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A subcontractor is a person or business which undertakes to perform part or all of the obligations of another's contract, and a subcontract is a contract which assigns part of an existing contract to a subcontractor.
A general contractor, prime contractor or main contractor may hire subcontractors to perform specific tasks as part of an overall project to reduce costs or to mitigate project risks. In employing subcontractors, the general contractor hopes to receive the same or better service than the general contractor could have provided by itself, at lower overall risk.
The European Union has recognised the need to make provision for sub-contracting in its rules on public procurement, as arrangements for sub-contracting can support the EU's drive to involve more small and medium-sized undertakings in the provision of goods and services for the public sector.
Definition
United States public acquisition regulations contain a number of distinct definitions of "subcontract" and "subcontractor", with calls for a consolidated definition to be adopted.
Types
In United Kingdom building industry contract law, particularly when using JCT standard form contracts, three subcontractor types are identified:
- Domestic subcontractor
- A subcontractor who contracts with the main contractor to supply or fix any materials or goods or execute work forming part of the main contract. Essentially this contractor is employed by the main contractor.
- Nominated subcontractor
- Certain contracts permit the architect or supervising officer to reserve the right of the final selection and approval of subcontractors. The main contractor is permitted to make a profit from the use of nominated subcontractors on site, but must provide "attendance" (usually the provision of water, power, restrooms, and other services to enable the nominated subcontractor to do his job). In effect the appointment of nominated subcontractors establishes a direct contractual relationship between the client and the subcontractor.
- Named subcontractors
- Effectively the same as a domestic subcontractor — a subcontractor who contracts with the main contractor to supply or fix any materials or goods or execute work forming part of the main contract. Essentially this contractor is employed by the main contractor.
Contracting law
An obligation to award a subcontract to a named subcontractor can arise, where a bidding process names a subcontractor as an intended partner and a prime contract is subsequently awarded to the contractor by the client. In a 2002 Canadian case, A. Dynasty Roofing (Windsor) Ltd. v. Marathon Construction Services (1991) Inc., the Ontario Superior Court held that when Marathon Construction Services, a general contractor in the construction industry, had bid for a contract to construct an industrial building in January 1999, it had named Dynasty and another roofing company, Smith Peat, as the subcontractors who would be employed for the roofing work. Prices had been submitted by both Dynasty and Smith Peat, both were held to be capable of doing the work, and Dynasty's prices were the lowest submitted. However, on being awarded the prime contract, Marathon agreed a lower price with Smith Peat and offered them the subcontract. The court held that Marathon were obliged to subcontract with Dynasty, and the Court of Appeal for Ontario upheld the ruling in October 2003.
Tax law
Under UK tax law, certain activities that might appear to be subcontracting are actually treated differently. This is a subtlety of corporate taxation that may easily be missed or misunderstood, and may be relevant to research and development tax relief. Examples of activities that involve outsourced work that do not count as subcontracting for tax purposes include:
- Collaborative research – research carried out across two companies that benefits both companies.
- Externally provided workers
- Self-employed consultants.
Payment clauses
Some contractors appoint subcontractors to work under a "pay when paid" clause, sometimes called a "pay if paid" clause, where the general contractor will work with subcontractors and the subcontractors are only paid if and when the general contractor is paid for the work. An example clause from a construction context reads:
Subcontractor agrees that all progress payments and final payment to Subcontractor are contingent upon and subject to Owner's acceptance of Subcontractor's work and upon contractor's receipt of payment from Owner. Subcontractor agrees to accept the risk of non-payment if Contractor is not paid progress payments and/or final payment from Owner, for any reason. Subcontractor further agrees that Owner's payment to Contractor of all progress payments and final payment for any work performed by Subcontractor, other Subcontractors and Contractor shall be an express condition precedent to any obligation of Contractor to make any progress payment, retainages, or final payment to Subcontractor, and Subcontractor hereby waives all right to commence litigation or arbitration until payment is made to Contractor.
However, in the case of Avon Brothers, Inc. v. Tom Martin Construction Company, Inc., the New Jersey Superior Court, Appellate Division ruled in 2000 that a pay when paid clause represents an unconditional promise to pay, merely permitting payment to be postponed for a reasonable time, and not a condition precedent which would completely excuse the contractor's obligation to pay even though not paid themselves. Under Florida construction law, a pay when paid clause is unenforceable unless it unambiguously transfers the risk of non-payment to the subcontractor. The common usage and generally shared intent of pay-when-paid clauses in the Florida construction industry was recognised by the Florida Supreme Court in Peacock Construction Co. v Modern Air Conditioning, Inc., 353 so 2d 840 (Florida 1977), even though the contractual language used may vary from case to case.
See also
- elancing
- False self-employment
- Freelance marketplace
- General contractor (aka prime contractor)
- Independent test organization
- Inside contracting
- Misclassification of employees as independent contractors
- Outsourcing
References
- EUR-Lex, Directive 2004/18/EC of the European Parliament and of the Council of 31 March 2004 on the coordination of procedures for the award of public works contracts, public supply contracts and public service contracts, recital 32, accessed 24 July 2023
- Koprince, S., FAR & DFARS Have 27 Distinct Definitions of "Subcontract", Koprince McCall Pottroff LLC, published on 8 February 2018, accessed on 27 June 2024
- vLex.com, Dancing With The Subcontractor You Brought: Undercutting Will Not Be Tolerated, accessed on 29 June 2024
- Court of Appeal for Ontario, A. Dynasty Roofing (Windsor) Ltd. v. Marathon Construction Services (1991) Inc., delivered on 24 October 2003, accessed on 29 June 2024
- "Corporation Tax Act 2009". Retrieved 3 October 2021.
- Adam Leitman Bailey and Dov Treiman, Pay When Paid, Limits and Limitations, New York Law Journal, published 9 October 2018, accessed 26 November 2020
- ^ District Court of Appeal of the State of Florida, Fifth District, International Engineering Services, Inc. v Scherer Construction and Engineering of Central Florida, LLC, case 5D10-2764, filed 21 October 2011, accessed 30 August 2021
- Meisik and Meislik, Avon Brothers, Inc. v. Tom Martin Construction Company, Inc. Case Law Summaries, opinion dated 30 August 2000, accessed 30 August 2021
- Hollander, H. J., "PAY-WHEN-PAID" CONSTRUCTION CONTRACT REQUIREMENT: BANE OF THE SUBCONTRACTOR’S EXISTENCE, Florida Bar Journal, June 2002, volume LXXVI, no. 6, archived 3 October 2023, accessed 3 October 2023