Just about every business in every sector is faced with the decision and dilemma of using subcontractors to help deliver their product or service at some point. This is especially true in construction.
In fact, in the construction world, there’s actually a term used to identify a person or firm who builds a project directly for an owner principally using subcontractors. This type of contracting is known as General Contracting, and the firm providing the service is called the General Contractor or GC.
Using subcontractors is common, but are they right for your construction company? Let’s talk pros and cons of using subcontractors.
Pros of Having Subcontractors:
- Saves cost in the long run by not having to maintain labor and equipment between jobs. Use them when you need them, and send them home when you don’t.
- You pass down risk and liability. Typically, when subcontractors are used, the Contractor or GC will flow down the same terms between them and the owner. This often requires the sub to take on liability or their share of the risk for their products/work and may require their portion of the work to be bonded.
- Establish or flow down pay terms favorable for the Contractor or GC. In today’s construction space, payment terms are often “pay-when-paid” or “pay-if-paid”. By establishing this as a pay term, there is no out-of-pocket expense until they are paid… a new form of payables financing.
Cons of Having Subcontractors:
- Subcontracting can lower profit margins. In today’s contracting environment, markups on subcontractors are often capped, if not eliminated entirely, requiring sub-cost to be passed through. This inevitably reduces your gross and net profit margins.
- Cannot completely control the quality of the work. In construction, word of mouth is often the best, and sometimes the only, marketing tool. Do a good job and a few know of it. Do a bad job and everyone knows it.
- You cannot contract away all the risk. Conversely, having the ability to pass down risk is sometimes more difficult than you think. As the GC or the Contractor, you can never fully shed the risk with subcontracted work. When things go wrong with a subcontractor, things can slip and many dominos fall that require time, money, and yes… lawyers. This one is truly a double-edged sword!
At the end of the day, the answer to the question “Do you use subcontractors or not?” should truly be based on a project-by-project basis. If you are a pure GC, that question is likely answered for you. If not, and you have a diverse organization with diverse skills, you should self-perform the work for which you have a high degree of confidence in your abilities and the capacity to perform.
By capacity, ask yourself if you have the resources to handle the new workload, or will it stretch you too thin? If it’s a stretch, subcontract the work, have one of your seasoned employees oversee the operation, and give up a little profit. This is much better than a “clean up on aisle 6” as I like to say. Always play the long game.
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