Working with subcontractors: What you need to consider legally

It is not uncommon for companies to want to take on a particular large order but are unable to carry out all the work involved on their own. They then often use a subcontractor. The subcontractor takes on certain services independently. 

Estimated reading time: 5 minutes

Contract design between general contractor and subcontractor

First of all, it is important that the contractor (also known as the general contractor or general transferee) and the subcontractors conclude a legally binding contract for their collaboration. The "subcontractor contract" is - dependant on the agreed service - a work contract or a construction contract.

With a legally compliant subcontractor agreement, you can avoid potential conflicts in advance and minimise liability risks.

What a subcontractor contract should contain

A subcontractor contract should contain the following information and provisions:

• Name and address of the contractual partners
• Description of the construction or work to be performed by the subcontractor
• Performance period and delivery date
• Dates for interim acceptances, if applicable
• Place of work
• The manner in which the acceptance should take place
• Agreement on the remuneration of the subcontractor and payment modalities
• Regulation on liability for defects or damages and on possible recourse/compensation claims of the general contractor
• A contractual penalty may be agreed in the event of a delay in performance by the subcontractor

If the subcontractor breaches contractual agreements, the general contractor can assert claims against them. These include claims for rectification if the contractually agreed services have not been properly provided, as well as possible claims for damages if specific damage has been incurred due to the breach of contract.

The subcontractor...

•  owes not only his co-operation, but also a work result in the form of a concrete construction or work performance.
•  performs the service independently or with his own employees.
•  uses - unless otherwise agreed - his own work equipment such as tools, vehicles etc.
• is not integrated into the general contractor's work organisation. 

The general contractor...

• has no right to issue instructions to the subcontractor's employees.
• may monitor the subcontractor's activities, but must respect the subcontractor's independence and has no right to intervene in the actual execution of the subcontractor's work. 

Who is liable for damage or defects caused by subcontractors?

From a civil law perspective, the subcontractor is a legal representative of the general contractor. According to § 278 BGB, a debtor is responsible for the fault of his vicarious agent as if it were his own fault. In other words: In principle, the general contractor is liable for defects or damage caused by the subcontractor.

However, if necessary, general contractors have the option of right of recourse against the subcontractor to recover the costs of rectification or damage caused by the subcontractor. Depending on the degree of negligence and the type and amount of damage caused, the subcontractor may have to pay for all or part of the damage.

In the subcontractor contract you can define liability clauses. In addition to the regulation of claims for damages a disclaimer can also be agreed upon for certain risks.

General contractors should check their public liability insurance to see whether it also covers the liability risk when using subcontractors. 

Evidence and control

Because the general contractor is also responsible to the customer for the performance of the subcontractor used, it should fulfil certain requirements. These control measures include overseeing the execution of the subcontractor’s work.

To protect yourself as a general contractor, you should always draw up an acceptance report when accepting the work or construction service. This allows you to rule out defects and protect yourself against claims from the customer.

On the other hand, the general contractor should also monitor the subcontractor's treatment of its personnel. This primarily concerns the correct payment of social security contributions,adherence to the payment of legal minimum wage, and compliance with working time regulations.. If the subcontractor does not fulfil these obligations, the general contractor is generally liable, for example for unpaid social security contributions or unpaid minimum wages. To this end, the general contractor can, for example, obtain pay slips or time sheets from the subcontractor.

In addition, it is advisable to obtain an authorisation from the public liability insurance of the subcontractor. 

Last but not least: general contractors are also responsible if the subcontractor they have appointed turns out to be a bogus self-employed company or if the arrangement qualifies as covert temporary employment. General contractors should therefore take the appropriate and necessary precautions to avoid bogus self-employment and covert temporary work.