Generally, a sub-contractor agreement defines your scope of work and payment terms. Like any contract, these will be legally binding and should be carefully reviewed before you sign it. This avoids unfair terms being agreed to by accident. This article will outline the main points to look out for.
What is a sub-contractor agreement?
A sub-contractor agreement is made between the head contractor and the sub-contractor. If you are the sub-contractor, this entails you to uphold your end of the deal to be paid on time and in full. If you don’t, you risk not being paid part or all of the payment you were otherwise entitled to.
You can either download one online, or have a contract lawyer draft up one from scratch for your company.
The code
As of 2 December 2016, all sub-contractors involved in Commonwealth funded projects are now code covered entities. When the term ‘The Code’ is used, this refers to The Code for the Tendering and Performance of Building Work 2016 (Cth). The Code sets out rules for both the contractors and sub-contractor. A construction lawyer will of course understand this well, however you should have a basic understanding yourself too.
If you are a sub-contractor but not involved in a Commonwealth funded project, you are not covered under this specific code.
Unfair terms in your sub-contractor agreement
If you are about to enter into a more general sub-contractor agreement, you must look out for unfair terms. If your contract was made or renewed after 12 November 2016, you are protected by the law in this area.
To be eligible:
- One of the parties must be a small business, (employer with less than 20 employees)
- It involves the sale of goods or services
- The contract has an upfront payment of no more than $300,000
- The contract has an upfront payment of no more than $1 million, IF the contract is over more than 12 months
The criteria that deems a contract unfair include:
- Allowing only one party to avoid or limit any obligations
- Only one party is able to terminate the contract
- If the contract is breached, only one party is penalised
- Only one party is allowed to vary the terms
For the contract to be deemed unfair, only a court or tribunal can review this matter. If there are found to be unfair terms in the contract, those terms only will be void. The rest of the contract will still continue to act as legally binding. However, in order to get this result, you will need to spend lots of money to have this ruled in your favour. This is why it’s more economical to ensure the contract is fair and valid from the very start.
You can always have a contract lawyer review any contract and point out any unfair terms before signing.
Payment terms in your agreement
Payment for the services or goods you provide to the contractor is the basis of your success and livelihood. Ensuring the payment terms in the sub-contractor agreement are fair and doable is essential. Usually, for prolonged jobs (e.g construction contracts), payments are made regularly each month.
The contractor will usually state that the progress claim can be submitted by you on a certain day each month, and the contractor will pay within a certain amount of days. If your sub-contractor agreement is missing these details, you must bring this up with your contractor. Having no payment terms for both parties to adhere to can seriously impede your ability to be paid on time, or at all.
If there is anything in the payment terms that doesn’t make sense, you should also clear this up immediately with the contractor before signing.
Liquidated damages
Often, there is a clause which sets out specific penalties if the project isn’t completed on time. This is crucial for the contractor as they assume the risk for the whole job. Asking a contractor to get rid of this section completely is not reasonable, however the terms can sometimes be negotiated.
You should read this section very carefully and understand exactly what will happen if you cannot deliver on the job. Usually, this is not too much of a worry though, especially if you can communicate with the contractor well, notify them of any potential delays early and work with them to find solutions.
If the amount of the liquidated damages seems too much or very unfair for you, negotiating the amount with the contractor can be useful.
Conclusion
It’s important to review your sub-contractor agreement as a whole, however there are some main points you should read even more carefully. Once you sign a contract it becomes legally binding, which makes it all the more vital that you understand what you are agreeing to first.
