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Industry Discussion

What is a subcontractor?

A subcontractor is a person who works for a general contractor to perform an agreed portion (or scope) of work. This arrangement generally applies where the workload requires more than one person to complete. A common example of subcontracting is found in the construction industry where a general/head contractor will subcontract out some or all of the work.

Most subcontractors form close working relationships with the head or general contractors as they are then provided with a valuable stream of business. Subcontractors tend to be ‘independent contractors’ who are not hired as employees but are engaged for ad-hoc works as they arise. This means that they don’t attract the same benefits as employees such as insurance cover, paid holidays, etc.

Larger businesses can establish subcontracting relationships to work exceedingly efficiently with significant flexibility as they are not required to cover the costs associated with an overhead of staff to support the ups and downs of work pipelines.

If you are thinking of providing subcontracting services then you need to identify yourself as such; not everyone is willing to work under this type of arrangement. There are also a number of legal and taxation issues you will need to work through.

Benefits of Being a Subcontractor

There are a number of benefits to being a subcontractor, including:

  • Flexibility – generally you get to choose the hours that you work; the flip side is you may work too many or too few hours.
  • You may get the choice on what you work on, for example ad-hoc small tasks or major projects.
  • You set your earning levels. However this is ultimately limited by the number of hours you can work, so this tends to create a cap as well. Linked to this is the market rate or market willingness to pay you for your services.
  • You can choose where you work; this is only limited by any restraints you put on yourself.
  • You may be eligible for various tax benefits (seek and obtain good tax advice before making any commitments, as this is not a simple area of administration).
  • Negotiations are done for you, although the head contractor or general contractor may wish to pass some of these on to you via subcontract terms and conditions. Care should be taken when signing terms and conditions as you will need to make sure you take responsibility (indemnify) the other party for only the things within your control.
  • Depending on the indemnity provisions you agree, the general or head contractor may be the first port of call under any head agreement. This may offer you some risk sharing or risk protection. Seek appropriate legal and insurance advice so that you do not take on more risk or responsibility than you need to. Read the fine print.
  • Subcontracting may enable you to take on larger projects where you become the general contractor and hire subcontractors to assist you with the work. This may provide your existing customers with added benefits and reasons for maintaining your services.

Finding a Subcontractor and Building Relationships

An obvious place to look is where your own business advertises or utilises online business directories and / or job boards. Some online business directories (like this one) also allow you to create affiliates, which is an easy way to establish business networks. Once you have located a suitably qualified potential subcontractor, do your due diligence so that you can be sure that they are a low risk to your business and will add value.

Notwithstanding the above, you will most likely establish terms and conditions between yourself and the head contractor and/or subcontractors. The key to making this work is your various working relationship with each other. The following are some simple tips for improving and delivering effective subcontracting relationships:

  • Choose your subcontracting partners well. Take time to do due diligence to make sure that they have the resources and financial capability to deliver on contractual commitments you agree to.
  • Ensure that your business philosophies and ideologies are aligned. If you have well matched business objectives and each of you is clear on this, you are more likely to produce win-win outcomes. For example, you need to both understand what you intend to deliver in terms of customer service, your definition of quality and how you measure it. If you differ on these, you will quickly find yourself in disagreement. Getting the fundamentals right is very important as it sets the foundation for your subcontracting arrangements.
  • Establish a clear contract that sets out who is responsible for what. This creates a song sheet for both of you to work with and will go a long way to reducing conflict or difficulties if you have taken the time to prepare a good contract. The internet is a good source for information, but you will most likely benefit from seeking legal advice to establish a clear understanding of your own terms and conditions and/or those of the people you contract with.
  • Structure your contract and then working relationship around that contract. Generally contracts are mutually beneficial to both parties, but don’t forget to consider your business cultures and business processes. It is not advisable to enter into a contract with another business that expects you to drastically change the way you operate, so pick a contracting party you can work with based on your current processes. If you cannot do this, then be prepared to change some of your practices so that you open up your options.
  • Set time aside to manage the relationship. This includes documenting issues, contractual correspondence and managing contract administration. Equally important is establishing regular communications and meetings where progress, issues, rectification and relationship building can be undertaken. Poor communication (both written and verbal) is often the first step towards dispute and a contractual breach as it leads to misunderstandings.
  • Establish systems to maintain your relationship. This can be as simple as setting up regular communication meetings, establishing standard reports, etc. These processes will allow you to identify problem issues early so that corrective action can be taken, potentially avoiding major conflict and disputes.
  • Don’t assume that you will continue to move in the same direction as you set out at the start. If you are the party who is engaging subcontractors, adopt a project management approach to administering their work. This is needed to ensure that the contractual commitments are met and that the parties remain focused on what is to be achieved. Assuming that each will naturally take charge of their share of responsibility will not always lead to a positive outcome.
  • Be honest and ethical with your business partners.
  • Undertake a ‘contract close-out’. This will afford you the opportunity to determine what you did well and what you could do better next time. Lessons learned offer parties the ability to build on the relationship and to address opportunities where both parties could improve their output. Chances are, if you achieve this you will each improve your bottom line.

Make Sure You Are a Subcontractor

There is a fine line between being an independent contractor and an employee and it is important for a range of legal and taxation reasons that this distinction in understood. See “How to determine if workers are employees or independent contractors” - http://www.ato.gov.au/content/4540.htm


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