What is a subcontract in construction?
A subcontract is the agreement between a contractor and a subcontractor to perform a defined part of a larger construction contract. It sets the sub's scope, price, schedule, payment terms, insurance, and risk. The owner usually has no contract with the sub, so payment and claims run through the GC. A purchase order, by contrast, usually buys materials.
A subcontract is the contract one level down. The owner hires a general contractor under the prime contract. The GC then hires trade companies (electrical, plumbing, drywall, roofing) under subcontracts. Each subcontract defines what that trade does, what it gets paid, and how much of the prime contract's risk passes down to it. A sub can in turn subcontract part of its work, creating a sub-subcontractor tier.
The owner usually has no contract with the subs. That matters: the sub's rights to payment, changes, and claims run through the GC, which is why the subcontract's terms matter so much to the sub.
Key clauses in a subcontract
| Clause | What it controls | What to watch |
|---|---|---|
| Scope of work | Exactly what the sub does | Vague scope and missing exclusions |
| Price and payment | Contract sum, billing dates, retainage | Pay-if-paid language, retainage above the owner's rate |
| Flow-down | Binds the sub to the prime contract terms | Terms the sub has never seen |
| Schedule | Start, duration, coordination duties | Open-ended acceleration at the sub's cost |
| Changes | How extra work is priced and approved | Short notice deadlines, written-only rules |
| Insurance and indemnity | Coverage limits, additional insured, who pays for what | Broad indemnity beyond the sub's own fault |
| Default and termination | What happens if either side fails | Termination for convenience without overhead and profit |
| Back charges | Charges for cleanup, damage, or delays | No notice or chance to cure first |
A subcontract on a real job
Say a GC buys out the drywall and ceilings on a 40,000 square foot school for $612,000. The subcontract attaches the drywall scope exhibit, the spec sections that apply, the project schedule, and the owner's insurance requirements. Payment terms say the GC pays within 10 days after it receives payment from the owner for the sub's work, with 10 percent retainage. A flow-down clause binds the sub to the prime contract's notice and warranty terms.
In month four, the owner's architect adds a soffit detail at the corridors. Under the subcontract, the drywall sub has to give written notice and a price before doing the work. The sub's foreman builds it on verbal direction instead. Three months later, the GC rejects the extra for lack of notice. The work is the same; the paperwork decided who paid for it.
Federal jobs: required payment terms
On federal construction, the Prompt Payment Act requires each subcontract to include a clause obligating the prime to pay the sub within 7 days of receiving the government's payment for the sub's work, plus an interest penalty clause for late payment. Subs must pass these same clauses on to their own subs. See prompt payment act for details.
Common subcontract mistakes
- Signing the GC's form without reading the flow-down documents it references.
- Accepting pay-if-paid language without knowing how the owner pays the GC.
- Letting work start before the subcontract is signed, which removes leverage on both sides.
- Not matching the sub's insurance certificates to the subcontract's requirements.
- Using the same subcontract for a $15,000 job and a $1.5M job.
Related terms
Subcontracts connect to subcontractor, scope of work, back charges, and buyout. For a checklist, see what to include in a subcontract agreement. Smart Business Automator tracks each subcontract's value, changes, billings, retainage, and compliance documents in one place.
Frequently asked questions
What is the difference between a contract and a subcontract?
The prime contract is between the owner and the general contractor. A subcontract is between the general contractor (or another sub) and a company performing part of that work.
Is a purchase order a subcontract?
Usually not. A PO typically buys materials or equipment. A subcontract hires a company to perform work on site, often including labor and installation.
Do subcontractors have a contract with the owner?
Normally no. Their contract is with the GC. They may still have lien rights or payment bond rights against the project, depending on state law and whether the job is public.
Can a subcontractor negotiate the GC's subcontract form?
Often, yes, especially on payment terms, retainage, indemnity, and scope exclusions. Raise changes before signing, not after mobilizing.
