What is a subcontractor?

To begin with, a subcontractor can work in just about any sector of the economy and perform any task. Only very few jobs with limited access do without subcontractors, such as top certain civil service or military roles. As such, much of the world’s economy relies upon the work that subcontractors carry out. And yet, many people do not understand exactly what one is. Read on to find out more.

Subcontractor explained

At its simplest, a subcontractor is someone who carries out work according to an agreed scope of works. They are not employees of the organisation that has procured their services. Once the subcontracted work has been carried out, therefore, their work will come to an end and they will need to move on to seek another subcontract with another organisation. This is very different from people who enjoy an employed status, of course.

Subcontractors commonly take on specialist roles for which particular skills are needed. If a company won a government contract to build a new railway line, for example, then it would function in the role of a main contractor. Specialist works, such as fitting signalling equipment or electrical installations may be outsourced to experts by the main contractor. Those doing such work would consequently be known as subcontractors.

The Difference Between Individual Subcontractors and Subcontracting Firms

As you can see, there are all sorts of job functions that can be fulfilled by subcontractors. In some cases, however, the term becomes confusing because it can be applied in more than one way. In short, this is because a subcontractor could be an individual who has been passed work. This might be someone who works as a sole trader or a freelancer, for example, and is, therefore, self-employed.

However, a subcontractor could also be an employee of a large subcontracting firm. Subcontracting firms might bid for work running school canteens, providing manpower to clean hospitals or even to install HVAC systems in large buildings. These sectors are often catered for by larger companies providing subcontracting services to other businesses rather than being lone workers operating on their own.

Booking Subcontractor Specialists

Of course, some subcontracting firms have teams of specialists on their payroll that they simply hire out to companies that need them for a period. Others will take on self-employed subcontractors as and when they are needed. Such subcontracting firms are consequently subcontracting their work once more. This is a common practice and work may be subcontracted many times before it is carried out.

Which Industries Rely on Subcontractors?

Although subcontracting is common in many sectors, some industries rely on it more than others. This is largely down to the fact that some sectors of the economy are less predictable than others. In turn, this means that a more flexible approach to the labour market is required. The system of contracting and subcontracting is ideal in these cases because it delivers the desired flexibility.

Typically, therefore, the subcontracting model of procuring manpower is used in the construction sector. This happens with the most modest of home extension projects to the largest civil engineering and infrastructure builds. It is not just builders who are often subcontracted in this sector, but architects, engineers, designers, electricians and plumbers.

Typical industries that hire subcontractors

Other commonly subcontracted industries include the heating, ventilation and air-conditioning (HVAC) sector, the energy production sector, mechanical engineering and aeronautics plus parts of the automotive industries. It is also common in information technology where specialist skills may be in high demand but for only limited periods. Welding and fitting jobs are also often handed over to subcontractors.

Tax Issues Relating to Subcontractors

As you have already read, some subcontractors are the permanent employees of subcontracting firms. Others are self-employed people who will have to go about filling in their annual tax return themselves. For companies that use subcontractors to undertake work on their behalf, this difference is largely immaterial. This is because such firms do not need to concern themselves with these tax issues.

Unlike taking on staff directly to undertake work, using subcontractors means there is no onus on businesses using subcontracting work to deal with income tax. In the UK, there is the pay as you earn system which means deductions need to be made at source by employers. Similar systems exist in Ireland and other parts of the EU which create an administrative burden for all such employers.

Advantages of using sub-companies

By contrast, when you use a subcontractor there is need to concern yourself with their income tax or any other pay-related deductions. These might include – but not be limited to – employer pension payments, National Insurance Contributions, student loan deductions and payroll deductions for certain court-imposed fines. In other words, subcontractors are much simpler to deal with from an administrative and payroll point of view.

The Benefits of Hiring Subcontractors in Your Sector

As well as the aforementioned advantage of not having to deal with employee tax issues, using subcontractors has other numerous benefits. For one, it means being able to tap into a more responsive labour market as and when you need it. Remember that employees have numerous rights once they are hired. This means operating with a flexible level of manpower becomes much harder if you use in-house human resources alone.

Subcontractors are ideal for companies with variable workflows

With subcontractors doing all or part of your work for you, your pipeline of orders can be full or running at a trickle and you will not face a high financial burden from your salary costs. In short, subcontractors allow many businesses with variable workflows to continue to operate profitably when otherwise they might not. Keeping your enterprise nimble with subcontractors is a big plus point.

Of course, using a subcontractor also means being able to get the skills you need. For specialist works, you may require a highly skilled individual who – at other times – might be overqualified in your business. Hiring a subcontractor means only paying for the skills you need when you need them and avoiding additional payroll costs you could do without. It also means you do not have to pay for ongoing skills acquisition and training, either!

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