The Rights and Duties of a Subcontractor

Posted on Monday, August 06, 2018

If you are a subcontractor for a construction project, you should be aware of your rights and duties. Most of the specifics should be set forth in the subcontractor's agreement. As with all business dealings, having the terms in writing is the best way to know what you have agreed to, rather than having an oral agreement, which can lead to potential disputes. So be sure to have your agreement about payment, rights and duties in writing.

In addition, make sure you understand the terms. Before signing a contract you don't fully understand, obtain legal advice. You may be able to negotiate revisions to the agreement that are more acceptable to you.

Taxes

A subcontractor is responsible for paying federal and state income or self employment taxes. 

The general contractor may send each subcontractor a Form 1099-MISC showing non-employee income if $600 or more was paid in a calendar year. The annual deadline for sending these forms is January 31.

The following list provides some of the terms or sections that are included in a subcontractor's agreement:

Scope of Duty;
Milestones;
Approval of products used for the job;
Payment schedules;
Coordination with other subcontractors;
Verification or Inspection of work completion;
Warranties;
Insurance; and
Indemnification.

Depending on state law, subcontract agreements should not:

1. Limit the general contractor's implied duty not to hinder or delay the subcontractor. Also, the contract should not prohibit the general contractor from requiring subcontractors not to hinder or delay the work of the general contractor or other subcontractors.

2. Limit the general contractor's authority to resolve subcontractor conflicts.The contract should set forth how conflicts are resolved.

3. Restrict the subcontractor's right to damages for changes to the construction schedule or work caused by the general contractor. At the same time, the contract should set forth a notice period for when the subcontractor has a change in schedule.

4. Require the subcontractor to bear the cost of trade damage repair except to the extent the subcontractor is responsible for the damage. The general contractor could require the subcontractor to take reasonable steps to protect the subcontractor's work from trade damage.

5. Require the subcontractor to waive claims for additional time, compensation, bond or retainage rights as a condition of receipt of progress payment, except to the extent the subcontractor has received or will receive payment. General contractors could require the subcontractor to provide notice of claims in order to have a right of recovery or to execute a full and final release, including a waiver of bond and retainage rights, as a condition of final payment.

The terms outlined above are just some of the terms that might be part of a subcontractor agreement -- or should not be included. Consult with your attorney about your situation. Have an attorney review any contracts and/or negotiate the terms.

Waiver of Liens

Usually, a general contractor cannot require a subcontractor to waive a lien but it is frequently done in order for a person or company to get a subcontract. However, it would mostly be done for some type of compensation.

Owners frequently require statutory lien waivers as part of progress payments or final payments they make to general contractors. You should expect the owner and therefore the general contractor to demand a waiver in the form most likely prescribed by statute. These documents waive your lien rights to the extent of payment.

Depending on the state, there are certain types of statutory lien waivers, including: 

A conditional waiver and release upon progress payment;
An unconditional waiver and release upon progress payment; 
A conditional waiver and release upon final payment; and
An unconditional waiver and release upon final payment. 

You should generally never supply the unconditional waiver without being paid because your lien rights are gone for the work covered by the waiver.

Laws involving the use of subcontractors are complex. Consult with your attorney to protect yourself and minimize the risks attached with a job.

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Disclaimer: The information contained in Dulin, Ward & DeWald’s blog is provided for general educational purposes only and should not be construed as financial or legal advice on any subject matter. Before taking any action based on this information, we strongly encourage you to consult competent legal, accounting or other professional advice about your specific situation. Questions on blog posts may be submitted to your DWD representative.