What is a subcontractor

subcontractor definition
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Christian Jacobsen  3 months

The subcontractor explained

In its simplest form, a subcontractor is someone who performs work according to an agreed-upon scope. They are not employees of the organization that has contracted their services. Therefore, once the subcontracted work is done, their work will end and they will have to find another subcontract with another organization. Of course, this is very different from what happens with freelancers.

For starters, a subcontractor can work in almost any sector of the economy and perform any task. Only very few limited-access jobs do without subcontractors, such as certain senior positions in the civil service or the military. As a result, much of the world economy depends on the work performed by subcontractors. And yet many people don't understand exactly what one is.

Subcontractors often perform specialized functions for which specific skills are needed. For example, if a company wins a public contract to build a new rail line, it will play the role of prime contractor. Specialized work, such as the installation of signaling equipment or electrical installations, may be subcontracted to experts by the main contractor. Those who perform these jobs are called subcontractors. Read on to learn more.

How subcontracting works

Taking the construction industry as an example, when a public agency or company wants to build or repair infrastructure, it usually awards the contract for the work to a contractor. The contractor is an entrepreneur who negotiates the deal and works on a contract basis in exchange for an agreed fee. Sometimes, the work to be done is in a specialized field such as electrical, plumbing, insulation, or newer areas such as energy optimization and smart wiring infrastructure, which requires the contractor to hire another party. In this case, the contractor will subcontract the work to a specialized subcontractor.

As mentioned above, a subcontractor is a type of contractor who works in a specialized area and can be a freelancer, freelancer, independent contractor or supplier. While the contractor maintains relationships with clients (e.g., businesses or the government), the subcontractor works with a contractor, providing his or her specialized skill set in exchange for a contractual fee. The subcontracted person or company reports to the prime contractor, who is responsible for managing the contracted work from inception to completion.

Why outsource?

Subcontracting is done for several reasons. Subcontracting is very useful in situations where the range of capabilities required for a project is too diverse to be performed by a single general contractor. In these cases, outsourcing portions of the project that are not part of the general contractor's core competencies can help keep costs under control and mitigate overall project risk. It may even provide some defense in a vis major situation.

Also, some large government contracts or contracts that impact local community development may require the prime contractor to hire a certain number of subcontracted entities from the community as part of the contract. In addition, a company may decide to subcontract some mundane but necessary work to free up time and resources to attend to other profitable ventures.

It is less costly for a contractor to engage the services of a subcontracting firm or freelancer than to hire an employee, since the prime contractor is not responsible for paying workers' compensation benefits, vehicle and commercial general liability insurance, health insurance, full-time wages and Social Security taxes for independent contractors or subcontractors. From a management standpoint, subcontracting is a variable cost that occurs only when the work is needed, while hiring full-time employees is a fixed cost that occurs whether the work is available or not. This is called operating leverage. It is high when the fixed cost structure is high and vice versa.

Subcontracting companies

A subcontractor does not always have to be independent; it can also be an employee of a large subcontracting company. Subcontracting firms may bid for school cafeteria management, hospital cleaning or the installation of heating, ventilation and air conditioning systems in large buildings. These sectors are often served by large companies that provide subcontracting services to other companies, rather than lone workers operating on their own.

Of course, some subcontracting companies have teams of specialists on payroll who simply contract with companies that need them for a period of time. Others hire freelance subcontractors when they need them. Consequently, these outsourcing companies subcontract their work back to them. This is a common practice and work may be subcontracted many times before it is actually performed.

Typical industries that hire subcontractors

Although subcontracting is common in many industries, some industries use it more than others. This is largely because some sectors of the economy are less predictable than others. In turn, this means that a more flexible approach to the labor market is required. The contracting and outsourcing system is ideal in these cases because it provides the desired flexibility.

In the construction sector, therefore, the subcontracting model is often used to obtain labor. This is true for everything from the most modest home extension projects to the largest civil engineering and infrastructure projects. In this sector, not only builders, but also architects, engineers, designers, electricians and plumbers are often subcontracted.

Other industries that often subcontract are the heating, ventilation and air conditioning (HVAC) sector, the energy production sector, mechanical engineering and aeronautics, as well as parts of the automotive industries. It is also common in information technology, where specialized skills may be in high demand, but only for limited periods. Welding and assembly work is also often entrusted to subcontractors.

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