The Top 5 Elements of a Construction Contract with Subcontractors You Can't Afford to Miss

We know from experience that a clear and strong construction contract with your subcontractors is essential for the success of any construction project. Without one, you risk facing project delays, unexpected costs, and even legal disputes that can cause significant damage to your projects bottomline.

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That's why in this article we will discuss the top ten elements of a construction contract that you should have with your subcontractors that you simply can't afford to miss. By including these crucial elements in your construction contracts, you can prevent discrepancies, misunderstandings, and issues with your construction team, which in turn, will protect your bottom line and ensure the success of your project.

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01. Clear Scope of Work

One of the most critical elements of a construction contract with subcontractors is a clear and detailed scope of work. This section should outline the specific responsibilities of the subcontractor, including what work they will perform and what deliverables they will provide. Does their scope include both labor and materials? For instance, if a subcontractor is responsible for installing electrical wiring, but not for providing the wiring materials themselves. Or is it just labor, and they need to install all of the material which will be owner provided? This will help avoid any misunderstandings or disputes later on.

It's essential to specify which construction trades they will be in charge of, such as plumbing, electrical work, or carpentry, and what their specific duties will entail. This is where taking some time to ensure there are no scope gaps or scope overlaps will save your construction crews a lot of time and avoid any costly mistakes.

The scope should also include specifying the type of safety gear that will be required, such as hard hats, safety glasses, gloves, or other protective equipment. It is important to clarify the level of basic cleaning that will be maintained during working hours, including details on who will be responsible for cleaning, how often cleaning will occur, and what cleaning products (if any) will be used.

To ensure that the subcontractors are held accountable for maintaining a safe and healthy work environment, the scope should also outline consequences for non-compliance. This could include a warning system, fines, or other penalties, depending on the severity of the non-compliance. But more on that later in our next section.

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Don't start your construction project without a clear and comprehensive contract in place. Download our sample contract now to make sure you're covering all your bases.

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02. Payment Terms and Schedule

When you're working on a construction project, it's important to have a clear understanding of the payment terms and schedule with your contractor. This means figuring out how much you'll pay, when you'll pay, and what happens if the work isn't completed on time and quality issues arise.

It's a good idea to work collaboratively with your contractor to figure out what the payment terms and schedule should be. This way, both parties can agree on something that's fair and reasonable. This will avoid the contractor from blaming you for setting unrealistic timelines or expectations. You should also incorporate something that if the contractor completes the work early or goes above and beyond, that you may offer them a bonus. On the other hand, if they don't meet their deadlines, you can charge a penalty per day for each occurrence from their payment. Here is where you could include additional fines or fees if safety and cleaning violations occur.

Another important thing to consider when structuring the payment terms and schedule is the amount to be paid at each milestone. By setting up a payment schedule that is tied to specific milestones, you can ensure that the contractor is completing the work as expected and that payments are being made accordingly. This provides a level of financial protection, as you are only paying for work that has been completed and approved. If there are any issues with the work, you can withhold payment until the issues are resolved.

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03. Change Order Procedures

Construction projects are often subject to changes during the course of the project, which is why it is essential to have a process for requesting and approving changes to the scope of work, timeline, and budget. This process should include clear guidelines for how changes will be communicated, reviewed, and approved.

One important aspect of this process is ensuring that contractors do not begin any additional work that they expect payment on without prior written approval. This means that any additional work that will be billed for time and materials must be communicated and approved before work begins. This ensures that all parties are aware of the costs associated with the additional work and can make informed decisions about whether to proceed with the change.

Additionally, it is important to outline any additional costs associated with changes. This may include additional labor costs, material costs, or other expenses. By outlining these costs upfront, both the owner and the contractor can make informed decisions about whether to proceed with the change.

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04. Insurance and Liability

In addition to establishing a clear process for requesting and approving changes to the scope of work, timeline, and budget, it is crucial to define who is responsible for carrying the necessary insurance coverage. This includes specifying whether the owner is responsible for carrying insurance through a builder's risk plan, if the general contractor is responsible through a general liability policy, or if each trade and crew on the job-site will be required to be insured.

It is important to specify the types and amounts of insurance required, including general liability insurance, workers' compensation insurance, and any other specialized insurance coverage that may be necessary. This ensures that all parties are adequately protected in case of accidents or damage, and that there is no confusion about who is responsible for liability.

Additionally, this section should outline the process for making insurance claims, including the information that needs to be provided and the timeline for filing a claim. It is also important to specify any deductible amounts that may apply and who is responsible for paying the deductible.

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05. Termination

Establishing conditions for termination is an important aspect of managing a construction project with subcontractors. While termination is always the last resort, having clear conditions for termination can help ensure that the project is completed on time and to everyone's satisfaction.

One important aspect of this process is establishing a warning system to give the subcontractor an opportunity to address any issues before termination is considered. This could include written or verbal warnings, depending on the severity of the issue.

An easy system to implement  is a "three strikes and you're out" rule. This gives a clear guideline that everyone understand for when termination is necessary. After a certain number of warnings, if the issue is not addressed, termination may be necessary.

When terminating a contract, it's important to specify the conditions for termination, such as non-performance, breach of contract, or bankruptcy. This section should also outline the notice requirements and how the subcontractor will be compensated for work completed. It's important to establish payment milestones throughout the project to ensure that there is enough budget to terminate the contract and still have enough money left to finish the job.

Overall, establishing clear conditions for termination is crucial for the success of a construction project. By providing proper warnings, outlining the conditions for termination, and establishing payment milestones, everyone involved in the project can work together to ensure that the project is completed on time and to everyone's satisfaction.

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Ready to get started on your construction project? Download our sample 1-page contract to ensure that you have all the essential elements in place!

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