SubContractor Agreements – What Australian Businesses Need To Know

What Is a Subcontractor Agreement?

A subcontractor agreement is a written contract between a head contractor (the party that holds the principal engagement with an end client) and a subcontractor engaged by the head contractor to perform part of the contracted work. The agreement allocates scope, payment, risk, intellectual property and liability as between the head contractor and the subcontractor; it does not create any direct contractual relationship between the subcontractor and the end client unless a separate collateral agreement (for example, a deed of novation or a side deed) is put in place.

Subcontractor agreements are most often encountered in the building and construction industry, but are also used in information technology, logistics, professional services, creative services, mining services, and any other sector where work is broken into specialist packages. In the construction industry, subcontracting is regulated by the Security of Payment legislation in each State and Territory (in Victoria, the Building and Construction Industry Security of Payment Act 2002 (Vic)). This legislation overrides many common contractual provisions, including ‘pay when paid’ clauses, and is dealt with separately below.

When Do You Need One?

There are two common scenarios:

You Are the Contractor (Engaging Down)

You have a contract with an end client and you engage another entity (subcontractor) to perform part of that work.

Example: A web agency wins an e-commerce project and hires a freelance developer to build the payment gateway.

You Are the Subcontractor (Being Engaged)

A contractor asks you to perform part of a project they have won and you wish to protect your right to be paid and control your own work methods.

Example: A builder engages an electrician to rewire a commercial renovation. The electrician uses their own tools and sets their own hours.

What a Strong Agreement Covers

Subcontractor vs. Employee vs. Independent Contractor

A subcontractor is, in legal terms, an independent contractor who happens to be engaged by another contractor (rather than directly by the end client). The defining characteristics of an independent contractor are that the worker operates their own business, is engaged for a result rather than for their labour, controls the manner in which the work is performed, supplies their own tools and equipment, bears commercial risk and reward, and is free to engage other clients. A subcontract is not, and must not be, a disguised employment contract. The legal differences are significant.

Is a Subcontractor Agreement Legally Binding in Australia?

Yes, provided all of the following are present:

• Offer and acceptance– One party proposes terms, the other accepts (preferably in writing).
• Consideration– Something of value passes each way (example, payment for services).
• Intention to create legal relations– Both parties intend to be bound. A signed document strongly establishes this.
• Certainty of terms– Essential terms (scope, payment, duration) are clear enough for a court to enforce.

Since the 2023 amendments to the Australian Consumer Law, unfair contract terms in small business contracts are void. A one-sided or hidden term may be struck out, even if both parties signed it and for these reasons it is important to have the agreement reviewed by a lawyer.

Legal and commercial prerequisites for subcontractors

To operate as a subcontractor in Australia, the subcontractor will typically need:

(a) an active Australian Business Number (ABN);

(b) GST registration if annual turnover is at or above the GST registration threshold (currently $75,000);

(c) an appropriate trading entity (sole trader, partnership, company or trust);

(d) the licences, registrations and qualifications required for the relevant work in the relevant State or Territory (for example, a Victorian Building Authority registration for building work in Victoria, an electrical contractor’s licence, or a security licence);

(e) public liability insurance, professional indemnity insurance and (depending on the work) product liability insurance, all at limits acceptable to the head contractor and (where relevant) the end client;

(f) workers’ compensation cover where the subcontractor employs workers (and, in some States, where the subcontractor is taken to be a worker of the head contractor under deeming provisions); and

(g) a written safety management system that satisfies the applicable WHS or OHS legislation.

Negotiation Tips – For Subcontractors

Never sign without reading. Standard-form agreements favour the party that wrote them. It is highly recommended that these document are reviewed carefully and unreasonable terms are deleted.

Pay when paid clauses. Resist ‘pay when paid’ or ‘pay if paid’ clauses. In the construction industry, such clauses are void by force of the Security of Payment legislation in each State and Territory (in Victoria, section 13 of the Building and Construction Industry Security of Payment Act 2002 (Vic)). Outside construction, where the legislation does not apply, subcontractors should push for a maximum period by which payment must be made (for example, 30 days from the end of the month in which the invoice is rendered) and a contractual right to charge interest and to suspend work for non-payment.

Clarify IP ownership. Are you licensing your work (you keep ownership) or assigning it (you transfer ownership)? Assignment should attract a higher fee payable to the subcontractor.

Put variations in writing. An email confirming a change to scope or price is better than a verbal conversation.

Cap liability appropriately. A clause limiting the subcontractor’s aggregate liability to a sum tied to the contract value (for example, the fees paid in the preceding 12 months, or 100 to 200 per cent of the total contract sum) is common and is generally enforceable as between commercial parties. Three qualifications generally apply. First, liability for personal injury or death cannot be excluded or limited under most State and Territory civil liability legislation. Second, the consumer guarantees in Part 3-2 of the Australian Consumer Law cannot be excluded, although the remedy can in some circumstances be limited under section 64A. Third, an excessive or one-sided limitation clause in a standard form contract may be struck down as an unfair contract term.

Negotiation Tips – For Contractors (Engaging Subcontractors)

Flow down obligations. Your contract with the end client contains warranties and deadlines. Your Subcontractor Agreement should mirror those same obligations.

Do not direct. Tell the subcontractor what to do, not how to do it. Control of method indicates employment.

Verify ABN and insurance. Check the ABN is active on ABN Lookup. Obtain certificates of currency in respect of the subcontractor’s insurances.

Own the IP. Ensure the agreement explicitly assigns all IP created by the subcontractor to you (or to the end client if required).

Include a set-off right. Deduct from payment any amounts the subcontractor owes you for defective work or delay.

Industry specific legislation (for example, Security of Payment in construction). If the work falls within the scope of the Security of Payment legislation in the relevant State or Territory (in Victoria, the Building and Construction Industry Security of Payment Act 2002 (Vic); in New South Wales, the Building and Construction Industry Security of Payment Act 1999 (NSW); and equivalents in each other jurisdiction), the legislation will override key parts of the contract. In particular: ‘pay when paid’ clauses are void; the subcontractor has a statutory right to make a payment claim and to obtain rapid adjudication if the payment is disputed; and the subcontractor may suspend work and exercise lien rights in some jurisdictions. Subcontracts in the construction industry should always be drafted with the Security of Payment regime in mind.

Related Documents

A Subcontractor Agreement is often accompanied by additional supporting legal documents. Depending on your industry and the specific structure of the engagement, you may also require:

• an Employment Agreement (Professional Services);
• a Non‑Disclosure Agreement (NDA); and
• a Contractor Agreement.

Together, these documents help strengthen your legal position and ensure appropriate protections are in place beyond the scope of the Subcontractor Agreement.