Handshakes don’t count: 5 tips for setting up subcontractor agreement

Have you ever sealed a subcontractor deal with a handshake? No sign-on-the-line, and the only element at stake is a good word from both parties? Sound familiar? Have you also regretted this same casual agreement when the job hits some unexpected bumps?

Shaking hands on a sophisticated transaction leaves both you and your sub at risk. On the other hand, writing out clear terms between contracting parties firmly puts everyone’s feet on safer ground.

So how do you get there? Here are five simple steps for negotiating subcontractor agreements that aim to protect and simplify both parties’ business affairs.

1. Comb the contract

Give the contract a close read to spot any provisions that will leave you exposed, such as lack of subcontractor insurance and/or construction warranty. It’s imperative to make sure the sub is financially protected in case of an incident that would otherwise fall on you. The last thing you have time or money to deal with is a lawsuit.

Regarding construction warranties, you want an explicit warranty, which means that it is written into the contract and can be upheld in court.

Next, ask yourself some questions before signing:

• Is the job quoted what you had asked for?
• Does the scope of the project and deadlines fit your timeline?
• Are there any extras added?
• Are materials quoted the most expensive options? What are some alternatives?

Read the contract twice with a pen in-hand. When — and only when — all details are outlined clearly in ink do you sign. After the contract is secure, be sure to keep a copy on hand for quick reference.

2. Consider the future relationship

Even if you’ve previously worked with this sub on a handshake deal, it’s not too late to make it official with a contract. Here are a few considerations:

• What’s their reputation in the community?
• Do they complete projects on time and within budget?
• Is this a trusted subcontractor that you’ll keep on speed dial in a pinch?
• Could solid work right now mean more projects in the future? 

It’s important to get to know the sub’s past work. Do this by reading reviews and finding samples online. Ask for references. You can also speak with the sub’s past clients to get a feel for their work. Having ‘your go-to guy’ for your jobs is vital to the success of your construction business.

3. Look into the details

Get a solid grasp on these particulars: scope of work, schedule, changes to contract, payment (we’ll get to that in step five), insurance and warranties.

When in negotiation, be sure that you’ve outlined clear provisions including what will happen in case of nonpayment, delays, damages or change orders.

Although rare, a common concern among builders is not getting paid for work completed. For this reason, there are two payment provisions that protect the unpaid bill from falling on your shoulders:

• pay-if-paid: the contractor will pay the sub if paid by the owner
• pay-when-paid: the contractor is allowed a delay in the payment timeline

You also need to cover yourself from damages and change orders. Who takes responsibility in the case of a delay, damage or requested work outside the agreed upon job? All these details, details, details will lead to a solid deal with your subcontractor.

4. Negotiate within reason

Many subcontractors are willing to negotiate price and terms when competing for a job. But, as you know from experience, the lowest bid isn’t always your best hire. Your goal is to optimize price-to-quality, so it’s important not to sour a potential relationship by negotiating the bid too low. You should also know your options.

Collect a few quotes from competing subs to better leverage your negotiation field. While pricing quotes, also discuss timeline expectations. Take notes as you collect quotes, but remember the golden rule … the best-price-to-quality hire. Keep current material costs on hand while negotiating and consider the seasonal prices in your area; slower summer and winter job starts may come with a lower price tag.

If there’s an option to negotiate on a couple terms, try it out! Business deals are negotiations and not ‘all or nothing’ transactions. Compromise is the name of the game.

5. Set clear payment expectations

Using construction management software to set clear payment expectations when hiring subcontractors is arguably the most important step in the process. Buildertrend’s construction software delivers online payment tools that help you pay subs quicker and in the way they prefer. At the end of the day, everyone must get paid and our construction app makes managing subcontractors easy.

You now know some simple ways to avoid risking the reputation and bottom line of your construction company with a risky promise. Next, why not let a construction app like Buildertrend take care of the payment so you can focus on your craft? It’s just one more part of the subcontractor agreement simplified.