Subcontract agreement: contracts in construction

In a typical construction project, one company, the main contractor, does not carry out all the work itself. Bricklayers, electricians, plumbers and other specialist contractors are engaged as subcontractors to carry out defined parts of the work. The result is a web of contractual relationships, where a clear subcontract agreement is essential to avoid disputes.

Subcontract agreements are among the most dispute-prone contract types in construction. Unclear scope descriptions, delays, defects and payment problems are frequent causes of disputes. A well-drafted subcontract agreement significantly reduces this risk.

What is a subcontract agreement?

A subcontract agreement is a contract between a main contractor (who has the construction contract with the employer) and a subcontractor (a specialist who carries out part of the works).

The subcontractor is not a party to the contractual relationship with the employer. The subcontractor delivers to the main contractor, who is liable to the employer for the overall result.

Who uses subcontract agreements?

• Construction and civil-engineering firms that engage specialist contractors
• Electricians, plumbers, roofers and bricklayers on larger projects
• Turnkey and main contractors with complex project structures

AB 18 and subcontract agreements

AB 18 (the General Conditions for works and supplies in building and construction) is the central contractual framework for construction contracts in Denmark. AB 18 is an "agreed document", that is, voluntary conditions drawn up by the parties in the construction sector, but it is the de facto standard in Danish construction. AB 18 only applies if the parties have agreed to it in the contract.

It is common to include a clause that AB 18 applies to the subcontract, so that the legal standard is mirrored down into the subcontractor relationship. Many construction projects specify AB 18 as a contractual term already in the tender documents. For smaller and simpler works, there is also AB Forenklet (a simplified version).

What should a subcontract agreement contain?

1. The parties

Full company name, CVR number, address and contact persons for both parties.

2. The scope of the works

The precise description is the contract's most important element:

• What is carried out precisely (for example "carrying out the electrical installation in block A, floors 1 to 4, including fuse boards")
• References to drawings, specifications and tender documents
• What is excluded
• Quality requirements and choice of materials

Vague descriptions such as "electrical work" are a frequent source of disputes. Go into detail.

3. The timetable

• The start date and completion date
• Intermediate milestones
• Coordination with other subcontractors' work
• The consequences of delay

4. The contract sum and payment

Pricing model:

• Fixed price (fixed contract sum)
• Work on account
• Unit prices

Payment terms:

• The instalment payment plan
• The billing interval and payment deadline
• Any retention as security (agreed specifically)
• Interest on late payment

5. Coordination and access to the site

• Access conditions and working hours
• Who provides scaffolding, cranes and common services?
• Cleaning and waste disposal
• Health-and-safety rules on the site

6. Variations and additional works

• The procedure for approving variations (written approval before starting)
• Pricing of additional services
• Consequences for the timetable

Orally agreed additional works are one of the most frequent causes of payment disputes in construction. Always require written approval before starting.

7. Defects

• The remedy deadline for identified defects
• Consequences of a failure to remedy (remedy by others at the subcontractor's expense)
• The duration of defects liability: under AB 18 section 55, a 5-year absolute limitation period runs from handover, supplemented by a 1-year and a 5-year inspection (sections 56 to 57)
• The handover procedure

8. Liability for delay

• Liquidated damages for exceeding the handover date (the amount is agreed specifically, often set as a per-mille or percentage share of the contract sum per delayed unit)
• Any cap on liquidated damages
• Compensation for documented loss
• Force majeure exceptions

Note that liquidated damages are not laid down by law but set in the contract. If liquidated damages have been agreed, they do not require proof of an actual loss.

9. Insurance

The subcontractor should have professional liability insurance, and it should be agreed who takes out any all-risks construction insurance. Require documentation of insurance before the work starts.

10. Sub-subcontractors

Does the use of sub-subcontractors require prior approval from the main contractor? Agree it expressly.

The handover procedure

Handover is the central legal moment in construction law:

• The subcontractor formally hands over the work to the main contractor
• The risk of accidental loss passes to the recipient
• The limitation period for defects begins to run
• Any retained amount is settled

AB 18 contains detailed rules for the handover procedure. Hold a formal handover with a written record.

Payment and the right to suspend

The right to suspend: the subcontractor can as a rule suspend the work in the event of the main contractor's payment default, but the procedure must be followed correctly.

Final account: usually drawn up after approved handover.

Set-off: the main contractor can set off documented defect claims against the subcontractor's invoice.

Who is liable to the employer?

The main contractor alone. The employer as a rule has no contractual relationship with the subcontractor and directs its claims at the main contractor, who is liable for the subcontractor's work as for its own. The main contractor can then bring a claim against the subcontractor.

Frequently asked questions about subcontract agreements

Is AB 18 mandatory for subcontracts?

No, AB 18 is voluntary standard conditions and only applies if the parties have agreed to it. But it is the de facto standard. If you leave out AB 18, the general rules of Danish law of obligations apply, which on several points are more unclear.

What are liquidated damages in a construction contract?

A pre-agreed penalty per unit of time the project is delayed. It does not require proof of an actual loss. The amount is set in the contract, often as a share of the contract sum.

Can the subcontractor stop the work in the event of non-payment?

Yes, on certain conditions. The right to suspend the work in the event of payment default is a fundamental principle, but the procedure must be followed correctly.

Can the agreement be made conditional on my winning the main contract?

Yes. It can make sense to insert a condition clause stating that the agreement lapses if the main contract is not obtained, and clarifying whether there is any liability for compensation.

Conclusion

A subcontract agreement is the construction sector's fundamental contract. It protects both parties: the subcontractor is assured a clear scope description and clear payment terms, while the main contractor is protected against errors, delays and defects. Build the agreement around the AB 18 standard, and seek construction-law advice on larger or complex projects.

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The content of this article is for guidance only and does not constitute legal advice. Consult a construction lawyer for advice on specific construction-law questions.