Handshake Deals and Hard Lessons: The Case for Contracts

Believe it or not, some of today’s subcontractors do business without a written contract with the general contractor. The subcontractor might assume that because there is no contract, all job site exposures for ongoing and completed operations are covered by the general contractor. Unfortunately, that may not be true—especially if the general contractor has signed a prime contract with the owner outlining the roles and responsibilities of each individual working on a job site.

But what does that mean for the small subcontractor, with only their integrity and a handshake for a contract?

It is unlikely that a general contractor would be involved in a construction project without a written contract with the owner. Unless a project is entirely self-funded and self-insured, a bank and an insurance company will be involved to confirm who is responsible in the event of damage or injury. Even if the project is self-funded and self-insured, the owner and general contractor would be well advised to have written contracts in place.

One concern is when an accident or injury occurs where the general contractor and subcontractor share responsibility. Typically, a general contractor requires a subcontractor agreement. This agreement passes their liability exposure to the subcontractor doing the work (as much as is allowed by state statutes).

In claims where both parties are partially at fault, and a properly executed subcontractor agreement is present, the claims process is more complex. The subcontractor agreement requires the subcontractor to name the general contractor as an additional insured and provide primary/non-contributory wording and waiver of subrogation. In this case, the subcontractor’s insurer would be designated to review the claim of both the insured subcontractor and the general contractor.

In the absence of a subcontractor agreement, it is doubtful the subcontractor would possess an additional insured or waiver of subrogation endorsement for the general contractor on their policy. When a claim occurs in that specific circumstance, the general contractor would tender the claim to their own insurance company and notify the subcontractor of the incident. The two companies’ adjusters would agree on a percentage of liability for each party and settle the claim accordingly.

From a business perspective, it is in the subcontractor’s best interest to have a contract in place. The contract might identify the type of work, each party’s role, how to handle change orders, and outline other key details. However, it is more important for the general contractor because they should be transferring the appropriate risk to the subcontractor doing the work. The subcontractor cannot transfer their risk to the general contractor.

Contractors should avoid working on projects without a contract in place. These documents exist to assign responsibility where it belongs, identify the type of work to be performed and the associated parameters, specify deadlines, and explain how to handle change orders. Without a contract, working on a job could be like a box of chocolates—not knowing what you are going to get.