Let’s say a general contractor asks a subcontractor to do something that that subcontractor doesn’t have the time or expertise to handle.
Could the subcontractor hire another subcontractor?
The answer is a little complicated. But before we get to it, let’s review some basics.
What are the types of contractors?
A contractor is anyone who works on a job-to-job basis, as opposed to working for a single company. Contractors must manage their own taxes, insurance and retirement accounts instead of having an employer manage them.
A subcontractor is a contractor hired by another contractor. Contractors usually hire subcontractors as part of a crew of workers who provide extra help and special skills. The act of hiring subcontractors is referred to as “subbing out.”
The head contractor of the project is usually called the general contractor (or GC). General contractors work directly for a client while managing the subcontractors.
If a contractor works for a client without any subcontractors, we call that an independent contractor.
How does a subcontractor agreement work?
To work on a project, subcontractors sign an agreement with the contractor hiring them.
A typical subcontractor agreement contains these components:
- Description of services: The subcontractor’s expected scope of work.
- Payment terms: The agreed-upon cost of the work and when the payments will be released.
- Permits and licensing: If the job requires building permits or specific licenses before performing the work, this specifies who is responsible for obtaining and paying for them.
- Change orders: How customer change requests will be processed, priced, and assigned.
- Default: What actions constitute a breach of contract by either party, and what the consequences are.
Do subcontractors need insurance?
It’s an excellent idea for subcontractors to carry their own contractors insurance.
From a general contractor's perspective, a subcontractor may be an unknown entity, so a subcontractor should be fully protected when they show up at a job site. Otherwise, the general contractor's liability exposure increases, meaning they might have to pay for a subcontractor's mistake out of their pocket.
Some general contractors ask to be added as an “additional insured” on a subcontractor’s insurance policy. That means if a general contractor gets sued for an accident caused by the subcontractor, the general contractor will also be protected by the subcontractor's insurance.
So can a subcontractor hire another subcontractor?
Whether subcontractors may hire subcontractors depends on the terms of the general contracting agreement.
Even if it’s possible, it may not be ideal. General contractors should be aware that sometimes too many cooks spoil the soup. As subcontractors hire other subcontractors, it can become harder for a general contractor to keep control of the project, which could result in delays or other problems.
What are the liability risks when a subcontractor hires another subcontractor?
A subcontractor who hires another subcontractor could create additional liability exposure for themselves and their general contractor.
If the lower-tier subcontractor causes an accident, the hiring subcontractor and the general contractor could also get sued.
That's why it's a good idea for all parties to carry their own insurance. The higher-tier subcontractors can ask to be added to the lower-tier subcontractor's policy as additional insured.
How does a subcontractor-to-subcontractor agreement work?
An agreement between two subs won’t look too different from a standard subcontractor agreement. As a general practice, it’s a good idea to ensure that the conditions in any subcontractor agreement match those of higher-tier contractors, including performance, timing and legal responsibilities.
If you’re a general contractor in this situation, you should be sure to carefully review the contract of a lower-tier sub and make sure it aligns with your general contract.
You won’t be directly responsible for the performance of a lower-tier subcontractor, but you do have a right to vet them and inspect the quality of their work.
How NEXT protects contractors and subcontractors
NEXT is dedicated to helping contractors thrive at every level.
We can help you easily find coverage for general liability, workers’ compensation and more.
It only takes about 10 minutes to customize your coverage, purchase a policy and print your certificate of insurance.
