Mind the risk gap – best practice when using subcontractors

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How you can effectively use subcontractors without increasing your risks

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 of 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.

Other key terms

Aside from the normal provisions setting out respective obligations, payment terms, termination rights and so forth, subcontractor contracts should be clear about the nature of the relationship between the two parties.

An ‘independent contractor’ clause is recommended to make it explicit that the parties are acting as independent businesses and there is no joint venture, agency or indeed, employer-employee relationship.

If your subcontractor is operating as a limited company, adding in provisions that clarify the relationship further in line with IR35 legislation will also be important. The aim here is to ensure that the subcontractor is not deemed to be an employee of yours for tax purposes. Irrespective of IR35, even if you are contracting with a sole trader, similar provisions are considered best practice too.

Reserving the right to amend and update the agreement is good practice. Sometimes sole traders switch to working as limited companies and vice versa and as your working relationship evolves or new legislation emerges, it would be in the best interests of both parties to review and update their contract appropriately from time to time.

Commercial pitfalls

In order to cultivate a positive relationship with subcontractors, businesses often shy away from a comprehensive agreement and seek a short contract instead. As outlined here, leaving out key protections could also leave your business exposed to unnecessary risks.

As your client base grows, you may end up with a variety of different client contracts and this creates the risk of a mismatch in any related subcontractor agreements. It is, therefore, important to conduct regular audits of provisions that have been negotiated with clients which then need to be covered off with subcontractors.

Subcontractor engagements often comprise a mixture of project-based assignments or ongoing retainer assignments. Different provisions may apply to each type of engagement. It is possible to draft a subcontractor agreement to work with both types of engagement, but this needs to be anticipated at the outset.

Sometimes, insurance checks are completed at the outset but then not routinely verified thereafter. This can be implemented once a year, and it is one of the easiest ways to protect your business.

How we can help

We believe that 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 commercial team 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 an informal discussion, please contact me in the Corporate and Commercial Team on 01733 882800 or email [email protected].

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