Subcontractor Contracts: Everything You Need to Know
Subcontractor contracts are legal agreements between a contracted worker hired by a primary contractor for a project.3 min read
Updated July 7, 2020:
Subcontractor contracts are legal agreements between a contracted worker hired by a primary contractor for a project.
What Is a Contractor?
Contractors are workers who are technically independent entities and are different from employees.
What Is a Contractor Agreement?
Contractor agreements are written documents signed by the company and the contractor hired by that company.
These agreements spell out the relationship between the company and contractor and specify details like:
- Tasks the company expects the contractor to complete
- The window of time for these tasks to be completed
- Money to be paid for the work
What Is a Subcontractor?
Sometimes independent contractors can bring subcontractors in to help them complete an assigned project. Once a contractor is hired by a business, they can then hire subcontractors. Subcontractors will sign an agreement like the one the contractor signed with the company, but the subcontractor will sign with the contractor. The contractor manages all of their subcontractors, so subcontractors won't interact much, if at all, with the company that hired the contractor.
Subcontractors are also defined by the IRS as separate entities and are therefore expected to pay their own self-employment taxes, keep track of their income, and manage their own work and schedules. Basically, subcontractors are just contractors working under other contractors.
These workers will also be subject to contracts with their contractors that will lay out exactly whats expected of them. These agreements should include:
- Subcontractor assignments and responsibilities
- Due dates for work
- Pay rates for work
- Rules and regulations
What Is a Subcontractor Agreement?
Subcontractor agreements will be formed between primary contractors and their subcontractors. These contracts detail the specific services or products that the subcontractor is providing, how much they are being paid for these contributions, and any warranties that are necessary. Other inclusions could be:
- Insurance clauses
- Default clauses
- Change orders
- Indemnity clauses
Subcontractor contracts are most common in construction projects, as the primary contractor will be hired by a company to handle the entire construction project, which includes hiring subcontractors for specific parts of the project. This type of arrangement can be used in any project beyond construction. Once a contractor hires all of their subcontractors and lays out the agreements, the job can begin. Marketing firms use this setup as well. They will bid on a job, and once they get it, they will hire subcontractors to handle the design, writing, and editing.
Why Use a Subcontractor Agreement?
Subcontractor contracts or agreements are important because they offer protection to the workers and owners of projects. All details like the final goals and visions for the work, due dates, and payment are all outlined clearly so no one is blindsided or taken advantage of. Insurance information and responsibilities are also spelled out, and that legally binds the parties to their promises regarding the work.
Subcontractor contracts provide a level of risk management for projects and the transfer of work. If a contractor doesn't use a subcontractor contract for anyone brought on to work with them, that worker becomes a liability for the primary contractor. These agreements help to avoid potential legal issues and insurance costs, plus the expectations and professional relationship is clear.
In the case that issues arise with a subcontractor, a subcontractor contract can help keep legal action out of the picture. Anytime someone decides to work professionally with another individual or company, they should form a contract.
Are Subcontractors Allowed?
When companies hire contractors, they form a contract called a master agreement. This contract will detail the project expectations and necessary information like whether or not the contractor is allowed to hire subcontractors and other restrictions on the how the work is managed. Before a contractor hires any subcontractors, they should first be sure that the master agreement allows this practice.
Sometimes the agreement will simply say that the client must be notified of when hiring subcontractors, while other times it is forbidden. Subcontractors might be allowed, but they may also be bound by the master agreement along with the primary contractor. The master agreement will sometimes say that contractors will be held liable for any mistakes or issues caused by the subcontractors.
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