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Reasons to Get Sub Agreements in Writing

Sure, an informal agreement with minimal documentation is easy, but it could cost you time, money, and referrals

September 27, 2017

An annoyed customer leaves an after-hours voice mail. The crew you sent to her house last week to install siding didn’t clean up at the end of the day or when the job was closed out. They asked to use the bathroom ten times a day, then tracked dirt inside. This morning? Cigarette butts in the flowerbed. It was the cigarette butts that prompted the call.

It’s a new crew whose work for others you’ve inspected. This is the third job they’ve done for your company, and the first complaint. The agreement you have with this sub is wholly verbal, apart from an address, a price and a start date on a scrap of paper. So what now? Do you apologize to the homeowner and resolve not to use the crew again? 

If that’s your response then you’re not only out a crew, but you can forget about a customer referral. What if your backlog is months out and you need any competent crew you can get? What if the crew leader calls, wanting to know where their next job is? What if you stumble across the customer trashing your company on Facebook? 

Buddy-to-Buddy or Business-to-Business?

Such scenarios are common because the easiest thing to do when hiring someone’s services is to shake hands and verbally agree on a price and start date. It will work almost every time if you know the crew leader and have a relationship based on trust as well as the check you’re cutting. Many general contractors have a reliable group of subcontracting installers, some they’ve used for years or even decades, doing great work and trusted to behave in a way that puts the company in a good light. For that reason, these relationships are often informal, even verbal. And managing the relationship comes down to this: If things don’t work out, we simply don’t use that sub again.

But if you intend to grow and therefore are in constant need of new crews, or if you simply want to avoid costly or unpleasant situations having to do with professionalism, competence, and/or ethics, then the communication needs to be more than buddy-to-buddy. It needs to be business-to-business, and that requires a formal document, just like the one you expect your customer to sign before commencing work. 

“Perhaps you are used to hiring subcontractors with a conversation and a handshake,” the National Federation of Independent Businesses points out (“Hiring a Subcontractor? 7 Must-Take Steps”). “Perhaps you know the contractor and trust the project is simple and straight-forward. But misunderstandings and surprises can happen in the best relationships. Fortunately, most of these can be prevented by simply getting everything in writing. While putting your promises in writing takes more time and money at the outset than a simple handshake, written contracts can save you the high legal costs associated with surprises and misunderstandings.”

It Is Written

Getting it in writing means filling in the blanks on a well-thought out subcontractor agreement, which website upcounsel.com defines as “a legal document that outlines the responsibilities of someone engaged by a primary contractor to work on a project.”

At the least, that document spells out what the subcontractor is obliged to have in order to be hired and what he will do once he is. It includes these key points:

1) insurances (proof of current liability and workman’s compensation)
2) time and schedule of work
3) a warranty against all defects in materials and workmanship
4) indemnification (to protect from “any unforeseen liabilities, losses, claims or damages”)
5) arbitration or other dispute resolution clause
6) termination, i.e., a clause that establishes grounds for termination, which might include “failure to adequately staff the work, supply adequate and conforming materials, meet the schedule, pay laborers, subcontractors and suppliers, and comply with code and safety requirements.” (See “Thinking About Terminating a Subcontractor?” by attorney D. Scott Gurney of Frost Brown Todd.)

Said document will allow you to be clear on the scope of work (covering as many contingencies as possible), the start and completion dates, and how and when the subcontractor will be paid.

And you don’t need to pay an attorney thousands of dollars to draft such an agreement. Templated or generic versions of subcontractor agreements that you can customize to your purposes are available at National Law Docs, Business-in-a-Box, and other places online. Note that beyond these basics, subcontractor agreements can carry any manner of provision—for instance, your client might request the right to fire the subcontractor—that you may insert.

If this seems like a lot of time, effort, and expense toward managing something that’s rarely a problem, consider what experts have to say. “An effective contract with a subcontractor can save contractors a tremendous amount of time, money, and frustration,” writes Peter J. Lamont at Construction Executive (see “The Basics of Subcontractor Agreements"). “Unfortunately, far too often dealings with subcontractors are handled informally and, as a result, may even end up exposing the contractor to significant liability.”

And in his article “The Short List,” Manhattan attorney C. Jaye Berger notes that “A telephone call saying ‘Start on Monday’ or a brief purchase order is not sufficient to memorialize the agreement between parties.” Meaning if it ever comes to court, you won’t have much to stand on. 

Don’t Step Over That Line 

But let’s get back to the original scenario. How do you ensure that your subcontractors not only install to the level of quality you’re promising to customers, but act in a manner that represents your company well?

One way is to provide written standards or guidelines and discuss these with crew leaders. Another way is to have some level of management by your own employees on the jobsite for at least some portion of the day to ensure that the quality of the work is up to your standards and to communicate with customers about the quality of the experience. Likely enough that’ll be a project manager. 
Bear in mind, though, that your subcontractor is a separate business entity, not an employee on your payroll. He’s responsible for paying his own taxes. And should you go too far in managing on the job, the IRS may come calling about employee classification.

What’s too far? According to the IRS, “There is no ‘magic’ or set number of factors that ‘makes’ the worker an employee or an independent contractor, and no one factor stands alone in making this determination” (see “Independent Contractor (Self-Employed) or Employee?”). The agency points out, however, that “the degree or extent of the right to direct and control” a subcontractor’s work is the basis on which a decision might be made about whether or not that subcontractor is actually your employee in all but name.
Think of hiring a subcontractor as a purchase order for services. Issuing that purchase order doesn’t give you the right to run or control that subcontractor’s business, any more than buying groceries at a store entitles you to manage the place. But that doesn’t mean you can’t set standards and communicate those standards in written form, as parts of a subcontractor agreement.

About the Author

About the Author

Philadelphia-based writer Jim Cory is a senior contributing editor to Professional Remodeler who specializes in covering the remodeling and home improvement industry. Reach him at coryjim@earthlink.net.

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