5 April 2021
Mind The Risk Gap – Best Practice When Using Subcontractors
Whether you are planning on using subcontractors for a one-off project or on a long-term basis, there are several steps you can take to safeguard both your business and business relationships.
The first step is to carry out some basic checks on your subcontractor, as these will often dictate how your contractual relationship should be structured. Is the subcontractor operating as a sole trader or a limited company? Do they have adequate insurance in place? Do they intend on carrying out the work or will they also need to subcontract?
These are all important questions that will influence the measures you ought to take to protect your business.
The next step is to get a proper contract in place. It is worth remembering that this needs to address your relationship with the subcontractors, and it also needs to consider any contract or terms of business you use with your own clients or customers.
This will ensure you are not left unduly exposed as a result of your need to use subcontractors.
Making Sure The Contract Covers Back-To-Back Risks
Your customer contracts may contain certain terms which you will be held responsible for, and it is these terms that need to be appropriately drafted and included in your subcontractor contracts. Here are some examples:
- Responsibility for work done by subcontractors – if you will remain fully responsible for work done by and for the rectification of any defective work done by any subcontractors, your contract needs to ensure this is mirrored and the subcontractor will remedy works at no cost to you.
- Confidentiality obligations – depending on the nature of your business, your client contracts may bind you to confidentiality obligations and those provisions may require you to enter into similar provisions with any agents, employees or subcontractors. It is therefore good practice to include wording in your subcontractor agreement to cover these obligations adequately.
- Right to subcontract – bearing in mind that you may be liable for all subcontractors, instead of mirroring this in your subcontractor contract, you may need to consider closing this gap and preventing the subcontractor from further transferring their rights and obligations. If you cannot do this, consider adding in tighter provisions to give you more control or consent rights.
- Insurance – remember, if your subcontractor defaults in any way, the client will have recourse to you. If you have agreed a certain level of minimum insurance with your client, you ought to have the same or higher level of insurance requirements met by your subcontractors and this should be written into any contract.
- Scope of work and right to reject work – again, looking at your client contract and ensuring that you have the same if not tighter provisions with your subcontractor will give you the best protection. For example, if the client asks for work outside the original scope and your client contract states this will be done at a certain hourly rate, that needs to be reflected appropriately in your subcontractor agreement.
- Intellectual property rights – this is another really important area that needs to mitigate your back-to-back risk. If a client contract states that you have to fully assign any intellectual property rights in works completed, but your subcontractor agreement states only a licence will be granted or assignment is subject to full payment, this will be a clear indicator of exposure which you need to limit.
In Part 2 of this post, we will discuss other key terms in the contract and some commercial pitfalls to look out for.
How We Can Help
Subcontracting agreements should never be dealt with in isolation. Identifying gaps in the contracts right through the supply chain is crucial in ensuring your subcontract agreements protect your interests. Our solicitors can help you get the analysis right and contracts drawn up in a way that give you the solid foundations to continue running your business with peace of mind.
For further information, please contact us.
For more information about commercial contracts, click here.