Subcontracting is the practice of assigning part of the obligations and tasks under a contract to another party known as a subcontractor. Subcontracting is especially prevalent in areas where complex projects are the norm, such as construction and information technology. Subcontractors are hired by the project’s general contractor, who continues to have overall responsibility for project completion and execution within its stipulated parameters and deadlines.
Subcontracting is very useful in situations where the range of required capabilities for a project is too diverse to be possessed by a single general contractor. In such cases, subcontracting parts of the project that do not form the general contractor’s core competencies may assist in keeping costs under control and mitigate overall project risk.
Advantages & Disadvantages of Subcontracting
Businesses of all sizes sometimes lack the resources to accomplish the tasks facing them. At other times, companies realize that they don’t have the required expertise in-house to obtain the required results. Finally, management can determine that external suppliers who specialize in a particular field can carry out work at a lower cost than internal departments. In all these cases, companies look at subcontracting as a possible option. It solves the immediate problem the company faces but has disadvantages of its own.
1. Large Projects
Businesses using subcontractors can take on projects that are much larger than those they can handle on their own. They earn a profit on the parts of the project handled by subcontractors and can greatly grow their overall revenues. Larger projects come with higher risk. When more subcontractors receive orders, the risk that one of them will not perform as required is higher. Coordination is another headache. The company acting as the principal must ensure that the extra profit and revenue is sufficient to make the higher risk project worthwhile.
2. Professional Services
Many tasks and projects require the services of professionally qualified specialists who sign off on the work. A company may not have the required professionals on staff and has no ongoing need for them. In that case, it is an advantage to subcontract the professional
services and avoid having to hire professionals like engineers, architects or lawyers. The disadvantages of subcontracting this work lie in costs: The hourly expenses are high, and the professionals are independent in that they don’t report to supervisors inside the company. These factors make it challenging to control the costs of these subcontracts.
When the involvement of professionals is not legally required, it may still be advantageous for a company to subcontract specialized consulting services. Companies who develop special skills in areas like environmental disciplines, traffic management or archaeology
can usually get the work done more rapidly and at lower cost than non-specialists. The disadvantages of subcontracting this work lie in quality issues: the tasks may not be executed the way the principal company wants them done. Since the main contractor lacks
the expertise in these fields, he is at the mercy of the subcontractors in that respect.
Companies producing large volumes of one or a few products or services generally have lower costs than principals or main contractors who have to handle many tasks and goods. Subcontracting to these high-volume companies generally saves substantial amounts of money. In construction, high-volume companies typically handle cement work and steel structures. It is usually much cheaper to outsource work rather than hiring an employee. With an employee, a business owner must pay heavy taxes and a full-time salary. On the other hand, a contractor only gets paid for the work they complete. Not only that, a contractor is responsible for paying the taxes associated with compensation. Of course, one must pay a contractor a higher wage to compensate for the lack of benefits.
If your business experiences seasonal peaks and valleys, you can hire extra employees for busy times, then lay them off when business slows down. This is tough on employees and management, though. Subcontracting with a temporary labor firm allows you to add
and subtract employees as you need them. Subcontracting also allows you to offer your customers specialized services when they‘re needed, without your having to invest in specially trained employees. For example, a heating and air conditioning company might
subcontract electrical work to an electrician. This allows the HVAC company for example to offer customers a complete installation package, but they don‘t have to keep an electrician on staff. A party planning company might subcontract with a magician or a D.J.
to provide those services on an as-needed basis.
6. Labor Costs
When you subcontract for labor or specialized services, you pay a higher hourly rate than you‘d pay to one of your own employees. But you‘re not responsible for the employer‘s share of Social Security, Medicare and unemployment taxes for those employees, and you
don‘t have to pay health insurance or vacation pay for them. You also don‘t have to train the employee. This can make hiring subcontractors less expensive than finding and hiring employees of your own.
7. Insurance and Liability
You‘re not required to carry liability insurance for subcontractors, but you should verify that your subcontractor carries his own liability insurance. In the event of an accident, you could be held liable for something the subcontracted employee does. You‘re also required to verify that your subcontracted workers are legally qualified to work in the United States. You should ask all subcontractors to supply you with a copy of their W-9, showing their tax I.D. number, as well as a copy of their certificate of liability insurance.
You can handpick your own employees, train them the way you want them trained, and regularly assess and reward their performance. With subcontractors, you give up much of that control. Though the subcontractor working for you represents your company to the
customer, you can‘t always guarantee the quality of their work. The subcontracted employee may feel little loyalty to you or to your customers. The only way to overcome this is to exercise care when selecting subcontractors and to refuse to use any that don‘t
meet your standards.