November 22, 2014

Subcontractors – One More Reason For A Contract

Subcontractors - small businesses require contractsSubcontractors.  This is a relationship that screams for a contract.

You are asking someone who is not an employee to do work for you. You will be paying them. There are parameters that should be nailed down, agreed to, and put in writing.

A subcontractor contract does not have to be long or terribly wordy. The purpose is to detail the expectations on both sides of the table.

  • What will the contractor do for you and your client?
  • What will you pay the contractor?
  • When will you pay them?
  • How and when will they report to you?
  • How will the contractor interact with your clients?

In February 2009 a dispute occurred between a company in Shenandoah Iowa and their subcontractor. The dispute was over payment. Why? Because, according to the story in the Nonpareil Online, they had a verbal contract about the hourly rate. The contractor believed they’d agreed to $37.50 per hour for the team. The subcontractor asserted that the agreement was for $37.50 per hour per person. Quite a big difference.

This is a great example of how a written contract works. If the rate had been written into a contract there would have been no dispute. The parties would not be at odds and their dirty laundry would not be out for all to see.

There should also be a clause preventing the subcontractor from taking your client from you or going to work directly for your client.

Consider this example: a businessman enlists the services of a subcontractor to perform IT services at his client’s site. Years go by and the sub has gotten pretty ingrained in the client’s business. They never signed a contract because the businessman never considered that the sub would do anything but what was asked of him.

One day the client calls the businessman to say they are terminating the relationship. At this point the businessman discovers that the sub is now working directly with the client for a reduced fee — but more than the sub was making by working through the businessman.

Such a surprise! Unfortunately, the businessman set himself up for the coup. If he’d had a contract with the subcontractor it would have been difficult for the sub to cut him out of the deal.

Being trusting is a great thing. However, you have an obligation to your business, your clients, and yourself to make sure there are no surprises. In one of my coaching practices I have a partner. We trust each other completely. Guess what? We have a contract. It covers the bases so we can concentrate on the business at hand. We never have to worry about future surprises or misunderstandings.

To grow your business you have to be able to invest your energy on revenue generating activities. Surprises can be costly and damaging. Having a contract at the outset can help you avoid those surprises in the long run.

You can find many sites with sample contracts. Two I like are: FindLegalForms.com and FindLaw’s Small Business Center.

Editor’s Note: this is part two in a series about situations in which you need contracts in a small business.  For part one, read:  Death by Contract, or Lack Thereof.

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Diane HelbigAbout the Author: Diane Helbig is a Professional Coach and the president of Seize This Day Coaching. Diane is a Contributing Editor on COSE Mindspring, a resource website for small business owners, as well as a member of the Sales Experts Panel at Top Sales Experts.

19 Comments ▼

Diane Helbig


Diane Helbig Diane Helbig is a Professional Coach and the president of Seize This Day Coaching. Diane is a Contributing Editor on COSE Mindspring, a resource website for small business owners, as well as a member of the Top Sales World Experts Panel at Top Sales World.

19 Reactions

  1. Written Contracts are so important, even if they are the simplest. People are trying to have the best contract ever. Instead, how about making sure you have a written contract to start with?

    Dr. Wright
    The Wright Place TV Show
    http://wrightplacetv.com/communication
    http://www.twitter.com/drwright1

  2. I am a great believer in a gentlemen’s agreement but I understand the importance of written contracts. But they should be simple and understandable. For a good source, check out: http://www.smbceo.com/2009/03/18/freebusinessformscom-our-newest-free-tool/

  3. To a large degree, I think it comes to down to the reason for the written contract.

    If you feel that you must have a written contract with this person or they just might take advantage of you, then you should probably be working with someone else that you have a basic sense of trust with.

    If, like in my case, you simply are wanting to communicate expectations clearly on both sides in order to avoid jeopardizing a good business relationship, then a clean and simple contract with stated terms should suffice.

    We should all be striving to surround ourselves with people that only make us concerned with the latter point.

  4. Absolutely Right, Diane! Written contracts are very important and entrepreneurs must learn from this experience!

  5. Absolutely Right, Diane! Written contracts are very important and entrepreneurs must learn from this experience!
    Sorry… forgot to say great post – can’t wait to read your next one!

  6. The objections I hear from small biz owners are that it takes time and money to get these things written up. I also see sometimes that the owner doesn’t want a written contract to pin him into something he didn’t anticipate.

    If you cannot reduce the expectations in a business relationship into words, there is a great chance that there is going to be an expectation gap later on down the road.

  7. Excelent article! It is also a good idea to make sure the contract clearly says the contractor is not an employee and will pay all taxes (employment or otherwise) that would normally be witheld by an employer. The IRS may come after the business if the contractor doesn’t file correctly.

  8. Great post. Not only do contracts protect both parties, they also make it easier for others in the organization to understand the relationship.

    It’s much easier for your accounting department to pay a bill or collect on an invoice, if they have a written document detailing the agreement to refer to.

  9. Great points Diane. For anyone who watches the many court shows on TV, you have seen time and again how important contracts are. Both parties should look at contracts as a way to cover themselves. Both parties have something to either lose or gain, it benefits both of them to have a clear understanding of the terms.

  10. My online legal forms system has two contract templates for independent contracts. The first is the traditional contract setup with payment per hour / week / month or per job (only $12.99): http://www.medlawplus.com/forminfo/independentcontractor.htm

    The other is for a service level agreement (more complicated form of contractor arrangement sliding scales based upon the level of service provided): http://www.medlawplus.com/forminfo/servicelevelagreement.htm

  11. Thanks for this. We use a lot of contractors – our trainers. We secure them with contract and also purchase orders as well for each job so there can be no dispute!

  12. Great wake-up call. I do ensure I have contracts for work I do, and for work I subcontract. However, for long-term, ongoing business I have (on occasion) let the contract lapse – I’ve just gone through my work list and flagged those letters of agreement that have expiry dates! Thanks.

  13. Totally agree Diane.

    I know from experience that having a simple contract in place saves a lot of hassle and actually helps the relationship with subcontractors.

  14. Right Susan –> saves a lot of hassle –> big hassle in the future if there’s no written contract.

  15. Thank you all for such great comments! While I truly believe that you should build business relationships with people you trust, having contracts helps you maintain that trust.

    Imagine if you will a trusting business relationship that is years old with no contract. You are relying on memory – both party’s memory. Yikes! I don’t know about you but I’m not sure I’d want to trust my memory on something I agreed to a year or two ago.

    The goal is to have a successful business for you, your staff, your clients, and your associates. Setting the stage now to avoid the issues in the future will do wonders for your busines!

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