Subcontractor Agreements: Protecting Your Business 

As a business owner, working with subcontractors can help your business complete projects efficiently and bring in the vital skills you need but do not necessarily have in-house. Some tasks will require specialist skills or knowledge, which your company may not have yourself. By engaging a subcontractor with the right expertise, you can ensure that work meets high standards and keeps your customers happy. However, subcontracting creates legal risks, so you should prioritise a strong subcontractor agreement to define a subcontractor’s responsibilities, manage potential liabilities, and reduce risk. Your agreement will specify your working relationship and the subcontractor’s work and help prevent risk. This article explores key considerations for contracts with subcontractors.

What is a Subcontracting Arrangement?

In simple terms, a subcontract arrangement allows your business to work with a subcontractor to perform specific obligations under your main contract (e.g., a project with a customer). 

Subcontracting can help you delegate tasks, making it a practical way to manage projects and access specialist skills. However, subcontracting does not remove your liability. You will remain responsible for your obligations under your main contract. So, your business can face consequences if a subcontractor fails to perform or defaults in its obligations. 

When Might Your Business Work With a Subcontractor?

Your business may need a subcontractor when it requires specialist expertise or additional resources to complete a project. Certain industries (such as construction) rely heavily on subcontractors to deliver services efficiently and meet project deadlines.

While subcontracting allows you to delegate work, you will stay responsible for overall performance. As such, you must enter a robust and well-drafted subcontractor agreement to clarify your expectations, tasks deliverables, payment terms, and any terms you need to follow for compliance with the principal contract you have with your customer. 

Before hiring a subcontractor, you must check whether the principal contract permits subcontracting. Some contracts prohibit it, but others require customer approval. 

Before agreeing, you should ensure that the subcontractor you appoint has the skills and resources to meet your requirements. By choosing a subcontractor with the right expertise, you will be better positioned to maintain quality. This can also prevent project delays and keep your customers happy. 

How Can You Mitigate Subcontractor Risks?

You must draft a well-structured subcontractor agreement to protect your business from risk. Subcontracting allows you, as the main contractor, to delegate some or all of your contractual obligations to a third party. However, you remain responsible for any non-performance by your customer. 

While your business will generally remain liable to the customer for non-performance, you can mitigate financial exposure through subcontract indemnities and other contractual protections.

What Format and Terms Can a Subcontracting Agreement Cover?

When you draft a subcontractor agreement, you must consider several legal and contractual issues to protect your business. From the outset, you should ensure that subcontracting is permitted and whether any restrictions apply before you can appoint a subcontractor. 

When it comes to drafting, you must carefully define the subcontracting terms. For example, your contract must specify the scope of work, which obligations you are delegating, deadlines, and performance standards. It should also confirm how long the subcontractor will be engaged. As well as any remedies you have if they default and you face a claim from the customer. 

Contents

Subcontractor agreements will generally be either back-to-back agreements or standalone subcontracts. A back-to-back agreement ensures the subcontractor’s obligations closely match yours under the principal contract. A standalone subcontract operates independently, allowing you to set different terms from the principal contract. You should decide whether a standalone contract or a back-to-back agreement best fits your needs. 

A standalone subcontract will give you flexibility (e.g., it allows for different terms from the principal contract). In contrast, a back-to-back agreement ensures that the subcontractor’s obligations mirror yours. However, back-to-back agreements also carry risks—if terms are not carefully drafted, disputes may arise over enforceability, performance standards, and liability allocation. Ensuring that all key provisions from the principal contract are properly incorporated is crucial to prevent gaps in liability.

Depending on the circumstances, making the right choice will require careful consideration. It is sensible to seek legal advice to ensure that your agreement is fit for purpose. 

Some contracts require key provisions, such as audit rights, step-in rights, and policy compliance, to ‘flow down’ to the subcontractor. 

What Key Terms and Protections Can Your Agreement Include?

Your agreement must clearly define the subcontractor’s responsibilities. Key provisions that protect your business may include indemnities that require the subcontractor to cover any losses caused by their actions and mitigate your financial exposure, insurance requirements so the subcontractor has coverage for potential risks, and dispute resolution terms that set out how conflicts will be handled.

Depending on the nature of the project, additional issues may need to be considered. For example, if the subcontractor processes personal data, you will need to take into account mandatory requirements under data protection law. 

How Can Legal Advice Help Protect Your Business?

Subcontracting creates legal and commercial risks, so seeking legal advice helps you manage them effectively. A solicitor can review the principal contract to determine whether subcontracting is permitted. They can also advise on any customer approval or other key requirements. Further, they can draft a robust subcontractor agreement tailored to your business – ensuring it aligns with your obligations under the main contract and includes strong liability protections. 

By seeking legal advice, you will be better positioned to guard against potential compliance issues, avoid disputes, and protect your business when working with subcontractors. For instance, you can ensure that any flow-down clauses, indemnities, and regulatory obligations (such as data protection compliance) are correctly incorporated into your subcontract.

Key Takeaways

Subcontracting allows your business to delegate work efficiently but can create risks. A strong subcontractor agreement will help you set expectations, manage relationships smoothly and protect your business from risk. Given the risks and complexity that can arise when subcontracting, it is sensible to take prior legal advice to ensure that subcontracting is permitted, that your agreement is legally sound and that your business is protected adequately. 

If your business needs help with a subcontractor contract, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to solicitors to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.

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