Advantages & Disadvantages of Subcontracting

When your business needs more help, you can hire more employees, or you can use a subcontractor to do the work for you. Some businesses, such as construction, routinely use subcontractors for specialized jobs, while other types of businesses, such as bakeries, rarely use subcontractors. Knowing the advantages and disadvantages of subcontracting can help you determine when it’s smart to sub out jobs and when you should keep the work in house.

If your business experiences seasonal peaks and valleys, you can hire extra employees for busy times, then lay them off when business slows down. This is tough on employees and management, though. Subcontracting with a temporary labor firm allows you to add and subtract employees as you need them. Subcontracting also allows you to offer your customers specialized services when they’re needed, without your having to invest in specially trained employees. For example, a heating and air conditioning company might subcontract electrical work to an electrician. This allows the HVAC company to offer customers a complete installation package, but they don’t have to keep an electrician on staff. A party planning company might subcontract with a magician or a D.J. to provide those services on an as-needed basis.

When you subcontract for labor or specialized services, you pay a higher hourly rate than you’d pay to one of your own employees. But you’re not responsible for the employer’s share of Social Security, Medicare and unemployment taxes for those employees, and you don’t have to pay health insurance or vacation pay for them. You also don’t have to train the employee. This can make hiring subcontractors less expensive than finding and hiring employees of your own.

You’re not required to carry liability insurance for subcontractors, but you should verify that your subcontractor carries his own liability insurance. In the event of an accident, you could be held liable for something the subcontracted employee does. You’re also required to verify that your subcontracted workers are legally qualified to work in the United States. You should ask all subcontractors to supply you with a copy of their W-9, showing their tax I.D. number, as well as a copy of their certificate of liability insurance.

You can handpick your own employees, train them the way you want them trained, and regularly assess and reward their performance. With subcontractors, you give up much of that control. Though the subcontractor working for you represents your company to the customer, you can’t always guarantee the quality of their work. The subcontracted employee may feel little loyalty to you or to your customers. The only way to overcome this is to exercise care when selecting subcontractors and to refuse to use any that don’t meet your standards.