What is a Subcontractor Agreement?
A subcontractor agreement is a contract between a contractor and a subcontractor. In most cases, this type of contract is entered into independently of the primary contract or agreement between the contractor and the buyer. After an agreement for the project is signed, the general contractor can sign a subcontractor agreement with third-party subcontractors to be used on the property or new construction. It is common for subcontractor agreements to be required on construction projects. Less often, they are used in supply contracts.
Essentially, a subcontracting agreement is a type of agreement where one party (the subcontractor) , doing a specific job on behalf of another party (the contractor) receives some form of compensation. If you’re a contractor who will be entering into a subcontractor agreement for the first time, it’s normal to have questions.
In Texas, subcontractor agreements are standard parts of every construction contract. They establish expectations for all parties involved to keep everyone on the same page. Subcontractor agreements involve a contractor hiring a subcontractor to perform a specific job, service or otherwise provide labor, usually for another entity or individual.
What to Include in a Texas Subcontractor Agreement?
Just like the contract you enter into with your main contractor, your subcontractor agreement is equally important. Because this is a legally binding document, every agreement should be carefully drafted and include certain crucial details regarding your working relationship. The following are key components to look for in a subcontractor agreement:
Scope of work. Work should be specifically defined so all parties understand what’s to be accomplished. For example, if a contractor hires you to do electrical work in one area of the home, that needs to be specified in the agreement. If other work is to be included, such as roughing in other plumbing throughout the house, that should be included in the scope of work so there can be no dispute down the road.
Payment terms. This section should outline how and when you’re going to be paid for the work you’ve done and the expected date of completion. In most cases, payments are made in increments as progress is made, based on percentage of completion.
Payment information. Texas Subcontractor Lien Law requires all contractors to include certain payment language, which includes the name of the mortgage lender and designer, the street address of the project, the legal address of the property where work will be performed, the legal name of the contractor, and an accurate description of the work to be performed.
Schedule of work. The schedule in the subcontractor agreement should match up with the work schedule in the contract between the contractor and the homeowner. This will help prevent delays in payment.
Confidentiality. This clause is meant to protect your business and the information you may learn about the owner’s home. Many people value their privacy and privacy of ownership and don’t want personal information revealed to others. The confidentiality clause will protect you from revealing anything about the owner’s home or project to anyone else unless authorized to do so.
Items to exclude from your subcontractor agreement. There are several things that you should not include in your subcontractor agreement, including:
Also, there are certain items that are not typically included in a subcontractor agreement. These include warranty information and any references to state or local building codes. Be sure to review your subcontractor agreement carefully and consult with an attorney if you have questions or concerns.
Requirements Under Texas Law for Subcontractor Agreements
In our article "Subcontractor Agreements: A Guide to the Basics", we did not need to go into detail on the legal requirements of the subcontractor agreement itself, but we must address it more thoroughly here. Failure to follow the requirements can lead to business consequences, legal consequences or both. So what are the legal requirements for a subcontractor agreement under Texas law? First, the subcontractor agreement must be lawful. That may sound trivial, but it is the most obvious requirement and it is critical nonetheless. Put simply, if the work that is going to be performed under the subcontractor agreement is illegal, the subcontractor agreement itself may be deemed invalid. As explained in one Texas case, Brogdon v. Houston Paper Co. (1974), "[a]n illegal agreement, if performed, may be the basis of an action thereon, provided the law does not prohibit the bringing of such action to enforce an executed contract." Based on this, the Court held that "the contract [is] enforceable where the contract was fully performed or was completed by partial performance in accordance with its terms; . . . The rule excludes recovery on a partially performed illegal agreement, unless so performed in all respects sanctioned by law, in which event the extent of operations under the agreement would control the question of its enforceability."
In addition to the obvious requirements of an agreement being legal, there are other specific requirements to keep in mind. Construction companies that want to hire subcontractors should be aware that a subcontractor must have a license, if required, in order to perform construction work. For example, if you have a carpenter that would be required to supply a license to work on the contract, she must either carry a license or the contract should be void. Many contracts may require that the subcontractor be bonded. While the law does not require bonding for contractors to bid a job, if bonding is required in the job bid specifications, it is required that a bonding company bond the contractor during the contract. There are several other legal requirements that are important to keep in mind, but to try to keep the list from becoming too extensive, we are only covering these requirements. However, note that some requirements are qualifications for the subcontractor itself, while other requirements are qualifications for you, the business. For example, with subcontractor agreements, you might want to only hire subcontractors that are qualified for the work that they will be hired to perform. If a particular skill or job description is the most important qualification that you are looking for, the agreement is an opportunity to set forth that requirement.
In Texas, some subcontractors may be required to be licensed to perform that work. For example, a licensed plumber would be required to only hire licensed and registered plumbers, who in turn had a lawfully issued registration from the State Board of Plumbing Examiners. Check to see if the law provides that the subcontractor, or contractors performing work under the subcontractor agreement, are required to be professionally licensed to perform the work. Action Item: For each of your contracts, keep a contractual checklist of the legal requirements that every agreement should meet. Review your contracts before executing the agreement to confirm that you are hiring a qualified subcontractor and that the contract contains all the legal requirements.
Common Issues and How to Avoid or Fix Them
Even with all the right legal language, subcontractor agreements can still lead to problems. A subcontractor who doesn’t perform the work as promised can create a variety of difficulties for the general contractor, from scheduling issues to safety concerns. Also, if a subcontractor fails to pay its workers or subcontractors, the general contractor could be facing unwelcome labor liens on job sites. To work successfully with subcontractors, it’s important for the general contractor to know how to prevent and address potential issues that could arise.
A commercial general contractor should take care, when hiring subcontractors, to follow a few simple rules: While each of these rules is straightforward, as simple as they seem, they frequently get left by the wayside. First, it’s not uncommon for a general contractor to hope that a prospective subcontractor’s reputation will ensure the subcontractor’s performance. This may be an especially appealing idea if the general contractor is pressed for time, because it allows the general contractor to move forward with hiring a subcontractor without putting in the effort that a thorough vetting process would entail. Even if the subcontractor has a good reputation in the industry, though, the fact is that any subcontractor can fail to perform once he or she is hired, and at that point, the failure becomes the general contractor’s problem. As such, doing due diligence on subcontractors—even if it takes extra time and resources up front—is very important for avoiding problems later on.
In addition, one-third of contractors report having a hard time finding skilled workers. Keeping employees happy and motivated is the key to high productivity. First, contractors need to build a culture that respects and rewards performance. Second, management gets more respect if it enforces rules. Finally, Chandler Solutions’ research into low staff turnover at the Walgreen’s Drug Store and Starbucks shows the value of improving job satisfaction through personal recognition.
If Dallas contractors structured their subcontractor relationships based on the concept of shared risk and reward, they would improve their relationships with subcontractors. Subcontractors are given an incentive – if the subcontractor delivers a higher quality project on time, they receive a bonus. It is a win-win situation, because the contractor spends less money to re-do the job.
Benefits of Having a Valid Subcontractor Agreement
The single most valuable benefit of a well-prepared subcontractor agreement in Texas is in the Court’s finding of "the intent of the parties" if there is a disagreement. The intent of the parties is key in most disputes because it is the parties who create the contract. Generally speaking, Courts will not go looking for reasons to invalidate an agreement, so long as the terms are not illegal in of themselves. Because the intent of the parties is generally best supplied by the writing itself, having a well-prepared subcontractor agreement is the best way to show what you want the agreement to mean.
Another benefit is it reduces the ambiguities in the agreement to zero. If the "terms and conditions" of the agreement are multiple pages long, a party is justified in saying that it was not given an opportunity to read the agreement, since it is highly unlikely that anyone will read all the pages. On the other hand , a one-page agreement that has clear and precise terms and conditions will limit any claim that the party did not understand the agreement prior to signing.
A third benefit is the ability to state all matters that were not agreed to on the written page. Many construction contracts have an addendum page or one at the end which states that there are no "oral addendums." That kind of language can help if a party claims that the written agreement does not cover all discussed topics. Anything not included in the contract was intended to be excluded. Even without that type of language, a written contract will still get you most of the way there. While there are some topics that cannot be excluded, such as scope of work, others can be excluded, such as warranties. Some parties have a separate agreement that governs the scope of the warranty. Again, the point is to write it down, in the clearest possible terms.
A fourth benefit is you will be able to define things that are otherwise undefined. For example, a subcontractor agreement can use the definition of an "industry expert" as defined by the Texas Rules of Evidence. This term is used in many agreements. In some situations, the parties have tried to argue over who is an industry expert and who is an expert with a capital E. The Court would not have had to rule on that issue had the parties just referred to the Texas Rule of Evidence.
How to Write a Texas Subcontractor Agreement
In Texas, as with most states, the subcontractor agreement can be negotiated and drafted in various ways, depending on the facts and circumstances of a particular project. To avoid legal issues later on, subcontractor agreements should be drafted with care and should include provisions that address certain issues, such as liability and insurance terms. The subcontractor agreement should also allow the general or prime contractor to hire a subcontractor for future work, if necessary. If possible, it may also be best to include a contractual obligation for the subcontractor to get a written agreement with its own subcontractors. Please note that the typical form subcontractor agreement and form contract for construction does not necessarily contain all of the provisions that may be helpful or necessary for a particular project.
All subcontractor agreements should provide that the subcontractor will obtain, at a minimum, liability and workers’ compensation insurance that meets the requirements set out in the prime contract. If the prime contract requires additional insurance policies as a prerequisite for engaging in the work, the subcontractor needs to obtain a premium listed for those policies. For example, if the prime contract requires a pollution liability policy with a $2,000, $10,000 or $5 million aggregate limit, the subcontractor should obtain an identical policy with those aggregate limits. In addition, the subcontractor should also add the general or prime contractor to its and its subcontractors’ policies as an additional insured. Without this additional insured coverage from the subcontractor’s insurance carriers, the general or prime contractor may end up defending itself – and its subcontractors – against suits. As a result, the general or prime contractor should include a contractual requirement for subcontractors to maintain liability and workers’ compensation coverage with proper limits and endorsements.
No matter how simple or complicated the agreement is, each subcontractor agreement should be drafted and/or reviewed by a construction attorney, especially if the general contractor is not familiar with subcontractor template contracts.
Where to Get More Information
In addition to Lone Star Legal Solutions, there are a number of other resources that businesses and contractors can utilize. For example, the Texas Association of Builders (TAB) provides sample contracts and online workshops as part of your membership.
The American Subcontractors’ Association of Texas also has a library of resources that members can access. The Associated General Contractors of America is another option and Texas members can join the AGC Houston Chapter. Many trade associations and chambers of commerce offer a variety of materials for their members. However , it is strongly recommended to have an attorney draft or review any contracts or agreements to ensure they meet the requirements of the law and protect you and your clients. There are attorneys that practice franchise, construction and small business law that will charge a relatively low rate in comparison to the potential of losing thousands or millions of dollars if you have a problem with a contract that has not been properly reviewed and revised. You may also be able to find free legal clinics in your area that can provide assistance.