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Always Use Written Subcontractor Agreements

Subcontractors are a great way to boost your business’s productivity without having to pay the high costs that come with employees – but what risks come with hiring subcontractors?

The Court Statistics Project estimates that a dispute over a contract typically costs a whopping $91,000 when all is said and done. Raise your hand if you’ve got that kind of money lying around. No? Didn’t think so.

Many IT business owners have a gaping hole in their contract risk management. Our research shows that 54 percent of IT businesses don’t use a formal contract when they hire a subcontractor.

It’s optimistic of small-business owners to think they won’t ever run into contract problems. According to a study by the International Association for Contract & Commercial Management, nine percent of contracts result in a significant dispute or claim.

From a risk management perspective, going without a subcontractor's agreement is like smoking a cigarette while you’re pumping gas. Not super savvy.

Subcontractor Agreements: Reducing Your Risk

Without a subcontractor agreement, your risk for an expensive dispute increases. This prompts the question: why are contracts so important?

Sally A. Piefer, attorney with the Schroeder Group, explains that written contracts 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.

Lance Vaughn (@lance_io), CEO of web and mobile app company CabForward (@CabForward), has 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.

Having a strong, clear contract that outlines your expectations for the subcontractor helps you avoid these mishaps.

5 Ways Subcontractor Agreements Protect Your Business

You can add language to your contracts to provide additional protection from certain liabilities.

A subcontracting agreement may protect you by:

  1. Ensuring all parties carry liability insurance. Just as there’s a food chain, there's a chain of liability. If a contractor messes up part of a project, you're the one who could feel the heat in a client lawsuit. By ensuring that contractors have liability insurance, you can pass on the financial burden of a lawsuit.
  2. Preventing missed deadlines or incomplete work. Subcontractors could bail on a project for many reasons. Outsourcing work can be smart, but it means you're at someone else's mercy. Contracts formalize your relationship and can make it less likely for a contractor to leave you hanging.
  3. Assigning data liabilities. Contracts can specify how you want subcontractors to handle client data. Contracts should specify whether subcontractors are supposed to delete old data, remove their access to it, or store it securely. In the age of cyber liability, your clients expect you to take these steps to safeguard their data.
  4. Specifying insurance requirements. Subcontractor contracts are an easy way to specify your E&O Insurance requirements. Subcontractors will know they need insurance before they sign on the dotted line. You can require them to attach a copy of their Certificate of Liability Insurance to the contract itself.
  5. Clarifying complicated IT projects. Project management educational resource Project Smart's 2014 Chaos Report [PDF] found that only 61 percent of software projects are delivered with the originally specified features. Scope and software features can be incredibly hard to pin down. Trying to get that done without a contract? Good luck. Consulting contracts make sure you're on the same page as subcontractors.

Complication has scuttled many an IT project. While running SnowPak, managing partner James Johnson has found that, to be successful with subcontractors, he has to tell them exactly what to do. The clearer and simpler the project, the more likely it is to get done well and on time.

“The issues are usually around communication, so the more defined our problem is, the better the results usually [are],” Johnson says. “We have found it has been too hard to hire subcontractors for problems that need creative solutions or where the path forward isn't very clear.”

Of course, a subcontractor agreement doesn't mean you'll never get into a dispute with clients or contractors. But a strong, well-written contract can prevent misunderstandings that lead to lawsuits and minimize the damage if you are sued.

Next: Always Request Proof of E&O Insurance