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Advantages and Disadvantages of Subcontracting: Business Essentials for Both Parties

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By Next Insurance Staff
Jun 25, 2019 min read

Subcontracting can be a productive and mutually beneficial business arrangement. Hiring subcontractors can mean offering expanded and specialized services to your own clients, or simply increasing your business capacity. Working as a subcontractor can mean a steady stream of work without needing to find your own clients. Everybody wins.

To make it work, though, there must be clear communication and seamless cooperation between the parties. You both need to be on the same page about your objectives and goals as well as the terms and conditions of your arrangement. Making sure there is clear understanding between you will help guarantee that you will get the job done as efficiently as possible.

Pros and Cons of Subcontracting

The benefits of subcontracting are many. Using subcontractors comes with less commitment and responsibility, and gives your business more flexibility. Becoming a subcontractor means enjoying many of the benefits of working for a company without compromising your freedom as a freelancer.

That said, there are also some drawbacks.

Below are comparison charts detailing the advantages and disadvantages of subcontracting for both the hiring party and the party being hired.

Pros and Cons of Using Subcontractors

CostNo need to pay taxes and benefitsPayment per hour is higher
CommitmentFewer legal obligationsLess commitment to you on their part, which may negatively affect the quality of their work
ExpertiseCan bring specialized expertise to the company that you don't have among staffDoes not have the same training or day-to-day interaction with your staff as your employees, so their style and methods may not blend seamlessly with yours
Benefits to other employeesIncreased productivity due to decreased pressureSubcontractor may not cooperate as well as with employed coworkers; employees may resent being paid less per hour for the same work

Pros and Cons of Becoming a Subcontractor

Increased freedomBe your own boss, dictate your own schedulePay your own taxes and benefits, no paid vacation days or other employee benefits
CompensationMake more money per hourMore trouble getting company to pay you; many companies pay freelancers 30-60 days after the end of the month
Working for multiple clientsMore variety, experience working in different industriesLiving from gig to gig; may need to hustle during dry spells
CommitmentFewer obligations toward company that hires youCompany has fewer obligations toward you

To make the most out of the benefits and minimize the risks, it's important to know what you're getting into. That means a careful review of the contract you're planning to sign.

Tips on Subcontracting Contracts

It's always a good idea to have an attorney go over any contract before you sign it. In the meantime, here are a few things to keep in mind:

When Hiring a Subcontractor

  • Scope of work: The contract should give as much detail as possible about the work you expect from the subcontractor, including what the subcontractor should do, how often, when, and so on.
  • Compensation: The contract should list the exact conditions of payment, whether it's per hour or per job, and when and how the payments will be made.
  • Licensing: You shouldn't rely only on the subcontractor's word that they are properly qualified for the job. They should declare it clearly in the contract. In an unlikely situation where they haven't been truthful and their lack of qualification leads to problems, this part of the contract will protect you from liability.
  • Defense and indemnification: In this section, the subcontractor agrees to defend you and those associated with you against any legal issues that may arise from the subcontractor's own actions or negligence. It won't prevent you from being sued, but it does mean that if the subcontractor causes damage or fails to perform an adequate job, and the client blames you, the subcontractor will take responsibility.
  • Non-disclosure: You might need to share confidential company information with the subcontractor to enable them to do their job properly. This clause ensures that they will not share that information with your competitors or others who may harm the company with that information.

When Offering Your Services as a Subcontractor

  • Compensation: Look out for language that indicates that your payment depends on whether the contractor has been paid by the client ("pay-if-paid" versus "pay-when-paid"). The contractor is still legally obligated to pay you regardless of whether the client has paid, and a pay-if-paid clause probably won't hold up in court - but it doesn't bode well for your professional relationship.
  • Flow-through: A flow-through provision states that whatever the general contractor has agreed to relating to the project must also be part of the agreement between them and you. The issue is that by signing this, you don't actually know what you're agreeing to, unless the contractor shows you all the contracts they have signed. The only legitimate reason a contractor might have for including a clause like this would be discretion about confidential information, but you can't bind yourself legally to information that is hidden from you.
  • Indemnification: Make sure to read this section carefully. It's fair to take responsibility for damage that you might cause, but you don't want to sign something that makes you responsible for damage others (such as the contractor themselves) might cause.

One item on the contract is so important, we're giving it its own section:

Subcontracting Insurance Options

General liability insurance is a must for any business. It protects your business in case something goes wrong and the client holds you responsible. But the situation might get a little messy in a contractor-subcontractor arrangement: who will be responsible if a client sues?

There are two options. The contractor can add the subcontractor to the company's own insurance policy, or the subcontractor can purchase their own insurance. In the latter case, the subcontractor should provide proof of coverage. Either way, the contract should include this information.

As a subcontractor, it's often worth having your own contractors insurance policy. When you purchase your insurance, you can make sure that it addresses your specific needs and the risks most relevant to your profession. You also might want to add coverage that the contractor's insurance doesn't have, such as professional liability insurance, commercial auto or property insurance.

For more information about how insurance can protect your business, check out our Contractors Insurance page.

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By Next Insurance Staff
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