Subcontractor Agreements, an Easy Explanation

FYI this is about a 10-minute read, legal stuff bores me but it’s important to understand the agreements you’re signing.

Overview: Let’s say you own a webshop and a client has hired you for a project. Now you want to hire a designer and a programmer to work for you as subcontractors. What does the subcontractor agreement need to say to protect you?

During this article, we’ll call the webshop owner the “contractor” or just “you.” The “client” is the person that hired you for the project, and the designer and programmer are “subcontractors.”

Designer: Typically, a designer will be given pre-existing design files from a client from past projects, such as stock photos and color palettes. On most projects, it’s for an upcoming marketing/advertising campaign or unreleased product for the client. There could be concerns with the client giving stock photos they didn’t buy.

Programmer: They have access to client servers, and they’re writing software to complete business or marketing tasks for the client. The programmer could know ways to hack the client’s app or could build vulnerabilities into the product. They also know about products and marketing initiatives before public knowledge. They have knowledge of the product’s flaws and future features to implement.

Introduction and Preliminary Questions:

1. Who is a Subcontractor?

According to the IRS, a subcontractor is one who is responsible for keeping their own records and paying their own self-employment and taxes. Sound familiar? YES! Similar language is used to describe an independent contractor.

In brief, a contractor hires a subcontractor to help with a project.

2. Does the Master Agreement allow for a subcontractor?

Before proceeding with any discussion on the topic of subcontractors, it is essential that you, the contractor, refer to your Master Agreement (the agreement you have with a client) to see if the Master Agreement even allows for the use of subcontractors. Sometimes the agreement may prohibit the use outright, while on other occasions prior consent of the client is required before subcontractors can be used.

Before Proceeding With The Subcontractor Agreement, figure out…

Do I need to let the client know I am using a subcontractor?
Does the Master Agreement have any language indicating that the contractor must ensure that the subcontractor complies with the Master Agreement and that the contractor will indemnify (and hold harmless) the contracting party in the Master Agreement for anything that the subcontractor messes up?

What does this mean? If the Master Agreement does have the above language, then if the client sues you for something the subcontractor did, that’s on you. The client is not going to chase after the subcontractor when he has access to you. Later on in this article, you will read about how to deal with this situation.

3. Are you seeking bids from multiple subcontractors?

If so, keep track of what hourly rate, etc you promised this subcontractor. Be sure to incorporate those promises in your final agreement.

Maintaining a log could be helpful for this.
Your attorney will ask you if there are certain terms in the contract that you consider most important–think about these before meeting with your attorney.

4. What Clauses Do I Need?

Scope of work

Describe the project and the subcontractor’s duties in detail, and be as precise as possible.

This clause is important because it puts the subcontractor on notice of the contractor’s expectations. It may be difficult to include every single duty, but think of all of the possible situations that might come up–for example, what if the client hates the web layout? Once the web layout is submitted, is the subcontractor responsible for making changes to reflect the client’s expectations?

A good format to use is:

(i) Project Name:
(ii) Project Owner:
(iii) Project Location:

If your project contains specific timelines, spell them out in a separate piece of paper that can be attached as an annexure to the contract. However, you might not want to direct every aspect of the project, because that’s when you spill over into employee territory. You want to provide enough information to ensure timely action and compliance.

Include the following statement: Subcontractor shall furnish duly qualified persons to provide the services under this Agreement, which persons shall at all times be either employees or independent contractors of Subcontractor and not employees of Contractor.

Why is this important? You don’t want to be responsible for other people, whom you have no communication or relationship with, or to be held accountable for their employment-related issues.

Duration of Work

Fixed Time: Do you have a deadline in mind? If yes, indicate your deadline.
Is the work on an “as needed” basis? If yes, then describe how the project will be laid out.

Practical Tip: Make the deadline for project completion for your subcontractor well in advance of your own deadline with the client. This gives you adequate time to review the work and account for any hiccups or roadblocks.

Billing/Payment

Is payment per hour? If so, what is the maximum number of hours that can be devoted to the project per week, per month, and for the duration of the project?
Is payment a fixed price payable at the end of the project? What happens if changes need to occur after the fixed price is paid?

You should keep the following bullet points in mind while drafting your billing/payment clause:

Set Milestones for payment.
For the subcontractor, this will be useful as they have assured payment every time they hit a milestone.
For the contractor, this will be useful as they can be assured of timely delivery of project parts.
Do you want monthly invoices detailing the work done to be submitted? This is probably a good way to review work products the subcontractor is working on, and from the subcontractor’s perspective, it means being paid as different parts of the project are completed.
Indicate exactly what you are paying for. Anything the sub-contractor needs to do (special training, licenses, etc.) to prepare himself for the project is his responsibility and on his dime.

Sample Language:

The contractor shall pay Subcontractor for its services provided from time to time under this Agreement on the basis of time spent by Subcontractor and Subcontractor’s employees and subcontractors in providing the services. The amount paid shall be based on the rate of ($dollar amount) per hour per person. Payment shall be payable within ten (10) days of Subcontractor submitting an invoice for the services provided. If payment is not made within ten (10) days of receipt of an invoice, the amount due shall accrue interest at the rate of (amount of percentage) per annum, and the Subcontractor may stop performing services until paid in full.

Independent Contractor

Indicate that the subcontractor is an independent contractor and that you are not responsible for any tax-related deductions.

Sample Language:

The parties intend that this Agreement creates an Independent Contractor relationship between them. The subcontractor is not an agent or employee of the Contractor for any purpose. The contractor is not responsible for deducting, and shall not deduct, from payments to Subcontractor any amounts for withholding tax, FICA, insurance or other similar item relating to Subcontractor or Subcontractor’s employees. The subcontractor shall be solely responsible for deducting and paying such items. Neither Subcontractor nor Subcontractor’s employees shall be eligible or entitled to any of the benefits to which employees of Contractor may be entitled on the account of Contractor, such as worker’s compensation, unemployment compensation, insurance, paid vacations, paid holidays, pension, profit-sharing, Social Security, and other benefits that may be available.

Confidential Information/Non-disclosure

Similar to the “Employment Agreement” Clause.
Important to ensure project details remain confidential.
Do you want the subcontractor to promise that he will not divulge to anyone the fact that he “is a subcontractor for a specific contractor for project X”? If yes, include this point within your non-disclosure clause.
Don’t forget to consult the Master Agreement confidentiality clause–there may be issues with sharing certain information with the subcontractor and you are better off knowing what is allowed and what isn’t. If client consent is needed before you can share information with your subcontractor, you need to know that.

Recap:

Define confidential information.
Indicate what information can be shared and what can’t be shared.
Address the consequences of sharing information in violation of the clause.

Sample Language: (Taken from Docracy):

The Subcontractor and his or her employees shall not, during the time of rendering services to the Contractor or thereafter, disclose to anyone other than authorized employees of the Contractor (or persons designated by such duly authorized employees of the Contractor) or use for the benefit of the Subcontractor and his or her employees or for any entity other than the Contractor, any information of a confidential nature, including but not limited to, information relating to any such materials or intellectual property; any of the Contractor’s projects or programs including the project covered by this Agreement; the technical, commercial or any other affairs of the Contractor; or, any confidential information which the Company has received from a third party.

Non-Compete

Similar to the “Employment Agreement” Clause.
You don’t want the subcontractor (or any of his employees, independent contractors, or team members) to contact the client and offering a better deal. Of course, the client can’t just breach the contract he has with you without facing consequences, but he might choose to send all future projects to the subcontractor, which is a situation you want to avoid.

Consult local laws to determine the validity of a non-compete clause.

Sample Language:

The Subcontractor agrees, that during the term of this Agreement and for a period of _____ years after the expiration or termination of this Agreement for any reason, neither the Subcontractor nor any of its members, employees, agents, affiliates and/or subcontractors will perform any services for any client, whether similar or dissimilar to the Services provided hereunder (describe type of service here.) Since it is difficult to quantify the damages Contractor will incur by reason of the Subcontractor’s breach of this Agreement, the Subcontractor will pay the Contractor promptly upon demand the sum of (dollar amount due upon breach of contract) United States Dollars (US$dollar amount due upon breach of contract) for each breach of this Agreement, as liquidated damages for breach of this Agreement and not as a penalty.

Work for Hire

Similar to the “Employment Agreement” Clause. {Insert link}
Important as it informs the subcontractor that he has no ownership rights over the project he is working on, and that all rights related to the project are the contractor’s property.
You are the owner of the work the subcontractor produces, and when you submit it to the client the subcontractor has no rights to the work.

Insurance

Does your insurance cover independent contractors and their potential screw-ups? If your insurance doesn’t, you might want to include this as part of your insurance coverage, especially if you hire subcontractors (ICs) frequently.

Practical Tip: Don’t just sign off on an insurance policy–sit down with your insurance provider and discuss in detail provisions addressing subcontractors, and understand the extent of your liability coverage. Insurance policies have their own set of exclusions and limitation of liability provisions.

Keep the following bullet points in mind:

Does your subcontractor have its own insurance policy that can cover you?

If the subcontractor indicates that it does have its own insurance policy, ask for proof in the form of a certificate of insurance. Next, require your subcontractor to name you as an “Additional Insured” on their general liability policy. Once named, you get the same protection that your subcontractor gets. Therefore, if you are sued for damage to the subcontractor’s cause, the subcontractor’s insurance company will cover you for the claim.

Types of Insurance

Commercial General Liability: Commercial General Liability (CGL) insurance policies are a very important protection for corporate policyholders because they provide defense and indemnity coverage against claims for bodily injury and property damage.
Professional Liability Insurance or Errors and Omission Insurance: Are you providing a professional service or advice to clients? You will probably have some form of professional liability insurance in such situations. Consult your policy to determine the effect of a subcontractor’s professional errors or omissions on you and whether your policy covers them. The same rule of requiring your subcontractor to have their own professional liability insurance applies here.

In the IT and service industry, this is known as Errors and Omissions Insurance.

Assignment

Can the sub-contractor sub-contract out? You probably want to prohibit this because you can easily lose track of who is working on your project.

Sample Language:

This Agreement, and all rights and obligations hereunder, shall not be assignable in whole or in part without the prior written consent of Contractor, and any attempt to do so shall be void.

Indemnity

What happens if you deliver the product to your client and it doesn’t work correctly, and the client sues you for mistakes your subcontractor made? You want to make sure you can recover any money you pay out for the lawsuit, like legal costs or a settlement. This is called “indemnification,” and an indemnity clause will protect you in this situation. However, any mistakes you make cannot be blamed on your subcontractor.

Read your indemnity clause with your own client first–you want the subcontractor to indemnify you of everything you have agreed to indemnify the client of, provided your state laws allow for it. As previously mentioned, some states will not permit indemnity claims arising from your own negligence or willful misconduct.

Sample Language:

Subcontractor hereby indemnifies Contractor, its members, employees, and agents, and holds each of them harmless from and against, any loss, claim, damage, liability, cost or expense whatsoever which any of them may incur as a result of (i) the Work Product or the performance of Services hereunder, (ii) any breach of this Agreement by Subcontractor, its employees, agents, affiliates and/or subcontractors, and (iii) any acts or omissions by Subcontractor, its employees, agents, affiliates and/or subcontractors, in the performance of Services hereunder.

Warning: Indemnity is a complex topic so don’t try to go at it on your own–consult your local attorney.

Warranties

Warranties, as the name suggests, are promises the subcontractor makes.

Most common warranties:

The subcontractor will provide quality work. The subcontractor will perform in a workmanlike and professional manner.
The subcontractor will provide original work that is not copied from any other source or infringes someone else’s intellectual property.
Subcontractor warrants that his employees shall have the level of skill and experience required to complete the task. When an employee does not live up to the task, the Subcontractor promises to replace him or her immediately.
Subcontractor warrants that all deliverables will conform to the project specifications and if any errors, defects, inconsistencies, etc. arise, the subcontractor will correct them. Make sure to include a specific timeline within which you want errors fixed.

Again, these are only some of the most important clauses and considerations to think about while drafting your subcontractor agreement. The most important thing to remember is that you don’t want to compromise any of the promises you made to your own client by selling yourself short to a subcontractor. Think ahead, plan ahead.

We recommend you hire an attorney to help you with your legal documents and/or use legal document services like Docracy and LawDepot.

DISCLAIMER: This article is just friendly advice and only reflects the personal views of a few ‘ordinary’ people. It may not be the kind of advice that you agree with, nor prove to be helpful for your situation. This article is not a substitute for legal advice from an attorney in your own state. By using this website, you understand that there is no attorney-client relationship between you and the author. We encourage comments and viewpoints but try to be nice!

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Contracts

Subcontractor Agreements, an Easy Explanation