In the world of self-employment, it’s a common practice for contractors to hire subcontractors to get a job done. This allows contractors to focus on managing projects and clients while “subbing out” more specialized tasks.
There's a reason subcontractors are so common, especially in the construction industry: the arrangement works! But this arrangement has advantages and disadvantages for both sides of the relationship.
Here's what you should know if you're considering hiring subcontractors or working as one.
The pros and cons of hiring subcontractors
How contractors can benefit from subcontractors
Contractors often encounter job opportunities that require certain skills they don’t have. This is a common scenario when a contractor might bring on a subcontractor.
In construction, hiring subcontractors allows a general contractor to tap into the subcontractors’ specialized skills, as needed. For example, if a general contractor accepts a job that requires a complicated HVAC installation but lacks the expertise, they could “sub out” the work to an HVAC specialist.
Hiring subcontractors lets small business owners stay more flexible and ease the burden on their permanent employees without the commitment and costs of adding specialists to the payroll.
The risks of hiring subcontractors
Subbing out is supposed to save time. But hiring the wrong subcontractor can quickly erase these potential efficiency gains.
One common challenge contractors face is that they simply aren’t familiar with some subcontractors they hire. That means it’s hard to know if the sub will work well with the rest of the team, or if they’ll require a lot of time and energy to manage.
Even if a subcontractor gets along with everyone, it can be hard to predict the quality of a subcontractor’s work. Worst case, a contractor will have to waste even more time checking and fixing a sub’s work than if they were to do it themselves.
A general contractor could also be liable if a subcontractor causes an accident on a jobsite. That's why general contractors need to carry contractor insurance and ensure that a subcontractor has coverage.
In some situations, clients may feel uneasy about subcontracted work — it's a good idea for the top contractor to keep clients in the loop.
The advantages and disadvantages of subcontracting
The pros of subcontracting
From a subcontractor’s perspective, subcontracting means enjoying many benefits of working for a company without giving up the freedom of self-employment.
In many industries, subcontractors can earn a higher hourly rate than if they were working as employees.
Subcontracting also means working on a greater variety of projects, which can be a great way for a contractor to rack up a broad skill set.
And since subcontractors are freelancers, they’re under no obligation to keep working for the same boss.
The downsides for subcontractors
Because they are considered self-employed, a subcontractor must manage their own business, even while working for someone else. That includes figuring out their own taxes, benefits, and insurance.
Business insurance is especially important: if a subcontractor gets hurt or causes an accident on a jobsite, they shouldn’t expect the contractor or project owner’s insurance to cover them. That’s why every subcontractor should carry their own contractor insurance or risk paying damages out of pocket.
Subcontractors can also run into issues around payment. A contractor gets paid directly by the client, but the subcontractor’s payment often depends on the contractor’s cash flow. If a contractor’s finances are tight, a subcontractor could face lengthy delays in getting paid for their work.
Like all self-employed people, subcontractors have a lot of freedom — but less of a guaranteed paycheck. Subcontractors might face dry spells when they’re not getting hired for jobs. Or they might get so much work that it can be hard to manage.
How subcontracting insurance protects all parties
Unforeseen accidents happen even to the most skilled professionals. But the situation can get tricky in a contractor-subcontractor arrangement: who will be responsible if a client sues?
If a subcontractor makes a mistake on a jobsite and doesn’t have insurance, both the contractor and subcontractor’s businesses could be held liable.
General contractors may add subcontractors to their coverage, but many general contractors prefer not to do this, as it increases their liability exposure.
That’s why it’s always worth it for subcontractors to carry their own contractors insurance. General liability insurance is a must for any contractor, whether they’re subcontracting or the one hiring a subcontractor. It protects small businesses in case of bodily injuries or property damage.
A good insurance package should be designed around a contractor's specific needs and risks. Contractors may consider additional coverage such as professional liability insurance or commercial property insurance.
How NEXT helps contractors thrive
At NEXT, we’re committed to all kinds of contractors and self-employed business owners, which is why we offer customized insurance that fits your needs.
Everything is online and streamlined. You can compare options, get a quote, and buy coverage, all in about 10 minutes. You’ll have access to a live certificate of insurance right away.
Start an instant quote today.