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Subcontracting Agreement

Subcontracting Agreements or Subcontractor Contracts are legal agreements between a primary contractor for a project and a worker, which set out the rights and obligations of both parties for the sake of the project completion.

What is the Subcontracting Agreement?

A Subcontracting Agreement, which also known as Subcontractor Contract is a contract between contractors or project managers and workers and professionals, which are usually referred to as subcontractors. The objective of this agreement is to inform both parties about their obligations regarding the project, and their rights when any unfortunate circumstances occur, and to assure work and task completion.

A subcontractor agreement is an important legal document defining the terms of a business-related agreement between a contractor and a subcontractor, which requires specific information relating the terms of the agreement in clear, concise and legally-applicable language, to protect \both parties from unfair risks that may arise.

What Is Subcontracting?

Subcontracting is the practice of assigning a part of the obligations and tasks under a contract to another party known as a subcontractor, which can be common in areas or fields that requires working on complex projects, such as construction and information technology.

What Is a Subcontractor?

A subcontractor is a company or person whom a general contractor (or primary contractor, or main contractor) hires to perform a specific task as part of an overall project and normally pays for services provided to the project.

Subcontractors are hired by the project’s general contractor, who continues to have overall responsibility for project completion, but enter a contract with a subcontractor that specifies their limited tasks that are mostly related to their profession.

Guidance

It must be noted that the subcontracting agreement is a legal document that is heavily influenced and ruled by jurisdictions and statutes. However, there are several key elements that must be in a subcontractor agreement, which are the following:

  •       Scope of Work

A subcontractor agreement should always specify the scope of work. a well-defined scope of work is crucial, since the scope of work is what a subcontractor is hired to perform. A broad scope of work is hard to navigate and can be hard for subcontractors to complete. Since the work isn’t well defined, it is easier to say that subcontractors didn’t do the right work for the project.

This section should also include the required labor and essential materials that are needed for the completion of the project.

  •       Supply Chain

Another crucial element to note in a subcontractor agreement is the supply chain and other operational risks. The supply chain or owner specified items aren’t always within the subcontractor’s control and in those cases shouldn’t be the subcontractor’s fault. However, some contracts try to push that risk onto subcontractors. Reading and negotiating the subcontractor agreement will help prevent supply chain risk issues.

  •       Defense & Indemnification

A common element in a subcontractor agreement is defense and indemnification. Many contractors add defense and indemnification clauses to their subcontractor agreements. However, sometimes these clauses can add undue burden to the subcontractor.

It must be noted that some countries have passed laws to help subcontractors from unfair indemnification clauses, and other countries have rulings on the books that void unfair indemnification, which urge the need of drafting and revising the defense and indemnification clauses in a subcontractor agreement.

  •       Insurance, Bonds, & Liens

Many subcontractor agreements specify subcontractor insurance, liens, and bonds. All parties should know exactly what their contract specifies for insurance and bonds. But sometimes a contractor will specify whether or not a subcontractor can take out a lien in the subcontractor agreement. This prevents or limits the subcontractor’s ability to use a mechanics lien in case of non-payment or late payment.

  •       Warranty

A subcontractor agreement might specify the warranty on work. However, this element depends on the project itself. This section of the agreement does benefit both parties and set out their obligations and rights regarding any unfortunate events that may happen during the project.

  •      

    Termination

This element focuses on the rights of both parties when the agreement is terminated.

  •       Payment

When paying for subcontractors for their work, there is more than paying their invoices. Other outcomes from their work like customer satisfaction, delivery and variations need to be considered.

  •       Compensation

A compensation section can be beneficial for both parties, and can be included by setting out the basis of compensating the subcontractor and the compensation calculations.

  •       Confidentiality

You need to ensure that both parties are aware with any private information they encounter while working for clients and also treats information about the business as confidential.

  •       Policies and procedures

This section of the agreement can be written as a procedural manual, which set out the procedures and policies that must be followed by all parties when working on the project.

  •       Responsibilities

This section of the agreement sets out the obligations of both parties when working on the project, and how far the subcontractor can contribute in the project completion.

Key Points:

 

  •      Scope of Work
  •       Policies and procedures
  •       Responsibilities
  •       Payment
  •       Compensation
  •       Confidentiality
  •       Supply Chain
  •       Defense & Indemnification
  •       Insurance, Bonds, & Liens
  •       Termination

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