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 the construction world.
In fact, in the construction world, there’s actually a term used to identify a person or firm who builds a project for 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.
There are many pros and cons of using subcontractors.
Primary Pros of Subcontracting:
- Saves cost in the long run by not having to maintain labor and equipment between jobs. Use them when you need them, 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 risk for their products/work and may require their portion of the work be bonded.
- Establish or flow down pay terms favorable for the Contractor or GC. In today’s construction space, pay 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.😊
Primary Cons of Subcontracting:
- 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. Converse to having the ability to pass down risk, it 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 the double-edged sword!
At the end of the day, the answer to the question “Do you subcontract 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 work load, or will you stretch yourself too much. If it’s a stretch, subcontract the work, have one of your seasoned employees oversee the operation, and give on a little profit. This is much better than a “clean up on isle 6” as I like to say. Always play the long game.