Drafting a legally sound subcontracting agreement is crucial for businesses operating across South Africa’s sectors, especially in construction, engineering, IT, and logistics. These contracts establish the working relationship between a primary contractor and a subcontractor, detailing the project scope, payment schedules, legal responsibilities, and termination rights.

Understanding the core elements of subcontractor agreements can prevent delays, minimise legal risk, and protect your company’s financial and operational interests. This article outlines the essential clauses and compliance considerations under South African contract law.

1. Defining the Scope of Work in Subcontracting Agreements

A well-drafted subcontract must start with a clear and detailed scope of work. This clause defines the exact services or deliverables expected from the subcontractor. Under South African law, agreements lacking certainty on material terms may be invalid due to an absence of “consensus” (see Glen Anil Development Co (Pty) Ltd v National Development Company Ltd 1977 (2) SA 136 (A)).

To ensure enforceability:

• Clearly outline timelines, service standards, and performance specifications.
• Attach drawings, schedules, or reference documents like JBCC contracts.
• Include a variation clause that governs how changes to the work will be authorised, costed, and recorded in writing.

2. Payment Structures and Invoicing Terms

Subcontractor cash flow is highly dependent on predictable and transparent payment terms. Every subcontract should define:

• The pricing model (e.g. fixed price, measured work, or cost-plus),
• Invoicing intervals (typically 30 days from invoice receipt),
• Conditions for payment certification,
• Late payment interest based on the Prescribed Rate of Interest Act 55 of 1975.

For compliance, where labour is involved, subcontractors must be paid in accordance with section 33 of the Basic Conditions of Employment Act 75 of 1997, even if indirectly applied. The agreement should also address withholding tax, VAT registration, and documentation required with each invoice.

3. Allocation of Legal Liability and Risk

A subcontracting agreement must outline liability clauses to allocate risk fairly between the parties. This includes:

• Indemnity clauses for damage, third-party claims, or regulatory breaches,
• Limitations of liability that cap the financial exposure of each party,
• Exclusions for gross negligence or wilful misconduct, which cannot be contractually waived under South African law (Minister of Safety and Security v Road Accident Fund 2005 (6) SA 215 (CC)).

Precision matters. Ambiguous terms are interpreted contra proferentem, against the drafter (Intercontinental Exports (Pty) Ltd v Fowles 1999 (2) SA 1045 (SCA)). To avoid uncertainty, specify whether indemnities cover direct, indirect, or consequential losses.

4. Termination Rights and Exit Procedures

The agreement should explicitly cover termination rights, which protect both parties in the event of breach or other unforeseen circumstances. Termination clauses generally fall into two categories:

• Termination for cause (e.g. insolvency, breach, failure to perform),
• Termination for convenience, which must be expressly agreed in writing.

Under South African law, a party cannot unilaterally walk away unless permitted by contract (Interspares (Pty) Ltd v Transnet Ltd 1994 (3) SA 125 (A)). The agreement should detail:

• Notice periods and cure opportunities,
• Termination payment calculations,
• Handover obligations and final account closure procedures.

5. Regulatory and Compliance Requirements

A legally enforceable subcontract must include compliance clauses tailored to the project’s regulatory framework. Depending on the nature of the work, subcontractors may need to comply with:

• The Occupational Health and Safety Act 85 of 1993,
• Construction Regulations,
• Broad-Based Black Economic Empowerment (B-BBEE) Act 53 of 2003,
• Industry-specific registration requirements (e.g., CIDB for construction).

Subcontractors should be required to maintain valid licences, insurance policies, and health and safety plans. Main contractors often include indemnity provisions for penalties resulting from subcontractor non-compliance.

6. Subcontractor Payment Terms Explained Further

For clarity and fairness, payment terms should cover more than just invoice dates:

• Advance payments, if any, and the security required,
• Interim or milestone-based payments,
• Retention money, including the percentage withheld and conditions for release,
• Final account reconciliation.

Where governed by the Construction Industry Development Board (CIDB), retention funds may need to be held in trust or escrow.

7. Legal Formalities and Contract Validity

To be enforceable, all subcontracting agreements must comply with common law contract principles, including:

• Mutual agreement (consensus),
• Legal and possible performance,
• Proper capacity and authority.

Although most subcontracts are valid even if verbal, best practice and evidentiary certainty, requires a signed written agreement with:

• Entire agreement clauses,
• Authority declarations,
• Date and signature blocks for all parties.

This reduces future disputes over verbal amendments or misunderstandings.

8. Employment and Labour Terms in Subcontracting

Where a subcontractor provides labour services, it’s essential to address:

• The subcontractor’s independent contractor status to avoid employer liability,
• Adherence to minimum wages, overtime rules, and working conditions under the BCEA,
• Compliance with UIF, PAYE, COIDA, and skills development levies,
• Evidence of public liability insurance and any necessary umbrella insurance coverage.

Failing to do so could expose the main contractor to labour law claims, reputational harm, and regulatory fines.

Final Thoughts: Why Every Clause Matters in a Subcontract

In South Africa, subcontracting agreements must balance legal compliance, operational clarity, and financial protection. Whether you’re a main contractor or subcontractor, a carefully structured agreement can help avoid litigation, preserve business relationships, and ensure that projects are completed on time and within budget.