This section will discuss basic legal concepts of contracting, including subcontracts and IRS implications for contracting with individuals.
- Essential Elements to Form a Binding Contract
- Expected Clauses in a Contract
- General Resources for Information on Contracting
- Service Provider (Independent Contractor)
- Overview of Subcontracting from Other Universities
- Internal Revenue Service (IRS) Issues
- Flow Through Requirements
Essential Elements to Form a Binding Contract
- Offer – a promise to carry out the terms of the proposed transaction, in exchange for consideration
- Acceptance – in strict compliance with the terms of the offer
- Legal Purpose/Objective – the objective of the contract must be for a legal purpose.
- Mutuality of Obligation – “meeting of the minds” or mutual understanding and assent to the expression of the agreement
- Consideration – something of value that is bargained for and given in exchange for the promise contained in the offer
- Competent Parties – the parties to the contract must be competent and authorized to enter into the contract.
- More Definitions
Expected Clauses in a Contract
- Party Identification – including formal name and address
- Recitals – introductory paragraph that describes the nature of the contract and why each party has elected to enter into the agreement
- Term – duration and length of the contract
- Price and Payment – maximum amount in consideration for services provided and method/frequency of payment/invoicing terms
- Termination – A termination clause is a part of a contract that lets one or both parties in the contract end it. Generally, termination clauses apply only under certain circumstances clearly described in the contract.
- Technical Reporting – This clause describes the frequency for format for completing technical reports and also identifies where the technical reports are to be delivered.
- Amendments or modifications of the agreement – The Amendment clause defines the conditions for changing the terms of an agreement. It typically applies the parol evidence rule and requires a written document signed by both parties.
- Books and Records – The books and records clause states that the representing party will make its records available for inspection, review and audit at reasonable times and records and supporting documentation shall be retained for a stated period of time.
- Notifications – The Notices clause in the general provisions section of an agreement defines how notice is to be made, where notice may be made, and when the notice is deemed to have been received. The clause works in conjunction with other provisions of the agreement stating the circumstances when notice is required.
- Severability – clause that states if parts of the contract are held to be illegal or otherwise unenforceable, the remainder of the contract should still apply, such as confidentiality
- Survivability – a survival clause says that when the contract is terminated certain provisions will continue to govern the parties’ behavior toward one another.
- Liability –The clause serves to limit the liability of the parties and may be subject to certain statutory limit established at the State or Local level. Universities do not accept indemnification/hold harmless language. (Example of Indemnification).
- Use of names – This clause establishes limits on the use of the parties’ names by each other.
- Governing Law – clause specifies that the laws of a mutually agreed upon jurisdiction will govern the interpretation and enforcement of the terms of the contract.
- Assignment – Assignment clause determines whether rights, obligations and duties under an agreement may be transferred in whole in or part to another, and under what conditions.
- Independent Contractor – The parties are independent contractors to each other. Nothing in this Agreement shall be construed to create a partnership, joint venture or agency relationship between the parties.
- Entire Agreement – an entire agreement clause declares that the contract represents the complete and final agreement, thereby protecting the contracting parties. In other words, the contract supersedes any prior agreements the contracting parties might have made with regard to the subject of the contract.
- Force Majeure – a clause in contracts that excuses a party from not performing their contractual obligations due to unforeseen events beyond their control “acts of God”
- Confidentiality – It is a legal document that is signed between any two parties that are interested to share any sort of secret material, knowledge or any sort of secret information for any of their future perspective, but they are intended to restrict the further sharing of this information to any other party or person.
- Intellectual Property – this clause describes the terms for ownership, licensing and use rights to intellectual property arising out of a sponsored agreement. The clause will generally describe the approach to rights for IP that is solely or jointly developed under the agreement. This clause could also describe rights to intellectual property, which is owned by one of the parties, and may be used during the course of the sponsored agreement.
- Publication Rights – this clause describes the publication rights under the sponsored agreement and may set a requirement for a period of time for the sponsor to review a proposed publication to protect is proprietary or confidential information. Universities generally do not accept restrictions on publication rights. A requirement for sponsor “approval” of a proposed publication is not acceptable.
General Resources for Information on Contracting
- Business Contracts Legal Terms and Definitions Glossary
- Glossary of Common Contract Terms
- Contract Standards – General Provisions
- Contracts at UCAR
A subcontract is defined as a formal arrangement by which responsibility for a sizable portion of the scope of work of a research project is transferred from the University to a third party. In other words, it is a financial mechanism used when the intent is to have another institution or third party carry out an integral portion of the project’s scope of work. Subcontracts are not entered into with individuals and subcontracts are not issued to vendors (i.e. payment for goods and services). Subcontracts are issued when a collaborator will: perform work as part of institutional appointment
- have programmatic decision-making responsibility
- manage technical and administrative aspects of a portion of the overall project statement of work
- use institutional facilities, students and staff
Characteristics indicative of a payment for goods and services received by a vendor are when the organization:
- provides the goods and services within normal business operations
- provides similar good of services to many different purchasers
- operates in a competitive environment
- provides goods or services that are ancillary to the operation of the prime award, and
- is not subject to compliance requirements of the prime award.
Service Provider (Independent Contractor)
An individual or firm retained to provide professional advice or services for a fee. Here the service provider acts as an independent contractor, gives professional advice or service to a project in exchange for compensation. In general, a service provider is engaged when a particular unique expertise is required. A service provider rarely produces a written product. The selection of consultants should meet the following minimum standards:
- The service provider rendering service does not participate in programmatic decision-making
- There is evidence that the assistance to be provided is essential and cannot be provided by persons receiving salary support under the award or by other university employees
- Provides similar goods or services to many different purchasers
Overview of Subcontracting from Other Universities
Internal Revenue Service (IRS) Issues
When establishing independent contractor relationships, it is important to understand the nature of the relationship as it may be defined under IRS tax code?
For federal tax purposes, the usual common law rules are applicable to determine whether a worker is an independent contractor or an employee. Under the common law, you must examine the relationship between the worker and the business. All evidence of the degree of control and independence in this relationship should be considered. The facts that provide this evidence fall into three categories – Behavioral Control, Financial Control, and the Relationship of the Parties.
Behavioral Control covers facts that show whether the business has a right to direct and control what work is accomplished and how the work is done, through instructions, training, or other means.
Financial Control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker’s job. This includes the extent to which the worker has unreimbursed business expenses
- the extent of the worker’s investment in the facilities or tools used in performing services
- the extent to which the worker makes his or her services available to the relevant market
- how the business pays the worker, and
- the extent to which the worker can realize a profit or incur a loss
Relationship of the Parties covers facts that show the type of relationship the parties had. This includes:
- written contracts describing the relationship the parties intended to create
- whether the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation pay, or sick pay
- the permanency of the relationship
- the extent to which services performed by the worker are a key aspect of the regular business of the company
Flow Through Requirements
Just as certain terms and conditions are important to the contractual relationship between the sponsor and the prime awardee, these same terms and conditions are also important to the prime awardee/subcontractor relationship. For federal awards, certain terms must be included in lower tier subcontracts. State law will also dictate the inclusion of certain terms in the subcontract. Some critical flow through terms include
- Access to records
- Records Retention
- Applicable cost principals or cost restrictionAll cost reimbursement subawards (subgrants, subcontracts, etc.) are subject to those Federal cost principles applicable to the particular organization concerned. Thus, if a subaward is to a non-profit organization, this Circular shall apply; if a subaward is to a commercial organization, the cost principles applicable to commercial concerns shall apply; if a subaward is to a college or university, Circular A-21 shall apply; if a subaward is to a State, local, or federally recognized Indian tribal government, Circular A-87 shall apply.
- David-Bacon (as applicable)
- IRB (human research participant protections) or IACUC (animal subject protections)
- Conflict of Interest
- Availability of Funds
Subcontracts will also include appendices that establish the scope of work, serve to limit local authorities (requiring prior approval), establish reporting requirements and/or incorporation additional terms and conditions. The prime award is incorporated into the subcontract as an appendix.