A strong subcontract protects both parties. A weak one guarantees disputes. Here are the clauses that matter on commercial projects from $2 million to $50 million, and the language that keeps them enforceable.
A construction subcontractor agreement is the contract between a general contractor and a subcontractor. It defines scope, payment terms, schedule, insurance requirements, change order procedures, and dispute resolution. For commercial projects, the subcontract typically incorporates the prime contract by reference, meaning the sub is bound by the same terms the GC agreed to with the owner. That incorporation is powerful, but it is also why vague subcontracts are dangerous: every term you leave out defaults to whatever the prime contract says, which you may not have read carefully.
Essential Clauses Every Subcontract Needs
Scope of Work: The most important clause. Reference specific specification sections, drawing sheets, and addenda by number and date. Vague scope guarantees disputes. Include explicit exclusions too, because what is not excluded is presumed included, and a sub who assumed something was someone else's problem will be back with a change order.
Payment Terms: Net 30 is the most common standard, with Net 15 and Net 45 also seen depending on the project. Pay when paid language, which ties sub payment to the GC's receipt of payment from the owner, is widely used and generally enforceable. Pay if paid language, which makes the sub bear the risk of owner nonpayment outright, is treated differently across states and some states refuse to enforce it. Specify the retainage rate and the release conditions clearly.
Schedule: Include the start date, milestone dates, and the substantial completion date. Specify liquidated damages if any, and describe how delay claims are handled, including notice requirements and the window in which a claim must be filed. A sub who misses a milestone without notice should not be allowed to argue the schedule was informal.
Change Order Procedures: No work without written approval, period. Define markup percentages for change orders, both for labor and for materials, and specify how disputed changes are handled while the work continues. The standard approach is proceed with the work under protest and resolve the cost in a defined window, so the schedule does not stall while the money is argued.
Incorporation of the Prime Contract
Most commercial subcontracts incorporate the prime contract by reference, which means the sub agrees to be bound by every term the GC agreed to with the owner, including flow down clauses for insurance, indemnity, dispute resolution, and termination. This protects the GC, but it shifts risk to the sub who may not have read the prime contract.
As a sub, ask for the prime contract and read it before you sign. As a GC, expect that request and provide the document. A sub who discovers onerous prime contract terms after signing will look for ways to recover the cost through change orders, and that dynamic poisons the project. Get the disclosure done up front.
Insurance, Bonds, and Indemnity
Insurance requirements should specify the coverage types and minimum limits: general liability, workers compensation, auto liability, and umbrella or excess liability. Require the GC to be named as an additional insured on the sub's general liability policy, and require the certificate before work begins. For larger scopes, require a performance and payment bond from the sub, with the bond form attached so there is no ambiguity about the bond terms.
Indemnity clauses allocate risk for third party claims. The standard subcontractor indemnity requires the sub to indemnify the GC for claims arising from the sub's work, to the extent of the sub's negligence. Make sure the indemnity tracks your state's comparative negligence rules, because broad form indemnity, where the sub indemnifies the GC even for the GC's own negligence, is unenforceable in many states.
Termination and Back Charges
The termination clause is the safety valve. Define the cure period for default, typically 3 to 7 days written notice, and the right to terminate for convenience with a defined payment for work performed. Specify what happens to on site materials, partially completed work, and subcontracts the sub has let to lower tier subs. Without clear termination language, removing a sub becomes a litigation exercise.
Back charge procedures matter just as much. When the sub fails to complete work or correct deficiencies, the GC needs the right to complete or correct the work and deduct the cost from the sub's balance. Require written notice and a defined cure period before the back charge applies, so the sub has a chance to fix the issue. Document every back charge with photos, logs, and invoices, because undocumented back charges are the first thing a sub disputes.
Lien Waivers and Pay Apps
Tie payment to lien waivers, which is standard practice. Conditional waivers accompany each pay app, unconditional waivers accompany each cleared payment. Specify the waiver form, AIA G706 or a state statutory form, so there is no argument about what counts as a valid waiver. Require the sub to submit a preliminary notice within the state statutory window, and track those notices, because a sub who missed the notice deadline has weaker lien rights and that weakness should not become your problem at closeout.
A well drafted subcontract is not a substitute for a good sub, but a poorly drafted one will turn a good sub into a problem. Spend the time on the clauses above, have your attorney review the template annually, and update it whenever the law or your project risk profile changes. The contract is the cheapest place to prevent a dispute.