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Installment 2: Before You Sub It Out...

If you are a service provider and ever rely on using subcontractors or freelancers to deliver services to your clients, this one is for you.

Over the last 20 years, I have drafted, reviewed and negotiated hundreds of professional services agreements between suppliers and their clients.

As soon as the ink was dry on the vast majority of those client agreements, what followed were agreements between the supplier and one or multiple subcontractors to perform a portion of the services owed to the client. This might include graphic designers, photographers, freelance producers, caterers, applications developers, event set fabricators, and oh so many more.

An important rule whenever bringing in a services subcontractor: you must negotiate that transaction with the underlying agreement with the client always in mind. Those deals do not exist in a vacuum. Terms within the client agreement will often dictate what terms have to be in your subcontractor agreement.

Here is a healthy – but by no means exhaustive - handful of critical things that you should be considering when you are engaging a subcontractor:

1. Are you even allowed to do it? Many clients will include provisions in their services agreements that expressly prohibit the use of subcontractors. Even if the client allows subcontracting, they may include a provision that states that you have to provide the names of the subcontractors and perhaps even get specific permission for each subcontractor.

2. Keep an eye out for “flow-down” provisions. Client agreements often contain obligations that a client has imposed on you that will also need to be imposed on the subcontractor. These might include confidentiality or data security requirements, indemnification obligations, intellectual property transfer rules and insurance requirements.

3. Don’t grant rights that you don’t have. It is common for service subcontractors to seek the right to publicize the work that they are doing for you. It is also common for subcontractors to seek to retain their rights in some portion of the work product that they deliver. If you are inclined to agree to these requests, you must first make sure that your client agreement allows for it.

4. Be careful about payment terms. As a service supplier who needs to engage a subcontractor, you never want to be in a position where you have to issue payment to your subcontractor before you have been paid by your client. At a minimum, you want to make sure you are “cash neutral” (i.e. you are receiving cash from the client just in time to make payment to the sub). This requires careful planning and potentially some sensitive conversations with your client and subs.

5. Never let your subcontractor terminate without cause. While it is perfectly reasonable for a service provider to have a right to terminate your agreement for cause (e.g. they aren’t getting paid or you have otherwise breached an important requirement in the deal), a service subcontractor should not be allowed to walk away because they feel like it. That will leave you scrambling to find a suitable replacement without the benefit of time to negotiate an appropriate deal with the new sub.

6. Make sure critical scope details are captured in the subcontractor deal. A well-crafted service agreement will contain important details about deliverables. For example, a marketing services agreement may contain an obligation to provide a summary report by the end of the month and also require that images from the campaign be included in the report. Assume in this example that you are engaging both a graphic designer to design elements within the report and a photographer to capture the required images. In your agreements with both of these subs, you will want to make sure that you have included deadlines that will allow you to meet your client deadline.

I want to offer one more consideration that is less about your subcontractor agreements than it is about your subcontracting process. Don’t put all of your eggs in one subcontractor’s basket. I see this way too often in the service space. A service supplier relies on a single subcontractor to deliver a critical piece of a service project and has no plan to replace that sub if things start going pear-shaped. In any area of your business where you routinely rely on subcontractors, you need to develop a roster of competent, reliable providers.

Future posts in this series will dig deeper on some of these critical issues, but keeping this list of considerations in mind should help you structure subcontractor transactions that serve as a blueprint for project success and minimize risk to your organization.

Broad Cove Advisors LLC (“BCA”) is a consulting firm that provides strategic advice to brands, agencies and other service suppliers. Among the services that BCA offers is advice on negotiation strategies designed to improve transparency, collaboration and service outcomes. BCA is not a law firm and does not provide legal advice.