Subbing it out?

For businesses and individuals – from construction companies to freelance entrepreneurs – hiring subcontractors can be the ideal way to bring in professionals with a particular expertise, expand in-house capabilities without the added overhead, or just keep up with a heavy workload. But there are pitfalls to hiring subcontractors you need to be aware of, and the days of sealing the deal with a firm handshake are long gone.

Below are six tips to help you create win-win working relationships with your subcontractors:

1.  Do your legal homework.

Before hiring a subcontractor, your first order of business is to consider the legal risks. With stricter federal tax and labor laws in place and widespread misunderstanding about who is legally considered a subcontractor, you need to know the law. If you are a business and tell someone where, when and how to do the work, that’s not considered a contractor relationship. Get this wrong and you’ll likely be hearing from the IRS and paying back employment taxes and penalties. And violating labor laws can cost you back wages and up to triple damages. If you are an individual-you still have to understand the nature of the relationship, especially if your painter (for example) is not directly under the General Contractors control, yet needs to coordinate his work with him.

2.  Hire smart.

When first meeting a subcontractor, ask what’s important to them and pay close attention to their answer. You can learn a lot about a person’s work ethic and values by having this conversation. You also have to be diligent about checking references. Whenever possible, visit the subcontractor’s current job site or otherwise take a look at their work. You want to make sure their work is up to your standards.

3.  Get it in writing.

A detailed written agreement is a must for any subcontractor you hire. It should clearly outline the specific scope of the work, a set price, and date of delivery if applicable. It’s also a good idea to include standard terms and conditions to make sure you have at least basic protection. At the very least, these should include:

  • Payment terms (e.g., net 30 days)
  • Deadlines or schedule requirements
  • Any applicable warranties
  • Any indemnification agreements
  • Insurance requirements

There are other items you could include, so ask an attorney about your situation to make sure you’re covering the necessary bases.

4.  Be clear about business insurance requirements.

You likely have insurance to protect your business such as a commercial general liability policy. Make sure you understand it. Most policies require you to get an indemnification and hold harmless agreement from your subcontractors and ensure that your subcontractors have at least minimum insurance. Failing to comply can result in denials of coverage. Ask your subcontractors to provide you with their current certificates of insurance and proof of worker’s compensation insurance if applicable. Depending on your situation, you might also need the subcontractor to add you as an additional insured.

5.  Protect yourself before paying.

All subcontractors should be required to sign lien waivers and releases before you pay the bill. If there will be multiple payments on a project, get partial lien waivers from your subcontractor in exchange for each payment. These are in effect a receipt to prove payment.

6.  Outsource the job, not the quality control.

You’d like to be able to hand over a project to a subcontractor and collect your check, but it’s usually not that simple. Anyone who hires you will expect you to stand behind your work, whether it’s done by you or your subcontractor. Having a quality control process in place is essential to make sure the work is done up to standards that satisfy the client and reflect well on you and your business.

Hiring subcontractors can give you greater flexibility and save you time and money. However, the contractual and business insurance ramifications can be big. Take the time to prepare for the pitfalls now to ensure a win-win working relationship.