Evaluating Subcontractor Agreements

A subcontractor is a company that performs work, usually in the construction context, for a general contractor that is responsible for completing a given project.  Subcontractors typically have their own employees, tools, and other materials, so it is important that the subcontractor and general contractor adequately memorialize their relationship.  There are a few things that companies should keep in mind when evaluating subcontractor agreements.

Indemnification

One of the most important considerations when evaluating subcontractor agreements is the indemnification language in such a contract.  General contractors often ask that subcontractors indemnify them against losses, included lawsuits, that may arise as a result of the work done on a project.  When writing such indemnification provisions, it is important that the parties detail the exact situations in which they expect the indemnification to occur.  In addition, it is important that a subcontractor only agree to indemnify a general contractor to the extent of its own wrongdoing and not indemnify the general contractor for anything the general contractor may do wrong.  It is important to note that laws and court cases may impact the extent of an indemnification.  As a result, it is important to speak with an experienced lawyer to ensure that an indemnification provision is enforceable and provides the greatest level of protection possible.

Additional Insurance

Additional insurance requirements are other provisions that are typically negotiated when evaluating subcontractor agreements.  Additional insurance provisions usually ask that subcontractors procure insurance for themselves, for the general contractor for which they are working, and perhaps the owner of a given construction site, among other potential insureds.  This protects the subcontractor and the general contractor in case there is a claim that arises out of the work performed because there will be insurance in place to pay for legal fees and a recovery that may be made the companies.

Parties need to be careful when writing additional insurance provisions.  For instance, parties need to carefully specify which entities should receive additional insurance protection since general contractors may use different legal entities and the precise entity needs to be named. Also, general contractors should insist that subcontractors produce evidence that insurance has been obtained prior to working on a given project.  In addition, the amount and type of insurance should also be discussed, and this will depend on the circumstances of the job.  For instance, jobs that require motor vehicles may require insurance that covers this type of work.  In many instances, insurance with a limit of one million dollars per occurrence and two million dollars aggregate should be enough, but parties should speak with counsel about whether this amount of coverage is sufficient.

Terms of Payment

Perhaps the biggest consideration when evaluating subcontractor agreement is the processes regarding payment for services rendered by the subcontractor.  Subcontractor invoices usually specify that payment shall be made to the subcontract a certain number of days after the subcontractor submits an invoice for payment. However, there may be a dispute about whether a subcontractor adequately performed work to the specifications of the general contractor.  In such instances, a subcontractor agreement may specify that a certain amount of the payment may be deferred until the companies come to an agreement about disputed work.  In addition, sometimes the general contractor does not have the money needed to pay the subcontractor because the property owner or project manager has not paid the general contractor.  In such situations, a subcontractor agreement may specify that payment to the subcontractor shall be deferred until the general contractor gets paid.  In addition, the general contractor may reserve the right to withhold payment to the subcontractor if the general contractor needs to perform remedial work on the project, pay fines, or conduct other work assigned to the subcontractor.  Payment to a subcontractor can be complicated in a variety of situations, so it is important to discuss all of the circumstances that can arise so that the parties have reasonable expectations about when payment will be made and possibly withheld.

Miscellaneous Provisions

There are a number of miscellaneous provisions that are also negotiated when evaluating subcontractor agreements. For instance, contractors may agree to arbitrate any disputes that may arise between them so that they can cut down on legal fees and keep matters more private than filing litigation.  Moreover, contractors may require that the parties keep certain terms of their agreement confidential, but parties should mention how financial and legal professionals should be allowed to know information relating to the agreement.  In addition, contractors may require that one or the other party be responsible for payroll taxes, government investigations, and other matters related to the work on a site.  Contractors may also specify that the written agreement is the entire understanding between the parties and the agreement can only be changed by a writing signed by the parties.  Contractors may wish for a variety of different provisions to be included in a subcontractor agreement, and it is important to work with an experienced contracts attorney to ensure that the expectations of the parties are memorialized in a written agreement.

The Rothman Law Firm has experience working with a variety of contractors and we have experienced evaluating subcontractor agreements.  If you are looking for an experienced contracts attorney to review your subcontractor agreement or other contract, please feel free to contact The Rothman Law Firm to request a free consultation.