Subcontractor Agreement - an Introduction
When you hire subcontractors either to the assist you with delivering a client assignment or to deliver an assignment completely on your behalf, your choice of contract is critical.
In the subcontractor agreement you need to strike the right balance between protecting your own position as the Lead Consultant and ensuring that the arrangement is sufficiently attractive to the subcontractor in terms of the balance of risk and reward.
As Lead Consultant you need to maintain two basic perspectives on risk:
Firstly, you should recognize that ultimately you are accountable to the client for the success of the assignment. Therefore you must understand the overarching risk profile of the consulting assignment.
Secondly, in engaging subcontractors you have the opportunity through the subcontractor agreement to transfer some of the risk to your subcontractor(s). The proportion of overall risk that you either are not able to pass on to subcontractors or choose not to pass on should be regarded as the residual risk retained by your Consulting firm.
As Lead Consultant you will be using the subcontractor agreement to define the key relationships and manage some specific risks as follows:
- Define the work to be done, including timescales, quality and cost i.e. the subcontractor's consulting fees
- Establish which party (Lead Consultant or Subcontractor) will carry what proportion of professional and commercial risk arising from delivery of the consulting assignment. Not surprisingly, both the Lead Consultant and the Subcontractor are likely to wish for the majority of risk to be weighted towards the other party. The challenge is to strike the right balance such that each party is comfortable that the allocation of consulting fees is broadly aligned with each party's level of exposure to risk and fairly reflects the amount of work that each party will need to undertake to complete the assignment
- Establish that the Lead Consultant owns the relationship with the End Client and therefore the subcontractor is prevented from contracting direct with the client - this triangular relationship is what enables the Lead Consultant to make his margin (profit) on the time input by the subcontractor
- Protect your position with the tax authorities by demonstrating that the relationship with your subcontractor is Business to Business rather than Employer to Employee. Assuming this is the case then the subcontractor will be responsible for managing his own tax affairs and the Lead Consultant will not deduct tax prior to settling invoices. This is the essence of the 1099 independent contractor agreement as used in the US; in the UK this point is at the heart of the debate around IR35
You should take legal advice to ensure that you fully understand the balance of risk and reward between yourself and your subcontractors and to establish whether you are comfortable carrying whatever level of residual risk remains.
In addition you should check with your professional indemnity insurance provider or insurance broker to understand which risks are covered by your insurance and what level of cover is in place. The insurance cover required by an independent consultant who always works on a solo basis will be fundamentally different to the cover that is required by a lead consultant who engages one or more subcontractors.
When you are building a new relationship with a subcontractor it makes sense to invest time up front in working closely together to review the draft subcontractor agreement and agree the basic framework for the relationship.
For each assignment that you subsequently undertake using that subcontractor the basic subcontractor agreement can be re-used with only slight variations required to reflect matters such as the specific details of the assignment and fees.
As Lead Consultant you are in the dominant position in that you have the relationship with the client and, in principle, you have a choice of subcontractors that you could use to deliver the assignment.
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