If you’re a subcontractor in construction or the trades, the “legal” parts of a **subcontractor contract** can feel like boilerplate—until something goes wrong.

Subcontractor Agreement: Insurance Requirements and Payment Terms (A Sub’s Practical Guide)

If you’re a subcontractor in construction or the trades, the “legal” parts of a subcontractor contract can feel like boilerplate—until something goes wrong. Two sections almost always control whether you get paid and whether you’re protected when a jobsite incident happens: insurance requirements and payment terms.

This guide breaks down those clauses in plain English from the service provider (subcontractor) perspective, with practical tips you can use when reviewing a construction subcontractor contract or negotiating an independent subcontractor agreement. You’ll also see red flags to avoid and sample language concepts commonly found in a subcontractor agreement template.

Note: This article is educational information, not legal advice. If you’re dealing with a high-value project, complex risk, or a payment dispute, consult a construction attorney in your state.

Why insurance and payment terms matter more than almost anything else

Most project disputes fall into one of these buckets:

Someone got hurt or property was damaged, and the parties disagree about who’s responsible (insurance/indemnity).
The work was done, but payment is delayed or reduced due to withholding, pay-if-paid, change order issues, or “back charges” (payment terms).

Insurance requirements determine who bears the risk when things go sideways. Payment terms determine when and how you get money, and what conditions might be used to slow or deny payment.

If you’re using (or being handed) a subcontractor agreement template, don’t assume the insurance and payment clauses are “standard.” They’re often written to push risk downstream—onto you.

Part 1: Insurance requirements in a subcontractor agreement

Insurance is not just “show proof and move on.” In a subcontractor contract, insurance clauses are often tied to indemnity, safety obligations, and breach/default. Missing a certificate can be treated as a material breach—even if your work is perfect.

Below are the core components to understand.

1) Types of insurance commonly required

Commercial General Liability (CGL)

What it covers: Third-party bodily injury and property damage arising from your operations (e.g., you damage a finished floor, a visitor trips near your work area).

Typical requirements in a construction subcontractor contract:

Occurrence form (not claims-made, unless clearly agreed)
Limits such as $1M per occurrence / $2M aggregate
Products/completed operations coverage, often required for a period after completion

Subcontractor tip: Confirm the policy includes completed operations—especially if your trade could create latent issues (plumbing, electrical, framing, roofing, concrete, HVAC).

Workers’ Compensation and Employers’ Liability

What it covers: Employee injuries and related employer liability.

Typical requirements:

Workers’ comp as required by state law
Employers’ liability limits (often $500k/$500k/$500k or $1M)

Subcontractor tip: If you’re a true solo operator without employees, some states allow exemptions. But many GCs still require proof of coverage or a compliant exemption document. Clarify what’s acceptable before mobilizing.

Commercial Auto Liability

What it covers: Autos used in the job (owned, hired, non-owned).

Typical requirements:

$1M combined single limit is common

Subcontractor tip: If your crew uses personal vehicles, ensure your policy includes non-owned coverage to reduce gaps.

Umbrella/Excess Liability

What it covers: Additional limits above CGL/auto/employers’ liability.

Typical requirements:

$1M–$5M is common on larger jobs or higher-risk trades

Subcontractor tip: If the contract requires higher umbrella limits than you carry, negotiate:

A lower limit,
A project-specific endorsement, or
A price adjustment (since you’re being asked to buy more risk coverage).

Professional Liability (Errors & Omissions)

What it covers: Design or professional services errors (shop drawings, engineering, design-assist).

Subcontractor tip: If you’re not providing design services, push back. If you are doing design-assist or delegated design, this may be appropriate—but confirm the scope triggering E&O is clearly described.

Builder’s Risk (less common for subs to provide)

Usually carried by the owner/GC to cover the project during construction. Sometimes a subcontractor contract tries to shift builder’s risk obligations downstream—read carefully.

2) Additional insured status: the clause that quietly shifts risk

Most construction subcontractor contract forms require you to name the GC (and often the owner, lender, architect, etc.) as Additional Insureds on your CGL policy.

What “Additional Insured” really means

It allows their insurance protection under your policy for certain claims arising out of your work. This can be reasonable—but the details matter.

Watch for these issues:

Primary and noncontributory: Your policy pays first, theirs pays second.
Ongoing and completed operations: Coverage applies during work and after completion.
Broad AI wording that effectively makes you the insurer for other parties’ negligence.

Subcontractor-friendly approach: Ensure AI status is tied to claims “caused, in whole or in part, by” your acts/omissions—not the GC’s sole negligence.

3) Waiver of subrogation: can your insurer still recover?

A waiver of subrogation means your insurer may give up the right to pursue recovery from the GC/owner if your insurer pays a claim.

This is common, but it can impact premiums and claim handling. Confirm your policy can provide it for:

CGL
Workers’ comp
Auto (sometimes)

If your subcontractor contract requires a waiver and you can’t provide it, that can become a technical breach—even if no one is injured.

4) Certificates of insurance (COIs): not just paperwork

A COI is evidence of insurance, but it does not change coverage. Contracts often demand endorsements in addition to COIs.

Practical checklist:

Deliver COIs before starting work
Confirm endorsements match contract requirements:
- Additional insured endorsement (specific form)
- Waiver of subrogation endorsement
- Primary/noncontributory endorsement (if required)
Keep renewal dates on your calendar—many contracts allow suspension for expired certificates

5) “Flow-down” obligations can increase your risk

Many independent subcontractor agreement forms “flow down” prime contract terms into your subcontract. That can include insurance provisions you never saw.

Subcontractor move: Ask for the prime contract and all insurance exhibits. If they won’t provide them, request that your obligations are limited to the insurance terms expressly stated in your subcontract.

6) Indemnity vs. insurance: don’t confuse them

Insurance pays (subject to policy terms). Indemnity is your contractual promise to cover losses, claims, and attorney fees.

A subcontractor contract may require both:

Insurance with high limits, and
Broad indemnity that goes beyond what insurance covers

Red flag: Indemnity for the GC’s sole negligence or for losses “regardless of fault.” Many states restrict this, but enforcement varies.

Part 2: Payment terms in a subcontractor agreement (how to protect your cash flow)

Payment terms are where you can either lock in predictable cash flow—or get stuck financing the project.

Below are the payment provisions that matter most in a subcontractor contract and how to evaluate them.

1) Price structure: lump sum vs unit price vs time-and-materials

Lump sum

You agree to a fixed amount for defined scope.

Your risk: Scope gaps and ambiguous inclusions/exclusions.

Protection: Attach a detailed scope exhibit and clarify exclusions (e.g., permits, patching, disposal, after-hours).

Unit price

You get paid based on measured quantities.

Your risk: Measurement disputes.

Protection: Define measurement method, documentation, and when quantities are verified.

Time-and-materials (T&M)

You bill hourly labor plus materials with markup.

Your risk: Tight documentation requirements and “not-to-exceed” caps.

Protection: Require daily tickets signed by the GC, define rates, and clarify what documentation is needed for approval.

2) Payment schedule: progress payments, milestones, and billing requirements

Most construction subcontractor contract forms use:

Monthly progress billing, or
Milestone-based payments (e.g., rough-in, trim-out, final)

What to watch:

Strict invoice format requirements (missing a line item can delay payment)
“Pay apps” tied to a schedule of values (SOV)
Short billing windows (e.g., submit by the 20th or wait an extra month)

Subcontractor tip: Ask for a clear billing checklist in writing: required lien waivers, certified payroll (if applicable), daily reports, photos, material invoices, etc.

3) Retainage: your money held back until the end

Retainage (often 5%–10%) is withheld from each payment until substantial completion or closeout.

Negotiation levers:

Reduce retainage percentage
Request retainage reduction at 50% completion
Release retainage upon your scope completion (not the entire project completion)

Operational tip: Retainage can crush small subs’ cash flow. Price it in if you can’t negotiate it.

4) Pay-when-paid vs pay-if-paid: the clause that can decide whether you ever get paid

These clauses show up in many independent subcontractor agreement forms:

Pay-when-paid: GC pays you within a reasonable time after they get paid (timing mechanism).
Pay-if-paid: GC only pays you if they get paid (condition precedent shifting owner payment risk to you).

Why it matters: Pay-if-paid can turn the owner’s nonpayment into your problem—even if you completed work perfectly.

What to do:

Ask to remove pay-if-paid language
Replace with pay-when-paid with an outside payment deadline (e.g., “no later than 30/45 days after invoice approval”)
Confirm your state’s stance—some states restrict pay-if-paid or require specific wording

5) Change orders: the #1 reason subs don’t get paid for extra work

A construction subcontractor contract often says: no change order, no pay. Real life says: field conditions change, schedules shift, and GCs ask for “just do it.”

Protect yourself with process:

Define what counts as a change (scope, schedule impacts, rework, acceleration)
Require written authorization but include a fallback:
- If directed in writing by superintendent/PM, you can proceed subject to pricing
Set pricing rules (labor rates, material markup, equipment rates)
Include time extensions where applicable

Subcontractor habit: Send same-day emails confirming directives: “Per our conversation, we’re proceeding with X as directed; this is a change in scope and we’ll submit pricing.”

6) Back charges and setoffs: “we’re deducting this from your pay”

Back charge clauses allow the GC to deduct costs they claim you caused—cleanup, rework, schedule impacts, damaged materials.

Subcontractor-friendly safeguards:

Notice requirement before back-charging (e.g., 48–72 hours)
Opportunity to cure
Documentation requirement (photos, invoices, time records)
Cap or limitation (no markups, no consequential damages)

7) Payment timing, interest, and late fees

Many subcontractor contract forms are silent on interest—meaning delays can be “free” for the payer.

Consider requesting:

Net payment terms (e.g., Net 15/30 after approval)
Interest on late payments (subject to state law)
Recovery of collection costs/attorney fees if you must enforce payment

8) Conditional vs unconditional lien waivers: don’t waive rights before you’re paid

You’ll likely be asked for lien waivers with each pay application.

Conditional waiver: Effective only when payment is actually received/clears.
Unconditional waiver: Effective immediately—dangerous if a check bounces or is delayed.

Subcontractor rule: Use conditional waivers until funds clear. Also ensure the waiver matches the payment amount and period.

9) Final payment and closeout: the “paperwork trap”

Final payment is often conditioned on closeout documents:

Final lien waiver
Warranty documents
As-builts
O&M manuals
Jobsite cleanup signoff
Final inspection approvals

Tip: Ask early for the closeout checklist. Don’t wait until the last week to learn what’s required.

Putting it together: a subcontractor’s review checklist (insurance + payment)

When reviewing an independent subcontractor agreement or subcontractor agreement template, focus on these deal points:

Insurance checklist

[ ] Required policies match your trade risk (CGL, WC, auto, umbrella, E&O if needed)
[ ] Limits are realistic and priced into your bid
[ ] Additional insured scope is not overly broad
[ ] Completed operations coverage duration is clear
[ ] Waiver of subrogation is feasible for your policies
[ ] COIs + endorsements are clearly listed (not vague “as required”)

Payment checklist

[ ] Price and scope are clearly defined (inclusions/exclusions)
[ ] Billing timeline and required documents are clear
[ ] Retainage amount and release timing are acceptable
[ ] Pay-if-paid language is removed or softened
[ ] Change order process is workable in real job conditions
[ ] Back charges require notice, cure, and documentation
[ ] Lien waivers are conditional until paid
[ ] Final payment conditions are reasonable and listed

Common red flags to negotiate (especially for small trade subs)

Pay-if-paid with no outside payment deadline
Additional insured language that covers GC’s sole negligence
Insurance limits far beyond your job scope (without compensation)
“No verbal directives” change clause with no practical workaround
Unlimited back charge rights with no notice/cure
Broad indemnity plus broad insurance requirements (double risk transfer)
Unconditional lien waivers required before funds clear

Practical negotiation tips (that don’t burn relationships)

Ask questions, don’t accuse. “Can we align this clause with our insurance endorsement wording?”
Offer alternatives. If they want a $5M umbrella, offer $2M plus a price adjustment.
Use trade norms. GCs often respond to “industry standard” phrasing.
Document everything. Email summaries after calls are your friend.
Price risk. If you must accept a risk-shifting term, consider adjusting your bid accordingly.

Conclusion: Protect your pay and your business before you mobilize

Insurance requirements and payment terms are the business engine of your subcontract—what happens when a claim hits, and what happens when money slows down. The best time to fix a bad clause is before you start work, not after you’re chasing retainage or responding to a demand letter.

If you’re reviewing a subcontractor contract and want a faster way to generate a clear, trade-friendly agreement with sensible insurance and payment language, you can explore Contractable, an AI-powered contract generator, at https://www.contractable.ai.

2025-02-12

Subcontractor Agreement: Insurance Requirements and Payment Terms (A Sub’s Practical Guide)

Miky Bayankin

Subcontractor Agreement: Insurance Requirements and Payment Terms (A Sub’s Practical Guide)

Why insurance and payment terms matter more than almost anything else

Part 1: Insurance requirements in a subcontractor agreement

1) Types of insurance commonly required

Commercial General Liability (CGL)

Workers’ Compensation and Employers’ Liability

Commercial Auto Liability

Umbrella/Excess Liability

Professional Liability (Errors & Omissions)

Builder’s Risk (less common for subs to provide)

2) Additional insured status: the clause that quietly shifts risk

What “Additional Insured” really means

3) Waiver of subrogation: can your insurer still recover?

4) Certificates of insurance (COIs): not just paperwork

5) “Flow-down” obligations can increase your risk

6) Indemnity vs. insurance: don’t confuse them

Part 2: Payment terms in a subcontractor agreement (how to protect your cash flow)

1) Price structure: lump sum vs unit price vs time-and-materials

Lump sum

Unit price

Time-and-materials (T&M)

2) Payment schedule: progress payments, milestones, and billing requirements

3) Retainage: your money held back until the end

4) Pay-when-paid vs pay-if-paid: the clause that can decide whether you ever get paid

5) Change orders: the #1 reason subs don’t get paid for extra work

6) Back charges and setoffs: “we’re deducting this from your pay”

7) Payment timing, interest, and late fees

8) Conditional vs unconditional lien waivers: don’t waive rights before you’re paid

9) Final payment and closeout: the “paperwork trap”

Putting it together: a subcontractor’s review checklist (insurance + payment)

Insurance checklist

Payment checklist

Common red flags to negotiate (especially for small trade subs)

Practical negotiation tips (that don’t burn relationships)

Conclusion: Protect your pay and your business before you mobilize

Other questions subcontractors often ask (keep learning)