Subcontractors help scale contractors’ business. Contractors offer their services to clients at an agreed-upon fee (based on the project at hand) on a contractual basis. Since they work with multiple clients simultaneously, contractors hire subcontractors to complete specific portions of a more significant project for faster completion.
However, when hiring subcontractors, contractors should meticulously weigh the advantages and disadvantages of subcontractors.
Why are Subcontractors Hired?
A subcontractor is a person or a business entity entering into a temporary contract with a company to complete a part(s) of a larger project. Subcontractors may be self-employed individuals (plumbers, electricians, tile masons, etc.) or a large corporation.
Subcontractors complete the task on behalf of the contractor for the clients. The contractor does not exercise any control over subcontractors. Contractors cannot control their work performance. Also, contractors cannot manage or supervise subcontractors, but they are responsible for completing the project.
For example, in a housing society construction project, the building contractor hires an electrician and plumber to handle the electrical and plumbing of the project. While the contractors cannot control the work of these subcontractors, they are answerable to the client who has sanctioned the construction work.
Contractors and subcontractors sign a service contract for each project. Such work contracts may be fixed-term, continuing, long-term, or task-based without termination.
When Should You Hire Subcontractors?
The first thing you must understand is that not all businesses demand subcontractors. So, you must evaluate your business status and then decide if you need a subcontractor. Budding contractors should not hire subcontractors. This may hamper their finances.
Thus, you must consider several factors when hiring subcontractors as a contractor. It is wise to hire subcontractors in the following circumstances:
- If a contractor undertakes a project that requires specific technical/domain expertise that they don’t possess, they must hire subcontractors.
- If contractors have their hands complete with ongoing projects, they need a subcontractor’s help for smooth project completion.
- Suppose a contractor feels they require a dedicated individual to handle client-side operations like answering emails, sorting paperwork, respond to social media comments/feedback. In that case, they should hire a subcontractor to save valuable time.
What to Consider When Hiring Subcontractors?
Contractors must be aware that their hired subcontractors determine the quality of work delivered to the client. Also, hired subcontractors play an active part in choosing a project’s final cost and timeline.
Thus, if you want to recruit subcontractors, be mindful of the following factors:
- It is vital to consider a subcontractor’s skills and expertise for a specific project. The subcontractor’s industry experience largely determines the resources used and the project’s quality.
- A subcontractor’s reputation and goodwill are also crucial. So, make sure to run a reference check to verify a potential subcontractor’s reputation and work delivery. Try to find out if the subcontractor is punctual or if they’ve been involved in past conflicts or litigations.
- If hiring a business entity as your subcontractor, it is advantageous to learn more about the person managing the company. Checking the business’s safety record, compliance structure, and decision-making process are important considerations.
- Contractors must maintain a record of the subcontractors’ insurance to ensure that they have the right worker’s compensation plan, general liability insurance, and automobile insurance with adequate coverage.
- It is essential to check the indemnity agreement with the subcontractor so that if the client files a lawsuit against the subcontractor’s work, the subcontractor can take responsibility for it.
Why Should You Know a Subcontractor’s History?
Hiring subcontractors can sometimes be more beneficial for the contractor than hiring employees. This is because subcontractors bring work flexibility and are responsible for their permits and taxes.
However, contractors must look into the history of subcontractors before hiring them because their hiring decision directly affects the project outcomes. Here’s how to go about it:
- Asking the subcontractor for their work portfolio will allow contractors to understand if the subcontractor has relevant experience in the particular domain where they are needed.
- If the contractor has valuable industry connections, they can quickly learn about a subcontractor’s work history. Plus, contractors can always ask subcontractors for references of previous clients to understand their work ethic and quality standards.
- If the job requires special licenses/permits, the contractor must ask the subcontractor to present them to avoid legal complications.
Since contractors are responsible for the final project delivery and its quality, it is standard protocol to perform such checks on subcontractors.
How to Choose the Right Subcontractor for Your Project?
Searching for the right subcontractors
Once you’ve decided to recruit subcontractors, you must know how to find the most suitable subcontractors for your project. Remember that cost-cutting or hiring the subcontractors at the lowest possible cost should not be your prime motive because it might hamper your market reputation.
Instead, look for qualities like industry experience, skills, and licenses/permits (if required) while hiring subcontractors.
Some of the best ways to find subcontractors are:
- Asking current or past subcontractors for references. Since personal recommendations and word of mouth heavily influence this industry, asking for references is a good practice to expand your contact base.
- Social media forums or online platforms, including subcontractor recruitment sites, could give you commendable leads for your project.
- Partnering with an EOR service provider like Multiplier would help streamline your hiring process and narrow down your search.
Once you have finalized a few prospects for hiring, the next step is to go through with the actual hiring process. You can follow these steps to recruit subcontractors:
- The first step is to interview the potential subcontractors to understand their work portfolio, experience, and communication skills.
- After completing the initial screening, explain the work requirements to the candidate to evaluate if they are a good fit for the project. If yes, you can ask for work samples and qualifications to verify their claims.
- The next step is to ask them about their expected compensation for the project and general expectations.
- If everything is finalized, you can prepare the contract and sign it.
If the hired subcontractors deliver the promised work in due time while maintaining the quality standards, you should build a good relationship with them to ensure a long-term collaboration.
What is a Subcontractor Agreement?
Contactors should draft a formal subcontractor agreement that legally binds them and the subcontractors. Essentially, a subcontractor agreement is a legal document signed by both parties – the contractor and subcontractor. It contains all work-related details for the subcontractor.
A subcontractor agreement must include:
- The job responsibilities of the subcontractor and the contractor’s expectations
- The agreed-upon payment terms include details like the subcontractor’s service charges and payment basis – per project/per task/per word or hourly/weekly/after completion.
- The total amount of work hours the subcontractor must give to the project
- A non-disclosure statement – if required by the contractor – should be included in the agreement to ensure that the client and contractor’s operations remain undisclosed and private.
- The contract should also include a force majeure clause stating the consequences if the subcontractor cannot meet the expectations.
The Benefits of Hiring Subcontractors
Recruiting subcontractors allows contractors to expand or downsize their business according to the economic conditions and hire skilled personnel instead of employees for their projects.
The benefits of hiring subcontractors are:
- With frequent economic changes, subcontracting offers the flexibility of fulfilling dynamic needs for large-scale workflows without laying off the people when the work requirement reduces.
- With subcontracting, contractors need not worry about employee benefits, staffing, sourcing work equipment, renting/leasing office spaces, and other overhead costs of running a business.
- Hiring subcontractors gives the scope to save money on capital equipment since contractors need not invest in training subcontractors. The responsibility of upskilling to gain a competitive advantage lies solely with the subcontractors.
- Subcontracting helps fulfill a project’s non-core technical requirements on a need-based basis since contractors don’t need to add a new team/division for a temporary assignment.
- Hiring subcontractors on a per-project lets contractors control the costs because it pushes subcontractors to complete their projects within the stipulated time and take on new projects to earn more.
- By hiring specialized subcontractors, contractors can expand the work offerings to clients without hiring permanent employees. They can only hire subcontractors possessing the relevant skills for a particular project.
Therefore, hiring subcontractors is often a much better and safer option for expanding the scope of work without hiring employees and ensuring payroll compliance.
Is Hiring Subcontractors Risky?
Hiring subcontractors also has many limitations like:
- Limited control of the subcontractor’s work and deliverables
- Chasing subcontractors for revisions after making the payment is a tedious task
- Often, contractors need to pay their subcontractors after project completion, even before the client pays them.
- If the subcontractor cannot provide quality work, the contractor is answerable to the client. Hence, the contractor’s reputation and goodwill are at stake when subcontracting a project to other people.
With increasing freelance work in the economy, it makes sense that companies recruit subcontractors without spending substantial money on hiring permanent employees. The best part of hiring subcontractors on a per-project/task basis is that contractors can meet the dynamic requirements of a temporary project.
However, hiring the right professional for a specific task is not a cakewalk. Thus, it’s best to take the help of a global PEO-EOR firm like Multiplier that can handle employee onboarding, payroll, benefits, service agreements, and tax management.
Our experts will ensure total compliance with local labor laws and regulations while onboarding subcontractors and correctly classifying your employees.
Frequently Asked Questions
Q. Are subcontractors self-employed individuals?
IRS considers contractors and subcontractors self-employed individuals who must make quarterly tax payments each year.
Q. Who can be a subcontractor?
A single individual wanting to work and earn money without being permanently employed in a company can become a subcontractor. Additionally, a business organization with the skills, equipment, and other resources to perform a task on behalf of another company can become a subcontractor.
Q. Is there a maximum age or time limit for becoming a subcontractor?
There is no maximum age or time limit involved in becoming a subcontractor. A subcontractor can be as old as 60 years or as young as 18 years. Moreover, if the contractor and the subcontractor are pleased with the association, they may continue to work together on several projects.