What Is a Subcontractor? Everything You Need to Know

Subcontractor
7
min read
September 22, 2022

For many business owners, subcontractors are a vital part of doing business. A good subcontractor expands your abilities and allows you to take on work that you might not otherwise be able to handle. 

Subcontractors are important because they are often more cost-effective for contractors than hiring employees to do the same tasks. With a subcontractor, the contractor does not have to pay for tools, workers' comp, liability insurance, and taxes on behalf of the subcontractor. 

We may think of subcontractors most commonly in the construction trade, but they can be found in different businesses and industries. In this article we'll take a look at subcontracting work, its pros and cons, and a few of the factors that you need to take into consideration when hiring a subcontractor.

What Exactly Is a Subcontractor?

A subcontractor is a person or company hired by a main contractor to do a specific job on a larger project. Subcontractors charge for their services and are often freelancers who work for themselves. Whereas a contractor has a good general understanding of all the factors involved in a project, a subcontractor is more of a specialist.  An electrician doing the wiring for an apartment building project is one example of a subcontractor. 

Note that if a contractor hires their subcontractor to be a full-time employee, or even part-time, they’re no longer considered subcontractors. A subcontractor is not the employee of a contractor. 

Types of Subcontractors

A subcontractor can be employed in just about any profession, but here are some of the more common jobs that may require the help of a self-employed subcontractor:

The Pros and Cons of Subcontracting

As is true of every job, there are benefits and drawbacks to being a subcontractor, as opposed to going into business as a general contractor. Here are a few of them:

Pros

Cons

The Differences Between Contractors and Subcontractors

The primary difference between contractors and subcontractors is who they work with. Contractors work for clients, either corporate or individual, and subcontractors work for contractors.

But there's more to the picture than that. A contractor takes on a whole project, while a subcontractor works on part of it. So, contractors may have a broad base of knowledge in a number of areas. A building contractor, for example, needs to know a little about electrical systems, plumbing, drywall installation and more in order to properly plan how to manage a construction project.

Subcontractors, meanwhile, are specialists. Their knowledge base might not be broad, but it will be deep. So the plumber may not know much about electrical systems, but they will have a comprehensive understanding of the detailed plumbing needs for a given structure.

Another difference: in any large project, the contractor is the one responsible for glitches or problems. This person needs to be able to answer to the client if something goes wrong. That includes substandard work or issues related to a subcontractor's role in the project.

So if the electrician does a poor job, it's still the contractor's role to take that information to the client, if necessary, to determine how to handle the situation. The subcontractor will have to answer to the contractor, but not to the client.

The same is true of payment. Usually, the subcontractor is paid by the contractor, rather than the client. The contractor then bills the client for the work of the subcontractor, marking up the cost to allow for his or her supervisory role.

Finally, there are differences in how contractors and subcontractors generally find work. A contractor runs their own procurement process for getting projects. They'll most likely bid on large projects—which may be corporate or government contracts—and need to have a good sense of where these projects will show up. Once a project is contracted, the contractor needs to be skilled at client management, or have someone on staff who can serve as client representatives. A subcontractor usually finds jobs through their relationship with contractors, so it's important for subcontractors to network effectively and maintain connections in professional associations.

Employees vs Subcontractors

There are several differences between an employee and a subcontractor. A subcontractor is someone who sets their own hours and chooses the work they want to do. They get paid by the contractor for their services, and have to pay their own taxes, provide their own tools and supplies, and do not generally receive health insurance, benefits, or vacation time from an employer. 

An employee, on the other hand, has set wages, hours and projects, which are determined by the employer. Their employer also deducts taxes from their paycheck. An employee may also receive benefits such as health insurance, 401k, PTO and other perks

Insurance for Contractors and Subcontractors

Both contractors and subcontractors may need insurance to protect themselves and their business. Even a small, one-person freelance electrician's shop should have liability insurance so they’ll be covered if they are sued by a client for property damage or medical costs. 

Business Owners Policies

Many subcontractors and smaller contractor firms purchase business owners policies (BOP insurance). These policies are geared toward smaller businesses making up to roughly $5 million annually and can be customized to the needs of a specific business. They feature several types of insurance bundled together: In addition to liability, BOP insurance will have business interruption insurance and property insurance.

Errors and Omissions Insurance

Another type of insurance that may benefit contractors and subcontractors is errors and omissions insurance, also called E&O insurance or professional liability insurance. This is a specific liability insurance type that covers contractors if you make a mistake that is costly. For example, a marketing company hires a freelance web designer, who accidentally creates a web page that doesn’t allow for purchases—costing the client significant resources until it’s discovered. E&O insurance may cover those costs. 

Cyber Liability Insurance

For those in the tech sector, cyber liability insurance will cover you for data breaches or other cyber challenges. If you are hacked, for example, and important health data is stolen, cyber liability may cover you if you’re sued by a client. It may also cover direct financial loss from a hack or data loss.

Surety Bonds

Not exactly a type of insurance, surety bonds are an important consideration for contractors more than subcontractors. 

A surety bond guarantees that a contractor will fulfill the terms of their contract. If they don’t, the surety will find someone else to complete the project or reimburse the client for their financial loss. 

Sometimes, a client requires a contractor to have a surety bond before they will do business with them. One of the benefits of surety bonds is that they allow smaller companies to compete for larger jobs, because clients know they are covered financially by the surety if the job goes poorly. Like a line of credit, a surety bond needs to be repaid by the contractor eventually. 

Experienced contractors often have both insurance and a bond in place. Their general liability insurance may be for up to $1 million, and protects against multiple types of claims, while the surety bond would be for less, since it must be repaid. 

Workers’ Compensation Insurance

Few subcontractors operating as sole proprietors or small businesses will need to think about workers' comp insurance, but subcontractors and contractors with three to five employees or more, depending on the state they live in, are required to carry workers' compensation insurance. This applies to almost all states, from New York to California, with the exception of Texas. 

If you fall into that category, Hourly has you covered for both workers' compensation insurance as well as payroll solutions. Hourly’s platform syncs payroll and workers’ comp, so premiums are based on actual wages—and not a guess. Their goal is lower audit risk, faster payroll runs, and better claims and safety services for small businesses everywhere. Hourly is also a licensed insurance agent with products underwritten by various insurance companies.

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