A subcontractor is a person or business which undertakes to perform part or all of the obligations of another's contract, and a subcontract is a contract which assigns part of an existing contract to a subcontractor.
A general contractor, prime contractor or main contractor may hire subcontractors to perform specific tasks as part of an overall project to reduce costs or to mitigate project risks. In employing subcontractors, the general contractor hopes to receive the same or better service than the general contractor could have provided by itself, at lower overall risk.
The European Union has recognised the need to make provision for sub-contracting in its rules on public procurement, as arrangements for sub-contracting can support the EU's drive to involve more small and medium-sized undertakings in the provision of goods and services for the public sector.[1]
United States public acquisition regulations contain a number of distinct definitions of "subcontract" and "subcontractor", with calls for a consolidated definition to be adopted.[2]
In United Kingdom building industry contract law, particularly when using JCT standard form contracts, three subcontractor types are identified:
An obligation to award a subcontract to a named subcontractor can arise, where a bidding process names a subcontractor as an intended partner and a prime contract is subsequently awarded to the contractor by the client. In a 2002 Canadian case, A. Dynasty Roofing (Windsor) Ltd. v. Marathon Construction Services (1991) Inc., the Ontario Superior Court held that when Marathon Construction Services, a general contractor in the construction industry, had bid for a contract to construct an industrial building in January 1999, it had named Dynasty and another roofing company, Smith Peat, as the subcontractors who would be employed for the roofing work. Prices had been submitted by both Dynasty and Smith Peat, both were held to be capable of doing the work, and Dynasty's prices were the lowest submitted. However, on being awarded the prime contract, Marathon agreed a lower price with Smith Peat and offered them the subcontract. The court held that Marathon were obliged to subcontract with Dynasty, and the Court of Appeal for Ontario upheld the ruling in October 2003.[3] [4]
Under UK tax law, certain activities that might appear to be subcontracting are actually treated differently. This is a subtlety of corporate taxation that may easily be missed or misunderstood, and may be relevant to research and development tax relief. Examples of activities that involve outsourced work that do not count as subcontracting for tax purposes include:
Some contractors appoint subcontractors to work under a "pay when paid" clause, sometimes called a "pay if paid" clause, where the general contractor will work with subcontractors and the subcontractors are only paid if and when the general contractor is paid for the work.[6] An example clause from a construction context reads:
However, in the case of Avon Brothers, Inc. v. Tom Martin Construction Company, Inc., the New Jersey Superior Court, Appellate Division ruled in 2000 that a pay when paid clause represents an unconditional promise to pay, merely permitting payment to be postponed for a reasonable time, and not a condition precedent which would completely excuse the contractor's obligation to pay even though not paid themselves.[7] Under Florida construction law, a pay when paid clause is unenforceable unless it unambiguously transfers the risk of non-payment to the subcontractor. The common usage and generally shared intent of pay-when-paid clauses in the Florida construction industry was recognised by the Florida Supreme Court in Peacock Construction Co. v Modern Air Conditioning, Inc., 353 so 2d 840 (Florida 1977), even though the contractual language used may vary from case to case.[8]