What is a Subcontractor Agreement?
A subcontractor agreement is a legal agreement between a company (the "contractor") and another company or individual (the "subcontractor") that will be performing work or providing services for the contractor on a specific project. The subcontractor may or may not be a licensed contractor depending on the scope of work and/or potential liability of the subcontractor. The purpose of a subcontractor agreement is to provide a legal framework for the relationship between contractor and subcontractor, including setting forth the terms of compensation and the responsibilities of each party. Subcontractor agreements are typically negotiated prior to the start of the work and set forth the time frame for performance , payment terms, as well as the dispute resolution process, including requirements for mediation and/or arbitration. Formal subcontractor agreements are often not in place for smaller jobs with small subcontractors, such as a painter contracted directly with a home owner for a small room to be painted. However, most subcontracts for work performed by licensed subcontractors, such as plumbing or electrical work, and for larger projects, such as a home remodel or new construction, set forth the payment terms, job scope and other important details to avoid confusion and potential disputes down the road.
Legality in California
In California, the use of subcontractor agreements is not only common but also required for compliance with the law. The state’s Business and Professions Code Section 7057 provides that "[n]o contractor shall sublet any work on a project in an amount exceeding half the original contract price, or in an amount in excess of fifteen thousand dollars ($15,000), whichever is greater." This means that general contractors should have written subcontractor agreements to demonstrate that no individual contract price exceeds the legal limit. In addition, California’s Contractors’ State License Law requires all persons who contract to perform work on a residential property or a property with four or fewer units to be properly licensed as a contractor with the California State Licensing Board. To do so the contractor must obtain the appropriate class of license (e.g., A, B, C-36, or C-7) for the type of work they perform. If they don’t, they have committed a misdemeanor and can be prosecuted. California Labor Code Section 1720 provides for what is called a "prevailing wage." In construction projects paid for by public works funds, such as government grants, construction companies and subcontractors are required to pay the prevailing wage in the area in which the project is located. Generally speaking, this wage is based on the prevailing wage determined as the basic hourly rate plus the fringes that the Davis-Stirling act provides for.
Under federal law, the Miller Act requires that contractors be bonded. These bonds protect the public works funds against theft, fraud, and other improper acts by the contractor or their subcontractors. Under California law, such a bond may be required to obtain a construction license.
Key Provisions of a California Subcontractor Agreement
Subcontractor agreements contain critical provisions to both the subcontractor and the contractor. Below I have provided some of these fundamental clauses that should be present in any well-drafted subcontractor agreement.
Scope of Work: A scope of work tells the parties exactly what work the subcontractor is responsible for. Without a clear scope of work, it opens the door for ambiguity and disagreements down the road, particularly between subcontractors. Having a firm scope of work allows the contractor to better manage its different subcontractors and different scopes of work.
Payment Terms: All construction projects face tight budgets and strict payment timelines. To prevent surprises on your project, you should be aware of the specific payment terms of the subcontractor. Key provisions helpful to include in an agreement are: when progress payments are to be paid, whether you can withhold payments, how much can be withheld, and whether you have a right to approve the subcontractor’s invoices before payment.
Confidentiality: A confidentiality clause can be very important on construction projects, especially if certain work is ground-breaking or proprietary technology.
Dispute Resolution: No one likes it, but getting ready for the inevitably of a dispute is the key to getting through successfully. For that key, you should consider including a provision identifying exactly how disputes under the contract will be resolved. Alternative dispute resolution is often preferred in construction contracts as it is often less costly than litigation. An alternative dispute resolution clause will typically require the parties to participate in at least one session of mediation and or arbitration.
Benefits of a Well-Written Agreement
A well-defined subcontractor agreement can prevent disputes with your subcontractor and minimize the likelihood that costly and time-consuming litigation will be necessary. For example, if subcontractors will be required to indemnify your company for any losses arising from their work, such an indemnification provision will be critical. It is often difficult to enforce an indemnity provision against a subcontractor that has already performed work for you—so having a proper provision clearly enunciated in advance can save headaches later. Indeed, simply having a written agreement in place can prevent a dispute over whether your agreement with the subcontractor should be governed by California law or the law of another state.
More generally, the agreement can help ensure that the subcontractor will comply with California requirements to obtain appropriate licenses, general liability insurance, and workers’ compensation insurance. A written agreement is the best way to ensure the subcontractor understands and agrees to any requirement that may be imposed now or in the future.
The agreement can also be used to protect the business interests of your company, including nondisclosure, non-compete, and intellectual property concerns. If you are bringing in specialists, consultants, architects, engineers, or project managers, it is wise to obtain written assurances that they will not violate the trade secrets of other companies by using your confidential information.
Drafting An Effective Agreement
As a California contractor, you can use a written contractual agreement with your subcontractor. It is not required by law in the state of California, but it often makes business sense. This is especially true if you have a complex job and are including unusual provisions in a subcontractor agreement, such as extensive confidentiality requirements, detailed liability provisions or provisions controlling how disputes between you and your subcontractor will be resolved. If you would feel better knowing there is a formal written record of your agreed-upon agreement terms, then a written subcontractor agreement will work for you.
Enlist a lawyer for complex terms and conditions
An experienced construction attorney can help with the drafting of these complex terms and conditions. Be sure to track down a lawyer who specializes in construction law, and not just any old attorney. For example, you could find yourself in court, going through a dispute over your subcontractor agreement. If you did not bother hiring an attorney to draft the agreement in the first place, thus leaving it open to interpretation, you are at a disadvantage in that litigation.
Furthermore, if you have claims against the subcontractor, for breach of his contractual obligations to you as the general contractor, you want to be represented by a lawyer who knows the ins and outs of California construction law.
Talk with your subcontractor about the agreement
A good subcontractor agreement should be mutually beneficial to both parties. In order to have one written that provides benefits and remediation opportunities to both parties, it’s wise for you to have a conversation first with your subcontractor regarding the terms you have in mind . If you’re thinking the subcontractor should be liable for anything and everything, it can hurt you in the long run. A mutual agreement is the ideal way to come up with terms that work for both sides and leaves no room for miscommunication.
Have an expert check your subcontractor agreement
Even if you end up not using a lawyer for drafting your subcontractor agreement, once a subcontractor agreement is drafted, be sure to have it checked over and evaluated by a professional, such as a construction management consultant or an attorney.
If you happen to have an experienced broker who can represent you on insurance issues and resolve them quickly, that would be another good resource to have on hand. They can give you great advice about how contract terms impact risk and liability.
Don’t use "dump and go" forms
Contracts that are online and sometimes offered free of charge can be a riskier solution than drafting out your subcontractor agreement from scratch.
A free online subcontractor agreement form may or may not be relevant to your state or your specific industry of construction. While spending money on a custom-written subcontractor agreement may not sound appealing to you, remember that even if the time it takes to draft the subcontractor agreement seems unnecessary, when it keeps you out of court, it will definitely end up being worth your while financially.
Your subcontractor agreement should be comprehensive and fully explain the responsibilities and benefits for both parties. Being familiar with aspects of California construction law and the importance of a written subcontractor agreement can help you avoid legal disputes and streamline the course of construction projects.
Common Pitfalls
Despite its importance, the No. 1 mistake that we see with many subcontractor agreements is that they do not comply with California law. In many cases, they are modeled after agreements that are used in other states and that contain legal principles that are not applied under California law.
Another common mistake is that the agreement lacks provisions that clearly define the rights and obligations of the parties. A long, complex subcontractor agreement that fails to provide clear, straightforward answers to questions that would require an understanding of California law is nearly always unenforceable. In California, subcontractors have certain rights under California’s mechanic’s lien laws that cannot be waived even if a subcontractor agrees to waive them (Business and Professions Code Section 7030) and subcontractors also have certain rights under California’s Prompt Payment Act that cannot be waived even if they agree to waive them (Civil Code Section 7132).
As a sub to a subcontractor, you also probably do not want a subcontractor agreement that does not put the main contractor in the best light. Most subcontracts we prepare are for subcontractors who are writing agreements or template agreements that are already in use in their region or in California. For this reason, we carefully create provisions that make it look fair. A lot of subcontractor agreements have unfair terms.
Settlement of Disputes in California
With respect to disputes arising over a subcontractor agreement, there is no specific statutory provision in the California Civil Code. Instead, there is a general rule under the California Arbitration Act (the "Act") that predicates a substantial right of any state resident (including business entities) to petition a California superior court to vacate or to correct any arbitration award. Pursuant to the Act, the only grounds for vacating an arbitration award are as follows: (i) corruption, fraud or improper means; (ii) evident partiality or corruption of the arbitrator; (iii) the arbitrator refusing to postpone the hearing or hear evidence pertinent and if the rights of any party were substantially prejudiced thereby; (iv) the arbitrator exceeded his or her powers, or made an award on matters not submitted to him/her; and (v) there was no arbitration agreement, and the applicant was prejudiced by unfairness in the conduct of the arbitration or the resulting award. "The burden is on the party seeking to vacate the arbitration award to demonstrate the existence of a ground for vacatur under the [Act]." See Dominguez v. Quintero Law, APC (2013) 221 Cal. App. 4th 752, 758-759. The burden is on the moving party to prove that the arbitration award is subject to being corrected under the Act . Id. "Mere dissatisfaction with a result, however, is not sufficient to vacate an arbitration award." Id. at 757. Instead of going through an expensive process to prevent an arbitration from proceeding, or to have the arbitration award vacated after it is rendered, it is often advantageous for the parties to go to mediation first in an attempt to resolve the dispute. Such mediation may be available through a number of forums including the American Arbitration Association, the Bar Association and other private organizations. Going to mediation first also helps to preserve the value of the business relationship between the parties and is generally less expensive than going through an arbitration hearing. It is also worth noting that construction litigation cases in California are subject to exclusive venue and jurisdiction in the California State Court system, unless there are issues involving federal funds. See Cal. Bus. & Prof. Code 7031.5(a), (b). Accordingly, apart from a request for a temporary restraining order, preliminary or permanent injunction under California Code of Civil Procedure sections 527, 526a, 1085, or 1085, such actions must be resolved in the state court system.