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The Importance of Using Written Agreements with Subcontractors

The Importance of Using Written Agreements with Subcontractors

Wednesday, April 27, 2016/Categories: independent-contractor-liability

Subcontractors help your business boost productivity and take on new kinds of work. But that help can come at an unexpected cost if you're not careful.

In yesterday’s post, The Importance of Requesting Proof of E&O Insurance, we discussed how small businesses can be held liable for shoddy subcontractor work. But today, let's focus on contract disputes – disagreements between you and your contractor that can easily get out of hand if you don't have a written agreement.

The High Price of Contract Disputes

The Court Statistics Project, an organization that publishes court case data from around the country, estimates that a dispute over a contract typically costs a whopping $91,000.

Unfortunately, many IT business owners don’t know that. We surveyed over 10,000 business owners who have applied for coverage with TechInsurance, and 54 percent of them don’t use a formal contract when they hire a subcontractor.

Sure, many people work with contractors they know and trust, but even a small disagreement can be enough to ruin that business relationship. Without a written agreement, there's no objective way to navigate the dispute.

Consider this: according to a study by the International Association for Contract & Commercial Management, nine percent of contracts result in a significant dispute or claim. That means nearly one out of 10 of your subcontractor agreements may run into trouble. You'll want a formal written agreement to back you up when that happens.

What to Include in a Subcontractor Agreement

Sally A. Piefer, attorney with (@tsglaw1), explains that written contracts should outline… 

  • The scope of a project. 
  • Payment. 
  • Important terms and conditions. 

“I generally take the opportunity to include self-serving language in the agreement which makes it expressly clear that the individual is an independent contractor and not an employee, and to include indemnification language in the event the contractor is deemed to be an employee,” Piefer says. 

A written agreement reduces the risk of an expensive dispute because it defines the relationship and sets clear expectations that both parties can consult as the project progresses.

Take the example that Lance Vaughn (Lance Vaughn on LinkedIn) offers up. He's the CEO of digital project agency (CabForward on LinkedIn), and he’s run into problems with flaky contractors who overpromised and delivered underwhelming results.

Vaughn had one contractor who said he could work, but Vaughn soon discovered that the contractor was already committed to 80 hours of work with other companies. Suddenly, CabForward had to work around its contractor’s busy schedule. That’s not the way things are supposed to happen.

A strong, clear contract can help you avoid these kinds of mishaps. After all, once a subcontractor signs the dotted line, they have a legal obligation to uphold their side of the bargain.

5 Ways a Written Subcontractor Agreement Can Protect Your Business

A well-written subcontractor agreement can help protect your business from certain liabilities by:

  1. Ensuring all parties carry liability insurance. If a contractor messes up part of a project, you may be held responsible for it. But if contractors have liability insurance, you can pass on the financial burden of a lawsuit and make sure they own up to their mistakes.
  2. Preventing missed deadlines or incomplete work. Subcontractors can leave a project for many reasons, but if you need them to stick around for the whole thing, you probably want a bit of reassurance. Contracts formalize your relationship and make it less likely that a contractor will leave you hanging. 
  3. Specifying insurance requirements. Subcontractor contracts are an easy way to specify your E&O Insurance requirements. Subcontractors will know they need insurance before they agree to the job. You can even require them to attach a copy of their Certificate of Liability Insurance to the contract itself. 
  4. Assigning data liabilities. Cyber liability is a growing concern and the courts are still defining the legal framework case-by-case. Regardless, your clients expect you to safeguard their data, especially if your subcontractors have access to it. Contracts should specify whether subcontractors should delete old data, remove their access to it, or store it securely.
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