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Perils of Sub-Contracting

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One commonly used business model for small services businesses is to become a sub-contractor for a larger business.  The common reasons why the larger business may seek a sub-contractor are as follows:

  • The larger company may be in need of an area of expertise they do not currently have to complete a project they have for a client.  An example may be a large software company may be expert at product development, but may not have capability in training.  A client may require that the contract with the larger company include a training component.  In that instance, the software company may sub-contract with a training company to provide training support for the project.
  • There may be other times when the larger company may have the expertise in-house, however; those resources are dedicated to other projects and due to time constraints, or other commitments, the larger company may choose to supplement their existing resources with sub-contracted assistance.

From the sub-contractor’s perspective, the benefits to being a sub-contractor may include:

  • Lower business development/sales costs due to a reduced need to solicit new business, prospect, or engage in marketing efforts (assuming the sub-contractor is recognized and known by the larger company’s decision-makers).
  • A chance to work with clients that might never have known of, or selected the sub-contractor for a project.  The smaller sub-contractor then can use the sophisticated or marquee client name as part of marketing efforts for additional business with other prospects/clients (assuming permissions have been granted).
  • Exposure to project work, expertise, and/or opportunities that extend beyond what the sub-contractor could have attained on his/her own.
Contractors often seek sub-contractors for project work.

Contractors often seek sub-contractors for project work.

The Considerations

In many instances, the fees the sub-contractor can charge for services may be lower than those that would otherwise be charged if the sub-contractor were to have solicited and acquired the business directly with the client.  The larger contractor will often add a surcharge on top of the sub-contractor’s fees to the client, and therefore, may require a lower fee to them in order to maintain appropriate pricing levels.  The rationale for accepting the lower fee is the lower costs expended to acquire the business.

Other considerations include the scheduling of payments and the loss of control over project direction.

It is not uncommon for sub-contractors to be asked to wait for their payment until the larger contractor has been paid.  In some instances, the sub-contractor’s payment may be tied into a client’s acceptance of the larger contractor’s total work effort – even the parts of the project that are outside the influence of the sub-contractor.  In these occurrences – through no wrongdoing or fault of the sub-contractor, the payment may be further delayed or even canceled if there is no stipulation in the contract to handle those eventualities!

As a sub-contractor, there may be times when there is no direct contact with the client, only the larger contractor.  The sub-contractor is then forced to trust that the contractor is correctly representing the needs of the client and can provide appropriate feedback on work products completed by the sub-contractor.  Keeping in mind, that in at least some of the instances, the reason why the sub-contractor was hired was because the expertise to complete the job competently was missing in the larger contractor – and it is easy to see how this can lead to conflict and a potentially compromised project.

Finally, regardless of which side of the equation you find yourself on (contractor, client, or sub-contractor), some hints can be found in this article to identify caveats to adhere to before entering into a sub-contracting relationship.

David Zahn

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