Understanding Construction Subcontract Agreements with a Free Template

by Alexander Fraser

In the contracting world, you need to get yourself familiar with construction contracts because this is something you’ll need to deal with regularly. Understand that it’s a legal document that confirms a mutual understanding between two parties to complete a project.

In this article I will go over some of the key thing you should understand in a subcontract agreement. Keep in mind, I am no legal expert this is just from my experience working in the trade. If you want legal advice, you should consult a lawyer who understand the your states local laws.

The construction subcontractor agreement template that we will be covering comes from the site below.

Construction Subcontractor Agreement

Before we dive into the subcontract agreement, let’s discuss why these are required in construction.

An agreement between two parties to complete specified work, done by a subcontract agreement.Typically, when a customer engages with a contractor to complete a project, depending on the complexity and magnitude they will likely work with a general contractor. The general contractor’s responsibility will be to complete the job and cover the scope for the entire project.

The general contractor won’t likely have all the trades required to complete the project within their company. Having that many people employed year round is not feasible for a company. So, as a result, they need to hire a subcontractor to fill that role.

To bring the subcontractor on board, a written agreement will need to be completed and fully executed. This is your subcontract agreement or SCA.

In the subcontract, it will cover the obligations of the subcontractor throughout the project. It will contain information on the scope of work, terms of payment, contract completion date, and more. With all the legal jargon it can be easy to get confused, contacting a lawyer for legal advice is a great way to fully understand the contract.

If you’re part of an already established company, it’s likely that they’ve already developed a subcontract agreement that protects them when hiring a subcontractor.

Since you’ll be responsible for issuing or receiving the subcontract agreement, you should know how to fill one out.

Let’s begin with the template that I had posted in the link above.

Item I. The Parties

This is where you will enter the information between your company and the subcontractors company. This states that both parties will be entering into an agreement to complete a project under the terms of the contract.

Item I. The Parties

Above I filled out this section of for you to reference. This way you know how this document should be completed. I will be doing this for the remaining fillable sections in the subcontract agreement.

Item II. The Client

This section will supply the contractor with information on the owner of the project. Occasionally, the general contractor will provide you with the contract that they have between the customer as a reference.

Item II The Client

As required by this contract, the subcontractor is obligated to comply with the agreement made between the general contractor and client.

Item III. Service Provided

This is the scope of work section, where you will write a general statement of the work that the subcontractor is required to fulfill for the project. When a contractor is bidding per the plans and specifications, this is their best guess on how much the project will cost before the job begins.

By using a statement as shown in the image below, you hold the contractor to complete the work that is required per the plans. They will need to finish it so that it’s in compliance with the specifications. Also, state which version of the plans and specifications they’re required to comply with so the scope is clear.

Item IV. Subcontractor Responsibilities

Item III Services Provided

In this part of the contract the general contractor will cover the obligations that the subcontractor needs to meet for the project. Depending on the agreement that was made between the two parties, different options will be selected.

Typically, a contractor will provide their own crew, materials, equipment, and cover the cost for commuting to the job site. If not, then this needs to be stated within their proposal during the bid phase.

There are some contractors, such as HVAC DDC Controls companies who provide only the equipment and labor to perform startup. It would be the general contractor’s responsibility to hire the electrician responsible for completing the installation.

Again, negotiations should be held to determine how the parties will proceed with the contract.

Item IV Subcontractor Responsibilites

Item V. Location

This should be straight forward, you need to include the location for project. Rarely will the construction job site be determined at a later date.

All plan and specs projects will already have the building location predetermine to the invitation to bid.

Item V Location

Item VI. Commencement Date

The Commencement Date is when the subcontractor has been provided with an official notice to start all pre-construction documents. This will be your submittals and any RFIs to begin ordering materials.

Another term for the commencement date is “Notice to Proceed”. You will hear this term thrown around a lot. This will come from the customer and it’s an official notice that the project is now underway.

Item VI Commencement Date

For this example, I included the date the contract was issued to the subcontractor. The contract will effectively be the notice to the subcontractor to begin their work.

Item VII. Completion

With any project, the customer will expect that it’s completed by a certain date. This information needs to be passed along and provided in the contract.

The subcontractor requires this information so they know when their work needs to be completed by to prevent project delays.

Item VII Completion

Another term you will hear is Contract Completion Date or CCD. Know that they’re referring to the project deadline when you hear this term.

Item VIII. Payment Amount

The most important part of any project is the costs. This is another items that needs to be clearly defined, prior to issuing the contract.

The subcontractor will typically provide their price in the form of a quotation. This will include any exclusions from the work that they’re proposing to complete.

For a plans and specs job the contractor will provide a cost which will be locked in unless there’s any changes to the drawings or specs. This price will be a flat fee for how much it will cost to complete the job.

If there is a change, then this will either result in change orders or a credit back to the hiring contractor issuing the subcontract.

Below is an example of how this will appear in the contract.

Item VIII Payment Amount

You’ll notice that the number value is written out and the numerical value is also included here.

According to the Lazy Begal’s blog, the numerical value is written out for clarity. This way you prevent potential disputes about the monetary amount agreed upon.

Item IX. Payment Method

This is where the payment details are described. Typically, you’ll see the payment method to be done on a monthly basis. As a project progresses you will need to get the company paid along with the employees too. This is done via progress billings, which will occur every month as required by the subcontract agreement.

Some contractors will include the day of the month that billings will be due to set as a deadline. So, it’s one of the subcontractors responsibilities to submit their billings before the deadline. This was the general contractor can bill for their work in addition to the subcontractors.

Item IX Payment Method

Let’s look at the last paragraph in this section, when the subcontractor submits their billings, there needs to be an understanding that the invoice will not be paid right away. As the contractor, it’s important to include the net payment terms on your invoice so the owner or general contractor knows when they need to provide you payment. It’s normal to see a net 30, 60, or even 90 day period the payment arrangement.

As long as the hiring contractor meets these payment terms, there should be no reason to make this a legal problem.

Item X. Subcontracting

It’s okay to allow your subcontractor to bring on other contractors under them. Usually, they’re in the same position as the general contractor. They might not be able to complete all of the work on their own so they need to hire some of it out.

Understanding what the subcontractor is capable of is also important. If they decide they don’t want to hire on another subcontractor, then the general contractor will need to find someone who can cover the remaining scope.

Item X Subcontracting

So, we will leave this section giving the contractor the right to subcontracting.

From here on in the post, I recommend that you download the subcontract agreement template and follow along as I break down the sections.

Item XI. Assignment

The assignment section prevents the contractor from selling the subcontract agreement to another contractor who would be able to perform the work at a lower price. This is not a common practice by contractors but it’s good to include to protect the companies best interest.

This is something you would more likely see in real estate. Where someone performing a wholesale will sell the contract to purchase a home and obtain a finders fee.

Item XII. Insurance

With everything in life, having insurance can protect your from getting into some serious trouble. The subcontractor should be responsible to insure their own company, so they will carry some sort of insurance.

Accidents happen, wether it’s due to a worker getting injured while performing a task or some equipment is damaged from misuse. The general contractor should not be required to cover the cost if the incident was caused by the subcontractor.

Insurance policies should be in place so both parties can be protected should accidents occur.

A company can do its best to enforce a safety plan and monitor operation of heavy equipment, but they shouldn’t be held liable to pay another companies workers’ compensation. Especially if it’s a result of poor management and implementation of safe work practices.

Item XII. Resolution of Disputes

When issues arise, the process of dispute resolution is important. If the problem can’t be resolved through a mutual agreement, then legal actions may need to be taken.

This contract mentions that the attorney fee’s will be covered by the individual parties should litigation be required. The contractor should have a law firm that they use for any legal matters such as contracts. It would be good to consult the firm when disputes arise.

Obviously, pursuing legal actions would be the last resort option but sometimes might be necessary. Choosing the last option would be the most reasonable here. It allows both parties to first work out a solution before taking the next step.

The last couple paragraphs in this section protect the contractor should disputes occur. This way they can secure payment on the work completed even if they need to go into litigation.

Item XIV. Termination

As the hiring contractor, you’ll always want a way to protect yourself and get out of the binding agreement should the subcontractor cause a breach of contract. This may be issues where the subcontractor is unable to meet their obligations as laid out in the contract. Whether they do not comply with the construction schedule or they’re uncooperative in the pre-construction phase.

If you feel that the subcontractor will not be able to complete such services, then you need a contingency plan. This termination clause can be the protection you might need to basically fire the subcontractor.

The final decision to terminate the contract between the two parties will ultimately be dependent on the individual. You want to give the subcontract the chance to prove themself and have faith that they will do good work.

This is mainly for the contractors protection if it comes down to terminating the subcontractor.

Item XV. Claims

Here, if any issues do arise, it is laid out how the notices of any claims must be addressed. Certified mail could be a multitude of things, make sure it’s clear how these claims should be filed. Typically, through email is fine, just make sure that you give the contractor sufficient time to respond.

This section provides a statement that “the parties shall have ___ business day(s) to correct the claim”. Allow 10-15 business days as this is a standard for waiting on a response. If you do not hear anything within this time, then consider the next steps for resolution.

Item XVI. Change Orders

Change orders are normal in the construction industry. Rarely does a job go with out a change order, even some of the best planned out jobs.

You never know if you’re going to run into an unforeseen condition with a renovation project. Or if you’re working on a new construction job, the design can change after the original contract has been issued. The change order will allow the subcontractor to cover their cost to complete the work.

This clause explains how these change orders will be documented through the construction project should they arise.

Item XVII. Entire Agreement

Any terms of an agreement should be discussed with the subcontractor. Once this contract has been fully executed, this clause states that the terms of the entire agreement are set by this contract. Moving forward this will be the legal binding document that holds the subcontractor to complete his or her work.

Item XVIII. Time

The general contractor will be required to maintain a construction schedule that will provide information on the phased of the work. This should include the pre-construction, construction, and closeout phases.

This schedule will also include the subcontractor’s work as well. It’s important that the two parties communicate with one another to set realistic expectations to complete the work. Last thing you want is the general contractor only provides you with half the time needed. Not all contractors will have a full understanding of what it takes to complete the subcontractors work.

As the subcontractor, reach out regularly for an updated construction schedule. This will provide you with the due dates of the project so you can stay on top of it.

Item XIX. Delays

Should delays occur and the subcontractor is found at fault, this clause protects the prime contractor from being responsible. Typically, delays will result in a fine due to liquidated damages.

Liquidated damage fines can incur daily and the value of the fine depends on the magnitude of the project.

Item XX. Inspection of Services

Every project should have some level of quality control implemented into it. As the general contractor you should be inspecting your subcontractors work on a regular basis. This way you know that the material being installed meets the project specifications.

It’s good to have this requirement in the contract so the subcontractor is not allowed to cut corners.

Item XXI. Labor Relations

This section of the agreement mainly states that the subcontractor is required to follow labor laws set forth by the state. Make sure to research your local laws to make sure your company is protected.

Federal government and state jobs will enforce the Davis Bacon Act to ensure the field crew is being compensated appropriately.

For more on the David Bacon Act, see the link below.

https://www.dol.gov/agencies/whd/government-contracts/construction

Item XXII. Indemnification

In any business, you need to make sure you protect yourself from issues that may arise. With this clause, if there’s an issue that is created and the subcontractor is found at fault, they will not be able to have the client or contractor compensate them to correct the issue.

There’s also a section here which describes what might get the subcontractor out from this requirement. This is to create some fairness to the subcontractor if something occurred that could have been prevented by the client/contractor.

The last sentence in this article, “The indemnity set forth in this Section shall not be limited by any insurance requirement or any other provision of this Agreement.” Solidifies this clause within the agreement.

Item XXIII. Warranty

Every contractor should provide some sort of warranty for their work. This warranty period will last about a year following the acceptance of a project.

Having this included in the subcontract is a good idea but it’s a standard to provide a one year warranty for any work done.

Item XXIV. Required Licenses

With any type of work, you want to make sure that it’s done by someone who understands what they’re doing. Having this clause guarantees that the subcontractor will have licensed journeymen performing the work.

Knowing that the work is being completed by licensed professionals is always reassuring. This is typically required by law any how.

Item XXV. Confidentiality

This will keep the terms of the agreement between the two parties confidential. Should any information be disclosed on operations or the project is in a high security facility. The subcontractor should understand that there’s information that needs to remain confidential to the project.

Item XXVI. Notices

Should any notices be required, the steps required to submit the notice will be laid out in this section. The subcontractor needs to understand this as one of the terms of an agreement.

There can be some exceptions if deemed necessary by the contractor if they feel the email is sufficient. This should be included in the agreement if that is the case.

Item XXVII. Injunctive Relief

Should the subcontractor create a breach of contract, this clause informs the subcontractor of how the contractor or client may be compensated.

This could result in the courts having to enforce a requirement on the subcontractor so the contractor or client will be covered.

Read more on Injunctive Relief in the link below.

Injunctive Relief (How It Works And Concrete Examples)

Item XXVIII. Severability

In short, this section states that should any part of the contract be unenforceable, then the remainder of the contract is still valid. That the contract has not been terminated and the subcontractor is still required to comply with the other terms of the agreement.

Item XXIX. Independent Contractor

This section is included to clearly state that the contractor is hiring the subcontractor as an independent contractor. That no joint venture is to come out of bring the subcontractor on for the project.

If the two parties decide to convene following the project, this would be acceptable per the terms of this agreement.

Item XXX. Force Majeure

Natural disasters can happen, and as a result this can create damage throughout a job site. This clause protects both parties should any issues that occur that is not within their control.

Some examples of what is deemed reasonable for this section to apply are spelled out in the clause.

Item XXXI. Governing Law

Include the state which the project resides in here.

Item XXXII. Attachments

Any other documents that might assist in clearly stating the scope of work that is being required by the subcontractor should be included with the contract.

This can include, project drawings and specifications, addendums, and construction schedules.

Avoid including the quote from the subcontractor. Often their own terms will be included on the proposal which can create some conflict with the agreement being issued.

Item XXXIII. Additional Provisions

Should the contractor or subcontractor find is necessary to include additional terms to the contract, this can be added here.

Conclusion

Always remember, to review and understand the contract that you are issued or issuing. This can save your butt when it comes to and problems that arise in the project. You can refer back to the subcontract as a way to identify what is and is not required in the scope of work.

Don’t make the common mistake of issuing contracts without understanding it, you can get into a lot of trouble by doing so.

I also want to reiterate, that this is a legal document. Consult a lawyer to discuss what should and should not be include in the subcontract. They will be your best resource on solidifying a contract to use in a business.

Thanks for reading.

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