What construction service providers need to consider in subcontracting agreements and negotiations
March 22, 2017

When the project and responsibilities are clear and the central terms have been discussed and agreed between the parties, there is normally no need to go back to the contract during the cooperation.
Nevertheless, a few topics may cause sometime questions especially in the beginning of cooperation if not covered in the contract.


First of all, it is important that an agreement has been concluded between the parties before the project starts. A subcontractor may need to invest time and money for the project preparations which makes it important for them to have a contract confirming the assignment and limiting possible changes in scope, schedule and requirements by the other party. Naturally, the contract is also in the client’s interest to ensure that the project will start as discussed. If a contract cannot be prepared in time due to busy timetable or other reasons but the subcontractor should start preparations in order to manage the schedule, in some cases a lighter version of an agreement, a letter of intent or preliminary agreement is prepared that may also include the most important binding terms and this way be better than no agreement at all, until an actual contract is ready.

In case unit prices or a lump sum contract have been agreed instead of hourly prices and the pricing is expected to be quite tight, possible external factors such as other subcontractors’ projects, or a timely delivery and access to materials, equipment and tools provided by the client may impact on the subcontractor’s efficiency and this way on profitability. The subcontractor might benefit when spending extra time on discussing and agreeing the construction site organization, logistics as well as how possible idle times are compensated and who is responsible for possible delays caused by external factors.

Invoicing and payment terms
The invoicing and payment terms should be mentioned in the contract documents including the invoicing rules and frequency, project acceptance practice, which influences on invoicing as well as payment time and interest for delayed payments.
However, payment terms help little if the other party has payment problems and therefore it is good to be familiar with the client’s and their client’s financial health and if there have been any issues concerning employee or subcontractor payments by the same client or on the same construction site in the past.

Contract termination
A contract may be terminated because of various reasons and many of them concern the subcontractor’s responsibilities and obligations. Doing direct business with the client’s customers or assigning of subcontract partly or totally to another company may be a reason for termination. Termination clauses are seldom negotiable but a subcontractor may suggest an addition of clause where they may exit a contract if the payment terms are not followed.

Sanctions and liabilities
Sanctions are normal in the most construction contracts and may come in effect in the case of delays or non-compliance of safety regulations or employment conditions as well as for other reasons. If the sanction amounts are extremely high or the conditions unclear, it may be a good to further negotiate these, request a clarification or consider other projects instead.
Liability insurance is always required and is often at least in the amount of 500.000 Euros for a subcontractor depending on the client and the size of construction site and project scope.

Obviously, contracts are different with various conditions and obligations, and hence they should be analyzed thoroughly before signing.

Please contact us if you would like to discuss about this or other topics concerning your projects (+358 44 239 8224, mikko.hirvilammi (at) promolior.com).

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