is not legal if the obligations fall into one of the following categories:  

 

  1. The main contract prohibits subcontracting expressly or implicitly

The main contract will prohibit subcontracting expressly if it includes a clause to the effect that the obligations stated should not be subcontracted whatsoever.

 

  1. The obligations are of a special nature requiring personal performance by the original contracting party

Some contractual obligations are such that the original party’s performance is the essence of the contract. For example, a contract to paint a picture or write a play.

 

  1. If, it can be implied from the circumstances that the contractor has promised personal performance

Whether it can be implied that the contractor has promised personal performance, depends on whether the contractor has merely promised to deliver a result or to personally perform the obligation.

 

If the former, then the customer should accept the subcontractor’s performance. However, if it can be shown that the contractor was chosen because of their skill, competence, or other qualifications, this indicates that the contractor has promised personal performance and performance of the obligations cannot be subcontracted.

 

If the contractor has promised personal performance yet the contractor still subcontracts performance, there is a breach of contract. This is even if the subcontractor is equally or more well qualified to perform the obligations at issue.

 

  1. Legal restrictions

Certain contracts, often in regulated industries, can only be performed by certain authorised persons. An example of such an industry is the insurance industry – insurance contracts can only be performed by persons with the due authorisations.

 

If any such obligations are subcontracted and the subcontractor does not hold appropriate licenses, the subcontract will be unenforceable.

 

 

How to write a subcontractor agreement?

 

A subcontractor agreement should expressly incorporate relevant terms of the main contract. This will ensure that the subcontractor’s obligations link clearly with the contractor’s duties to the customer in the main contract.

 

To enter into a subcontractor agreement, make sure to follow these three steps. 

  1. Negotiate and finalise all terms and conditions of the agreement

  2. Draft the agreement in writing and send it to the subcontractor for review

  3. Review the agreement, sign and execute 

 

When going through step 1, in negotiating and finalising all terms and conditions of the agreement, make sure to include and pay particular attention to the following terms: 

 

 

  1. Scope of work

 

A subcontractor agreement should clearly specify the work to performed by the subcontractor.

 

The work specified should be accurate and precise. A lack of accuracy and precision can create difficulties for both the subcontractor and contractor.

 

It creates difficulties for the contractor because it will be more difficult to say for sure whether there has been a default by the subcontractor. Likewise, the subcontractor will not be able to determine whether they have defaulted or performed all their obligations as required by the subcontractor agreement.

 

  1. Indemnification

 

Indemnification clauses frequently feature in subcontractor agreements – they usually obligate the subcontractor to indemnify (i.e., compensate) the contractor for any loss or expenses incurred as a result of the subcontractor’s performance of his/her obligations under the subcontractor agreement.

 

This is effectively a tool used by contractors to transfer risk associated with the subcontractor contract to the subcontractor. 

 

  1. Warranty

 

The subcontractor agreement might specify a warranty on the work product in relation to quality and workmanship.

 

Such warranties effectively hold the subcontractor liable to properly perform any obligations that are initially performed shoddily. The specificities of any warranty are dependent on the project at hand.

 

  1. Dispute resolution

 

Parties often agree how any disputes should be resolved should they arise. Often, they agree to arbitration clauses or mediation clauses.

 

Instead of going to court, these are alternative methods of dispute resolution whereby an independent arbitrator or mediator, as the case may be, hears the case and offers a resolution.

 

It usually species the location where any such arbitration or mediation should take place, the rules which must be followed in proceedings etc. The difference is that an award in arbitration is binding on the parties; mediation, however, is not binding on the parties.

 

  1. Payment terms

 

Different subcontractor agreements will feature different payment terms.

 

Two of the more common terms for payment are ‘pay if paid’ and ‘pay when paid’.  

 

Pay if paid is basically where the contractor will only pay a subcontractor if the contractor receives payment from the customer under the main contract.

 

Pay when paid is basically where the contractor will only pay a subcontractor when the contractor receives payment from the customer under the main contract.

 

These are basically conditional payment terms – they pass on some of the risk of non-payment from the contractor to the subcontractor.

 

Whether the contractor chooses these payment terms or resolves to simply pay an up-front fee, will depend on the financial position of the contractor. If the contractor is in good financial standing and is not relying on receiving fees from the customer under the main contract in order to pay the subcontractor, it might choose a simple up-front flat fee payment.

 

If not, the contractor may choose to adopt either of the ‘pay if paid’ or ‘pay when paid’ options.

 

  1. Compensation

 

Outline how the consideration for the subcontractor’s services will be calculated – is it a flat fee agreed to at the outset, or is payment to be determined depending on the number of hours the subcontractor spends on the work etc.

 

  1. Policies and procedures

 

The subcontractor agreement should explicitly state any policies and procedures that must be followed by the subcontractor when performing the obligations stated in the agreement. 

 

  1. Termination

 

The agreement should state when either party may has a right to terminate the agreement and what rights they will have the following termination.

 

 

Liability of a subcontractor in relation to the main contract:

 

In a subcontractor agreement, the contractor remains liable for performance to the customer under the main contract. This means, if there is an incomplete performance by the subcontractor, the contractor will be liable for performance to the customer under the main contract. The customer is not allowed to sue the subcontractor for breach of contract unless they have a claim in tort or a direct third party right.

 

The customer cannot sue the subcontractor for the breach because a subcontractor agreement is a distinct, separate contract that does not affect the legal position of the parties to the main contract.

 

The customer cannot sue the subcontractor because of the doctrine of privity of contracts. This doctrine states one can only enforce the benefit of or be liable for an obligation under a contract if they are a party to that contract. In the case of subcontracting arrangements, there are two agreements – the main agreement and subcontracting agreement. The main agreement only has two parties to it: the customer and contractor. The subcontract also only has two parties to it: the contractor and subcontractor.


The subcontractor and customer are not parties to the same contract. In fact, they do not have any contractual relationship with each other. Thereby, there is no privity of contract between them, and A cannot sue C if C's performance does not meet the requirements of the contract between A and B.

 

So, if A (customer) enters into a contract with B (contractor) to provide construction services to A, and B subcontracts a part of the work to C (subcontractor), C has no rights and obligations under the main contract between A and B. A, also, does not have any rights and obligations under the subcontract between B and C. This means, if any work carried out by C do not meet the specifications of the agreement between A and B, A can sue B for breach of their agreement, and B can likewise sue C for breach of the subcontract. However, A cannot sue C on its own because of the lack of privity between them.

 

 

 

 

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