Subcontractor Agreement

What is a Subcontractor Agreement?

A subcontractor agreement is a legal document that outlines the responsibilities of someone engaged by a primary contractor to work on a project. When independent contractors work on projects, they sometimes have their own contributors they bring into the job. These are known as subcontractors, and they're subject to similar agreements as the primary contractor. These arrangements are most often seen in the construction industry, where a company contracts for a job and then brings in their own contractors to complete the job. However, it can apply to any job with a similar structure.

For example, many marketing firms bid on jobs for clients and then use freelance designers, writers, and editors to complete the work. The same might happen for a publishing company that signs a license to produce works based on a television series. That company might hire graphic designers and writers as subcontractors to produce the results.

These subcontractors are bound by legal agreements that outline their responsibilities, deadlines, and the rate of pay they receive, as well as any other rules they must follow.

What Is a Subcontractor?

According to IRS definitions, subcontractors are responsible for paying self-employment taxes, keeping their own financial records, and determining how and when work gets done. In short, they are a contractor who works with another contractor.

Why Use a Subcontractor Agreement?

Subcontractor agreements protect all parties in a professional project. They outline the exact expectations of the work, any deadlines, and how compensation is granted. It clarifies responsibilities, from work to insurance coverage, and provides an important legally binding framework for the project.

Subcontractor agreements are an important element of risk management and transfer on a job. Without these agreements, you are taking on liability for anyone you hire to do work. The subcontractor agreement protects you from this liability, lowers overall costs for insurance and employment, and clarifies the specifics of your relationship with your subcontractor.

At the very least, without an agreement, any problems related to your subcontractor could be very costly in terms of liability, court costs, and time. It simply makes good sense to formalize an agreement before you work with another independent contractor.

Are Subcontractors Allowed?

The main agreement between the primary contractor and the client is the Master Agreement. It outlines whether or not subcontractors are allowed, and if they are, what (if any) restrictions are placed on their use. It's essential to make sure that subcontractors are permitted under the Master Agreement.

Check whether you need to tell the client that you're using subcontractors and whether they need to abide by the Master Agreement. Also check to make sure that you, the primary contractor, are not responsible for errors and behavior of your subcontractors. Otherwise, you could be liable for damages if your subcontractor behaves irresponsibly or does harm to the client.

Bids and Payment

If you've taken bids from a number of potential subcontractors, make sure you've tracked the offers on the table and the requirements of each agreement. That way you can be sure that when you draft your subcontractor agreement, you get the facts right. It is helpful to keep a log of all contact with freelancers and to talk with your attorney about terms you might want to include.

Preparing an Agreement

As you prepare your agreement, you want to gather certain facts and information so you know exactly what to outline in the document.

1. Know exactly what work needs doing and how it fits into the overall project. Make sure that you and your subcontractor understand your needs and agree that they're capable of delivering.
2. Estimate how long the work should take to complete and create a due date with the subcontractor. Try to keep the subcontractor's due date far enough ahead of yours so that any problems can be addressed before you have to turn it over to the client.
3. Know if there are any materials or information your subcontractor needs, and work out benchmarks for delivery. If it's a licensed project based on a series of novels, for example, how will you get the novels to the subcontractor? How long will they have to absorb the material? You'll want to build this into your deadlines.
4. Agree on the compensation. This can take some back-and-forth negotiations, but know what you want to pay and the maximum you can afford to pay.
5. Discuss what should happen in the event either of you breaches the contract. Nobody intends to do this going in, but unfortunate life events occur, and it's better to prepare for problems up front.

When you have this all together, it's time to draft your agreement, making sure you list all the vital information in terms that are clear, easy to understand, and concise.

Structure of a Subcontractor Agreement

There are a number of standard clauses that should be included in any solid subcontractor agreement. While each agreement has its own structure, it should always provide the following factors:

• Scope of Work

• Duration of Work

• Payment and Billing

• Clarify Status

• Non-Disclosure

• Non-Competition

• Work-for-Hire

• Insurance

• Prohibition of Assignment

• Indemnity

• Promises and Warranties

• Arbitration

• Termination or Modification

• Jurisdiction

• Validation

• Entirety of Agreement

These sections do not have to be entirely separate; some contracts create sub-sections and combine points. Validation and Entirety of Agreement, for example, can be part of the same clause, as can Jurisdiction and Arbitration. What's important is that the information is there in the contract and is very clear and concise.

Finally, the last section in every contract should be the signatures of the contractor and subcontractor, as well as the address, date, company information (if any), and tax information of each party (EIN, SSN, or other tax ID number). Both parties should have a completed copy of the contract, signed by everyone.

Scope of Work

Include a description of the project as well as the details of what duties the subcontractor is responsible for. Be clear and precise. Include the project name, owner, and deliverables. Make sure everyone understands the responsibilities.

Duration of Work

This section outlines any deadlines that are in mind, whether work is as needed, the layout of the project, and the time and date at which the contract will be fulfilled. It's a good idea to set this deadline ahead of your own, so you have time to handle any problems.

Payment and Billing

Outline the means and rate that you'll pay the contractor. Is it an hourly rate? Flat fee? Based on deliverables? Be clear about how and when payment will be issued, important milestones, and exact amounts. Consider a "buyout" clause in case things go badly. Outline if invoices should be submitted, and the format they should take.

Clarify Status

Note in the agreement that the worker is an independent contractor responsible for their own taxes, insurance, and the like. This section is important should they decide to challenge their status and want to be treated as an employee.

Non-Disclosure Clause

If your subcontractor is privy to private information, make sure there is a clause forbidding them from disclosing this knowledge outside of the company. Define what makes up "confidential information," and make sure you're in compliance with the Master Agreement.

Non-Competition Clause

This stops your freelancer from contacting your client directly and stealing the job out from underneath you, now or in the future. Check local laws or speak with your attorney about whether you can include this and what restrictions your state might have.

Work-For-Hire Agreement

This clause clarifies that the work produced by the subcontractor is yours, that they're being hired to develop your intellectual property, and that they waive all rights to it and assign them to you instead.

Insurance

Make sure the contract clarifies that your subcontractor is responsible for their own insurance coverage, including general liability (commercial and professional), errors and omission, workers compensation, health care, and other types of coverage.

Prohibition of Subcontracting

In general, you want to avoid sub-subcontractors, so include a clause forbidding assignment of work. Otherwise, you could end up with a very muddy picture around the structure of the project. Your Master Agreement may also have prohibitions on the number of levels of contractors allowed.

Indemnity Clause

This ensures that your subcontractor takes responsibility for the quality of the work and removes you from legal problems that might result. It's a vital means of covering yourself.

Promises and Warranties

This covers any promises the subcontractor makes - that they will do professional, high-quality work, their work will be original, they have the skill to complete the job, and they will correct errors they make.

Arbitration

This clause outlines the legal means by which any disagreements will be settled. Usually, it requires arbitration as an alternative or precursor to a court trial, which benefits all parties involved should an issue arise.

Termination or Modification

This section outlines the means by which the contract can be canceled or changed. It can include a "buyout" clause, under which the contractor can pay the subcontractor a smaller fee to take what work they've produced and cancel the rest of the contract. It usually requires written notice of termination to be agreed upon by both parties.

Jurisdiction

This section identifies the state under whose laws the contract is enforceable. Usually it's the state in which the contracting company is registered. So if your business is in Delaware, the contract is governed by Delaware laws.

Validation

This section, though not present on all contracts, specifies that if any part of the contract is unenforceable, the rest of the contract remains in force.

Entirety of Agreement

This section is a sort of catch-all. It clarifies that the written contract makes up the whole agreement between parties and that no other responsibilities on either side are implied or assumed in any way.

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