How to Hire a Subcontractor: Contract, Rates and Payment Terms

Hiring a subcontractor means agreeing in writing on scope, rate, payment schedule, and tax treatment before the first tool touches the job. Finding the right person is a separate step - if you are at the paperwork stage, you have already done that. This covers how to lock in the deal correctly so neither side gets a nasty surprise halfway through.

This is the model behind construction arbitrage: you win the work, the sub delivers it, and you make the spread. Getting the hiring mechanics right is what keeps that spread clean.

Day Rate vs Price Work: Which to Use#

The first decision when hiring a subcontractor is how you pay them.

Day rate means a fixed daily fee for labour. The sub turns up, works their day, and invoices you for days worked. Rates vary by trade and region - in the UK a skilled tradesperson runs anywhere from £180 to £350 per day depending on the trade and area; in the US the equivalent spread is roughly $250 to $500 per day. Day rates suit jobs where the full scope is unclear until work starts - opening up a wall, diagnosing a problem, anything with unknowns.

Price work (also called a fixed price or lump sum) means the sub quotes a set amount for a defined piece of work. You pay that amount whether it takes them one day or three. Price work is better for both sides when the scope is clear: you get cost certainty, the sub has upside if they work fast.

One thing to understand about fixed price quotes: a sub adding a fixed price is also adding a risk premium - typically 10% to 15% above what they would charge day rate - because they are absorbing the uncertainty. That is fair. You are not overpaying; you are buying certainty. For a construction arbitrage operator, price work is usually cleaner because your margin is locked the moment the sub signs.

I ran mostly day rate early on when I was learning what jobs cost. Once I understood the numbers, I moved most work to price. Fewer surprises, easier to manage from a distance.

Payment Terms and How to Structure Them#

For day rate work, pay weekly or fortnightly. Subs expect it, and holding payment longer than a fortnight burns goodwill faster than almost anything else. Agree the payment day upfront - Friday works for most.

For fixed price work, structure payments by milestone, not by time. A common split for a medium-sized job:

• 20-30% on start (to cover materials and mobilisation)
• 40-50% at a defined midpoint (when first fix is complete, or a floor is finished, or a clear visual checkpoint)
• Remaining balance on completion and sign-off, minus retention

Never pay 100% upfront. Never pay the full balance before the job is signed off. Both of these are how you lose control of a sub and end up with a half-finished job and an empty phone.

Retention is a percentage held back from each progress payment until the job is complete and any snags are fixed. The construction industry standard is 5% to 10%. Many main contractors now use 5% as a default - it is enough to hold a sub's attention without being punitive. Write the retention percentage into the agreement before work starts. Springing it at the end of a job is a fast way to lose a good sub permanently.

California tightened its rules from 1 January 2026, capping retention on private construction contracts at 5% to align with public works rules. If you are operating there, 5% is now the legal ceiling on private projects.

CIS in the UK: What You Must Do Before Paying#

If you are the main contractor in the UK and you are paying a subcontractor to do construction work, you are almost certainly caught by the Construction Industry Scheme (CIS). You need to register with HMRC as a contractor before making your first CIS payment.

Before paying any subcontractor, verify their CIS status using HMRC's online service. This sets their deduction rate:

• 0% - Gross Payment Status. The sub has met HMRC's turnover and compliance tests. You pay them in full with no deduction.
• 20% - The standard rate for verified, CIS-registered subcontractors. You deduct 20% from the labour portion of their invoice (not materials) and pay it to HMRC.
• 30% - Unregistered subcontractors. Deduct 30% from the labour element.

The deduction covers the labour element only. If the sub's invoice separates materials from labour, you deduct only from the labour line. File a monthly CIS300 return with HMRC by the 19th of each following month, and pay the deducted tax to HMRC at the same time.

This is not optional admin. Getting it wrong means HMRC can hold you liable for the deductions you failed to make. For more on how UK tax works across the model, see how taxes work in construction arbitrage.

1099-NEC in the US: When and How to File#

In the US, if you pay a subcontractor $2,000 or more in a calendar year (for payments from 1 January 2026 onwards - the IRS raised this threshold from $600), you must issue them a Form 1099-NEC. The form is due to both the IRS and the subcontractor by 31 January.

Before the first payment, get a completed W-9 from the sub. This gives you their legal name, business name, address, and tax identification number - everything you need to file the 1099 at year end. Do this before you pay, not after. Chasing a sub for a W-9 once the job is done is harder than you think.

What Goes in a One-Page Subcontractor Agreement#

The contract does not need to be long. It needs to be specific. Here is what to cover in a basic sub agreement:

1. Scope of work - what exactly the sub is doing, written clearly enough that there is no argument later about what was and was not included.
2. Start date and target completion date - both, in writing.
3. Rate structure - day rate (state the daily rate) or fixed price (state the agreed sum).
4. Payment schedule - dates or milestones, amounts, how invoices are submitted.
5. Retention - the percentage and when it is released.
6. Insurance - the minimum coverage the sub must hold before starting (public liability at a minimum; professional indemnity if relevant to the trade).
7. Materials - who supplies what. Common to specify that the main contractor supplies all materials and the sub provides labour only. This simplifies CIS in the UK and 1099 in the US.
8. Defects liability period - how long after completion the sub is responsible for putting right defects in their own work. Six to twelve months is typical.
9. Termination - how and when either side can end the contract if things go wrong.

You can have a solicitor or attorney draft a proper contract for larger jobs. For smaller residential work, a clear written document in plain language that both sides sign is far better than a handshake and a conversation.

For the full breakdown of what goes in both your client contract and your sub agreement - and how they should mirror each other - see what contracts you need for construction arbitrage.

Before You Hire: Make Sure You Have the Right Person#

Everything in this post assumes you already found and vetted the subcontractor. If you have not done that work yet, start there - how to vet subcontractors before you give them a job covers the licence check, the insurance call, references, and the trial job system.

And if you are still at the finding stage, how to find subcontractors covers where to look and what you are actually looking for.

The model only works if the sub delivers. The agreement is what keeps both sides honest when the job gets difficult.

Last checked: 10 September 2026.