Subcontractor agreements are a standard form of agreement between a general contractor the subcontractor they hire to perform work for the general contractor's client. General contractors can function as a residential remodeler or home builder, but most do not have large crews under their employ, so they rely on subcontractors to help perform the work.
General contractors hire subcontractors to do specific work like carpentry, electrical, or plumbing. Subcontractors are not hired directly by the client or homeowner, but rather the general contractor, who is responsible for the subcontractor’s work. As such, a general contractor will usually add 10%-15% markup to the subcontractor’s fee for supervisory efforts.
To be clear, in most states it is legal for a homeowner to function as their own general contractor. Although fairly rare, in these instances the general contractor and the client might be the same person.
Creating a good subcontractor agreement up front will save time and money spent correcting mistakes and resolving disagreements.
Simple subcontractor agreements clearly define what the general contractor needs done, when they need it, and what they are willing to pay for the services. Here we will discuss what a subcontractor agreement is, what it does, whom it protects, and why successful builders use them.
A subcontractor agreement is a contract between a professional, like a general contractor, and another professional to perform work for the general contractor’s client. A good subcontractor agreement is a document that functions as both a hiring contract and a request for proposal, also known as an RFP.
The structure of a subcontractor agreement might change from state to state, depending on how contracts are enforced. For example, a subcontractor agreement created in California might contain different information than a subcontractor agreement written in North Carolina. If environmental concerns must be addressed to comply with state law for example, it should be noted in the subcontractor agreement.
Subcontractor agreements function much like construction proposals, or construction bids. For example, a well written subcontractor agreement clearly states what the subcontractor will do, when they will do it, who makes the decisions, and what the work will cost.
Essentially, in comparison to a construction proposal, the general contractor switches places and becomes the client. The general contractor will send out an RFP to a handful of subcontractors they expect will do the best job for the best price.
Once the general contractor accepts the construction proposal from the subcontractor, a subcontractor agreement is created between the general contractor and subcontractor to perform the work. The subcontractor agreement will include the important details, like addresses, names, federal tax ID numbers, and so on.
A complete subcontractor agreement will also clearly identify who will do what work, where the materials will come from, and how they will get to the job site. A 1099 tax form is sent from the general contractor to the subcontractor every January reflecting the work performed the previous year. Confirming all the details of a subcontractor agreement will save everyone involved time, effort, and money.
For the same reason a great general contractor will provide a concise, informative construction contract, a good subcontractor agreement is clear, concise, and complete. In most cases, general contractors have subcontractor agreements written for specific work, like framing, masonry, or plumbing.
A good subcontractor agreement will be easy to read, easy to interpret, and include everything the subcontractor needs to decide if they want to submit a bid. When a subcontractor receives a subcontractor agreement, the subcontractor should be able to make a decision on the spot because everything they need is there in one convenient place.
Sloppy or incomplete subcontractor agreements tend to generate more questions than they answer. Missing information, illegible handwriting, and general sloppiness are red flags. Handshake deals are even worse, so a subcontractor agreement keeps relationships between general contractors and subcontractors professional and durable.
When appropriate, a well designed subcontractor agreement will require license numbers, certificates of insurance, and other important legal documents from the subcontractor. Other critical tax information, like the federal tax ID number of the subcontractor, will help avoid phone calls and emails in January when most 1099 forms are sent out.
A signed subcontractor agreement is the easiest way to prevent disagreements between a general contractor and a subcontractor. Contract law will vary from state to state, so to insulate themselves from the hassle successful home builders make sure their subcontractor agreements are enforceable, concise, and leave little room for interpretation.
As mentioned previously, many home builders will use subcontractor agreements designed for a specific job. This type of agreement will keep confusion to a minimum because it will be harder to accidentally send a framers subcontractor agreement to a plumber by mistake.
This will also save time, especially when using two subcontractors for the same work, like framing carpenters and finish carpenters. Since much of the content will be similar, like the payment schedule, insurance requirements and so on, much of one agreement can be repurposed for the other.
Each of the aforementioned disciplines bill in a different way, so having specific agreements makes the paperwork easier. For example, carpenters and framers tend to bill by the square foot, so a subcontractor agreement sent to the framing subcontractor would speak to how many square feet the project required, a detailed blueprint of the floor plan, and a payment schedule.
Framing subcontractors tend to be paid at various stages of completion, so a framing subcontractor agreement should discuss when the floor system is completed, when the framing will be finished, and when the project will be “in the dry”, meaning the roofing material will have been installed. These are common times for a framing subcontractor agreement to discuss payment draws and when they are available.
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A masonry subcontractor agreement will discuss how many straps or cubes of bricks the company can install. Bricks tend to generate debris, so material waste is higher with brick projects. As a result, it isn’t feasible to bill nor pay by the brick, but rather a bundle (usually about 100 bricks), or cube, which is about 500 bricks.
In case you’re wondering, bricks are installed by the square foot as well. However, the bricklayer will install more small bricks to equal the square footage provided by fewer large ones, so bricks are sold in pallets equal to the amount of square footage they provide. As a result, a pallet, or cube of a small size brick might contain more than 500, while a pallet of larger size bricks may have fewer.
Concrete blocks are usually sold and installed by the block, so having a subcontractor agreement for these jobs makes life easier for everyone. Projects that will have a brick exterior, for example, will require two different sizes of concrete blocks.
Larger blocks are heavier and more awkward to install than smaller ones, so masonry professionals charge a bit more to install them. Laying out clearly how many of each style block will be needed provides a clear understanding between both parties, which should always be the goal of an excellent subcontractor agreement.
Other licensed professionals like electricians and plumbers usually design, supply and install the materials and labor needed for the project. In contrast, other subcontractors like framers usually rely on the logistical prowess of the general contractor to ensure materials are delivered when and where they are needed.
Professional subcontractors are usually licensed by the state they do business in and will include functions like HVAC, electrical system, plumbing, and security system installation. Most general contractors leave these pros to their work and usually are more concerned that the paperwork is in order than the quality of the work.
HVAC subcontractor agreements tend to focus on the installation, inspection, and testing of the system. For example, a great HVAC subcontractor agreement will usually ask the HVAC professional to design and install the system with little involvement from the general contractor. A great HVAC subcontractor agreement will require that the system is correctly sized, performs as it should, and passes inspection.
A great electrician subcontractor agreement will focus less on the details and more on the number of “drops” the system will require. By knowing the total requirements of the system, an electrician can design the system so as to avoid issues like voltage drops, using more wire than necessary, while ensuring proper function of the system.
A good electrician subcontractor agreement will usually request an invoice for the work in response to a subcontractor agreement. So for example, a subcontractor agreement for an electrician would be based on the number of “drops”, which is slang for the number of fixtures and outlets the job will require.
The best electrician subcontractor agreements will clearly define when projects will be completed, what happens if the system fails an inspection, and when progress payments are due. In most instances, an electrician subcontractor agreement will be divided into three payments to represent the rough-in of the wire, installation of the outlets and fixtures, and final inspection.
If most general contractors, developers, and home builders kept accurate records of how much time they spend correcting mistakes and resolving disagreements, they would likely realize how expensive it is. A well written subcontractor agreement prevents the vast majority of these problems before they start.
All successful home remodelers and builders understand that every problem they avoid is one they don’t have to solve. Project plan disagreements, pay schedules, and material availability should be clearly defined in a subcontractor agreement. This way either party has a common and agreed-to resource each can refer to in the event of any discrepancy.
Remember, a subcontractor agreement is only as good as the creator(s). Investing the time and effort on the front end will save any professional untold hassles, avoid time wasted in litigation, and make for an overall simpler building life. Keep your subcontractor agreements accurate, concise, and complete and you’ll be step ahead.