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A subcontractor is a person or company hired by a contractor to provide specialized tasks. Subcontractors focus on a specific area of a much larger project, such as a marketing firm (contractor) hiring a writer (subcontractor) to write blog posts on a client’s website, or a general contractor hiring an electrician (subcontractor) to wire the lighting for a new house.
The major difference between a contractor and a subcontractor is who they’re in agreement with. Prior to hiring subcontractors, the contractor will enter into a formal agreement with the client (customer). Then, the contractor will enter into a sub-agreement with each subcontractor they hire. While the client is at the top in terms of hierarchy, the subcontractor’s duty is to the contractor that hired them, not the client.
Tax-wise, contractors and subcontractors are both viewed as self-employed. This means they’re responsible for deducting and paying their own taxes. There are two (2) important forms used by contractors, which are:
- Form W9 – Prior to beginning work, the subcontractor will need to provide a completed W9 to the contractor. This is a form used for collecting information on the subcontractor only and is not filed with the IRS.
- Form 1099-NEC – Using information from the W9, the hiring contractor will need to complete form 1099-NEC, which reports the amount ($) of money paid to the subcontractor in a given year. A copy of the completed form will need to be sent to the subcontractor and filed with the IRS.
A subcontractor agreement is a legal form used for establishing a working relationship between a contractor and a subcontractor. Completing and signing the form is the last step that must occur before work can begin on a project. It covers the services the subcontractor will perform, how they’ll be compensated, insurance they’ll need to hold (if any), and how the agreement ends.
- The Parties
- Service & Responsibilities
- Start Date
- Completion / Termination
- Dispute Resolution
- Change Orders
A standard section, that can be found at top of the first page of most agreements. It outlines the names and emails of both the contractor and subcontractor. Although optional, some agreements also include the name and address of the client.
This section specifies what duties and responsibilities the subcontractor will have. In addition to describing the service(s) the worker will provide, it should mention whether the subcontractor will be responsible for managing other workers (such as other contractors or employees), if they’ll need to provide materials, travel to the location (on their own), or they’ll need to provide their own tools.
An important provision, this section breaks down how and when the contractor is paid for their work. This section is highly variable and depends on the deal that was worked out between the two parties. Some are paid hourly, whereas others are paid in standard weekly installments. The parties can also write out custom payment terms if none of the standard payment options apply.
This section is straightforward, and simply includes the day, month, and year that the subcontractor will begin work.
Both “Completion” and “Termination” clauses refer to the event(s) that must occur in order for the agreement to end. The completion clause describes what must occur in order for the subcontractor to be declared finished with their services. This can be a specific date, upon the contractor deeming it done (in compliance with industry standards), or another condition of the parties choosing.
It’s important to understand that the “Termination” clause is not necessarily negative, but refers to conditions that result in the contract ending. If any of the events under the “Completion” clause occur, the contract will often terminate automatically. Alternatively, the parties can agree on a date that the agreement will end. This may be necessary if the contract includes a non-compete or non-disclosure clause, as the agreement would need to remain in effect for the clauses to remain binding. Alternatively, the contract can permit either party to terminate the agreement by providing written notice to the other.
This clause serves as a road map for reaching a resolution should a dispute arise between the parties. It outlines the process for how the parties should go about sorting out their differences, namely one (1) of three methods:
- Binding arbitration – Both parties sit down with a 3rd party (the arbitrator), explain their perspective, and then receive a binding decision made by the arbitrator.
- Non-binding arbitration – Similar to binding arbitration, but the parties are not required to accept the answer made by the arbitrator. If they do not accept the arbitrator’s conclusion, litigation will often follow.
- Mediation – The parties speak with a 3rd party as well as each other in order to reach a fair resolution to their differences. If the parties don’t come to an agreement, litigation OR binding arbitration will typically follow.
Mostly used in the construction industry, this section establishes the protocol to be followed if the client (or the contractor) requires a change to the services provided by the subcontractor.
Because the subcontractor is bound to provide services as written in the agreement, a formal change order acts as an amendment to the contract and provides guidance on the new services the subcontractor will be required to provide.