When you need a subcontractor agreement
Anytime you, as a general contractor, hire someone else to perform a portion of work on your project — electrician for the wiring, plumber for the rough-in, drywall crew for the hang-and-finish, framing crew for the deck — that’s a subcontractor relationship and you need a written agreement. Verbal handshakes work right up until something goes wrong, at which point you’re holding the bag for the sub’s mistake with no documented protection.
What goes in a subcontractor agreement
Scope of subcontractor’s work
Specific. Same level of detail as your homeowner contract, but scoped to the sub’s portion. If the electrician is doing rough-in only, say that. If they’re also handling final trim and panel labeling, say that. Disputes about whether device covers and panel labels are “in scope” cost time and money.
Payment terms
Three common structures: fixed price (most common for residential), time-and-materials with a not-to-exceed cap, or unit pricing ($/fixture, $/linear foot). Specify exactly when each payment is due — typically a deposit, progress payments tied to milestones, and final payment after the work passes inspection. Include retainage if you’re using one (5–10% held until project completion is standard for commercial; less common for small residential subs).
If you’re passing payment timing through from the homeowner, use a pay-when-paidclause — sub gets paid within X days of you receiving the corresponding payment from the homeowner. Don’t use pay-if-paid(sub gets paid ONLY if the homeowner pays); it’s unenforceable in many states and shifts your customer-collection risk onto the sub, which is bad practice and bad relationship-building.
Insurance requirements
Required minimums vary by trade and project, but a baseline:
- General Liability: $1M per occurrence, $2M aggregate
- Workers’ Compensation: state-statutory minimums, applies to all employees on your job
- Commercial Auto:$1M combined single limit if they’ll be driving on your projects
- Additional Insured endorsement: you (the GC) listed as additional insured on the GL policy
Critical: don’t accept just a Certificate of Insurance (COI) as proof. The COI is a snapshot — it can be cancelled the day after it’s issued. Verify directly with the carrier that the policy is current, and require notification of any cancellation. For long-running projects, re-verify quarterly.
Indemnification and hold harmless
Every subcontractor agreement needs an indemnification clause — the sub agrees to “indemnify, defend, and hold harmless” you, the property owner, and your insurance carriers against damages caused by the sub’s work or negligence. Without this clause, when the sub damages something you’re on the hook by default.
State law restricts how broad indemnification can be. Most states prohibit “sole negligence” indemnification (you can’t make the sub indemnify YOUR own negligence). Use a comparative fault indemnification — sub indemnifies for damages caused by their work, proportional to their fault. This is enforceable everywhere.
Lien releases
Mechanic’s liens are how unpaid subs collect — they place a lien on the property the work was done on, which prevents the homeowner from selling or refinancing until the lien is cleared. If you (the GC) take the homeowner’s payment but don’t pay the sub, the sub can lien YOUR client’s house. You’ll get the angry call, and rightfully.
Standard practice: collect signed lien releases as you make payments. There are four lien-release types, used in this sequence:
- Conditional Partial Release: collected at each progress payment. Effective ONLY if your check clears. Standard.
- Unconditional Partial Release: collected after the progress-payment check has cleared. Locks in that the sub has been paid for the work covered.
- Conditional Final Release: collected with the final payment. Effective when the final check clears.
- Unconditional Final Release: collected after the final check has cleared. Permanently waives the sub’s lien rights for this project.
State-specific lien-release forms exist (California has the §8132 forms, Washington has its own templates, etc.). When in doubt, use the state-issued form for the property’s state.
Termination and dispute resolution
Specify the conditions under which either party can terminate the agreement. Typical: either party can terminate for material breach with 7 days written notice and opportunity to cure. The GC can terminate for convenience (no cause needed) with payment for work completed plus reasonable demobilization costs.
Use a mediation-first arbitration clause for dispute resolution. Specify the governing state law (where the work is performed) and venue (also where the work is performed, not where you’re based — more enforceable that way).
1099 vs W-2 classification
A subcontractor agreement assumes the sub is an independent contractor (1099). The IRS uses a 20-factor test to determine actual classification, and misclassifying employees as 1099 is one of their highest-priority audit areas.
Quick test: if the sub controls their own schedule, brings their own tools, works for multiple GCs, and gets paid per-job rather than per-hour, they’re probably 1099. If you’re directing their hour-by-hour work, providing their tools, paying them weekly, and they only work for you — they’re probably W-2 employees, no matter what the contract says.
When unsure, talk to your bookkeeper or use a payroll service like Gusto or Justworks that handles classification. The cost of getting it wrong (back taxes, penalties, possible state-level workers’ comp claims) is ten times the cost of paying a service to handle it correctly.
Related contractor business resources
Hiring subs is part of executing your homeowner contract — see our construction contract template for the GC-to-homeowner side of the relationship. For pricing the full project (including sub costs), use our construction estimate template.