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In many industries, it’s common practice to sub-contract some of your work to other businesses.
Put simply, this means engaging other contractors to do part or all of the services you’ve promised your client.
While sub-contracting is a great way to scale your business, you need to make sure you’re doing it right. If your business engages sub-contractors, it’s a good idea to have both a Sub-Contractor Agreement and a Head Contract Review in place with each one you engage.
Why Do I Need A Sub-Contractor Agreement?
Engaging sub-contractors is an efficient way of expanding your goods and/or services offerings to your customers — but your reputation is also at stake. To help protect your business, it is crucial to have a Sub-Contractor Agreement in place.
Sub-Contractor Agreements are important to make sure both your business and the sub-contractor are aware of the scope of work to be performed, and are clear on the roles and responsibilities of both parties.
But Why Are They So Important?
Let’s put it this way. When a customer comes on board with you, they might sign a contract or agree to a scope of work for services that you promise them. Often, we call this the Head Contract.
When you ask a sub-contractor to do some or all of that work on your behalf, you want to make sure that they also do whatever you have promised your customer. This is where a Sub-Contractor Agreement comes in. It is important to have these terms clearly set out so that:
- Your sub-contractor satisfies the service expectations of your clients
- Misunderstandings between your client and sub-contractors don’t happen
- Your deliverables to your client aren’t delayed because of your sub-contractor
The last thing you want is an unhappy client because the terms weren’t clear with your sub-contractor. This could lead to non-payment of invoices or even nasty online reviews about your business. As small businesses often rely heavily on customer goodwill, you want to make sure you avoid this as much as possible.
Whatever your industry, your business’ reputation is reliant on your sub-contractors’ work. So, it’s important everything is set out clearly in your Sub-Contractor Agreement.
What’s In A Sub-Contractor Agreement?
Sub-Contractor Agreements can vary in substance depending on the industry in which they are operating, so it is important to make sure your lawyer drafts a customised agreement rather than using a template.
Depending on your industry and the nature of work your sub-contractor will be undertaking, these agreements typically address:
- Scope of services: This ensures both parties are aware of their responsibilities under the agreement
- Confidentiality: If your sub-contractor will have access to your systems or business processes, it’s important to have a binding confidentiality clause to make sure nothing gets disclosed
- Commission (if applicable): If your sub-contractor will be paid on an commission basis, the terms of this will need to be reflected in the agreement
- Payment and late payment: Payment provisions need to be clear, and you should also address what to do in the case of late payments and methods of recovery
- Sub-contracting restrictions: These are restrictions placed upon your sub-contractor so that they cannot sub-contract their services
- Dispute resolution: What happens in the case of disputes? How will they be resolved?
- Non-compete: This ensures your sub-contractor cannot provide their services to your direct competitors
- Intellectual Property (IP) protection: This ensures your IP (designs, business processes, etc.) are protected
- Term and termination: How long will the agreement last? What are the methods for terminating the arrangement?
Why Do I Need A Head Contract Review?
As mentioned above, you’ll need to make sure that your sub-contractor is clear on what you’ve promised to your client. In the legal world, this is where flow-down clauses come in.
As a contractor to your client, there may be terms in your Head Contractor Agreement that need to bind your sub-contractor. These are referred to as flow-down clauses.
Flow-down clauses are important in making sure your sub-contractors are bound by the terms and conditions of the Head Contractor Agreement.
They serve to protect your business and your sub-contractors, and are particularly useful for terms such as payment. The term in your Sub-Contractor Agreement can state, for example, that the sub-contractor will only be paid when your business (the head contractor) is paid by the client.
It is crucial that Head Contractor Agreements are referred to when drafting Sub-Contractor Agreements, as this ensures there are no misunderstandings and inconsistencies when delivering the goods or services to your client.
Most importantly, a Head Contract review will ensure liability clauses in your Sub-Contractor Agreement are drafted correctly.
This is why, if you are a business with a direct contract with a customer (a Head Contract) and you need to employ a sub-contractor, you will need to have a Head Contract review first, before your Sub-Contractor Agreement is drafted.
Example
Richard has received a project to complete a full kitchen and bathroom renovation for his client.
As Richard doesn’t have the requisite plumbing expertise, he decides to call on Paul, who is a plumber, as a sub-contractor for his project.
It is important that Richard has a well-drafted Sub-Contractor Agreement to make sure Paul is aware of things like when the work needs to be completed for Richard’s client. The agreement will also clarify that Richard will only pay Paul once the client has paid him.
What If I Am A Sub-Contractor?
If you are a sub-contractor, the difference is you will not need a Head Contract review as you won’t have one. You will just need a Sub-Contractor Agreement between yourself and the business hiring you.
Need Help?
Navigating Sub-Contractor Agreements can seem like a complicated process, especially if there are specific provisions in your Head Contractor Agreement that your sub-contractor needs to be aware of.
We’ll make sure your interests are protected, whether you are hiring a sub-contractor, or are a sub-contractor yourself!
Get in touch with us at team@sprintlaw.com.au or call us on 1800 730 617 to have a chat about Sub-Contractor Agreements and to find out how we can help broaden the scope of work you offer your clients!
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