Subcontracting – Definition

Cite this article as:"Subcontracting – Definition," in The Business Professor, updated September 10, 2019, last accessed October 20, 2020, https://thebusinessprofessor.com/lesson/subcontracting-definition/.

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Subcontracting Definition

Subcontracting refers to a situation in which a main contractor hires other individuals to perform a certain amount of work in a project. The main individual who undertakes a contract with a company assigns some part of the work to another person called the subcontractor.

In certain contexts, subcontracting is also referred to outsourcing. Contracts or projects that are huge in nature and require much human labor often undergo subcontracting. The main contractor still maintains the overall responsibility on the project. Other subcontractors hired for the project have specified tasks in a bid to ensure that the project is fully executed.

A Little More on What is Subcontracting

Subcontracting can occur in different sectors and for different projects such as the building, road construction, welding, engineering and many more. In the road construction for example, a state or local government can hire a primary contractor to construct inner roads for citizens in the locality. In a project of this nature, there is an initiation date and completion date stipulated in the context.

The primary contractor, having known that he cannot execute the project all alone then hires other professionals to execute specific parts of the project. This act is called subcontracting and the people hired are subcontractors. Each of the subcontractors work in specialized areas at an agreed fee for a specified time. The primary contractor is still the overseer of the main project and gives reports to the state government.

Why Subcontract?

Subcontracting is not a bad approach to executing a project, in fact, some projects warrant subcontracting due to their complex or multidimensional nature. In a situation where the coverage or workload of a project is beyond what a contractor can do on his own, subcontracting is needed. Also, a project involving diverse expertise and competencies, subcontracting is needed. Jobs that look insignificant but important can be given to subcontractors. Most times, main contractors or companies outsource certain jobs to save time and resources. Subcontracting is cost-effective and profit-oriented, this is because a subcontractor hired could be a freelancer or an independent contractor. The money required to pay such a person is less expensive than that of an employee.

Subcontractors or subcontracting firms require licensing, they can be licensed by the designated agency in the region or state in which they operate. A company or an individual running a subcontracting business can be licensed as a corporation or limited liability company. In the United States, subcontractors are required to register with the Internal Revenue Service where they are licensed and issued the Employer Identification Number. The Internal Revenue Service regards subcontractors as business owners, hence, they are required to file tax returns, self-employment taxes including social security taxes. Just like normal business entities, there are certain tax deductions that subcontractors can qualify for such as home office deductions and some business expenses.

Subcontractors are required to file an up-to-date income report with the IRS, this enables IRS separate independent contractors from employees of firms. The IRS does this using the relationship criterion which measures the interaction between the business and the project manager such as who pays the business expenses, delivers materials and tools, among others. A subcontractor can be treated like an employee by the IRS if it is the primary contractor that provides tools and materials, cover business expenses and sets rules of how the project is executed. In a case line this, social security tax and benefits are paid by the primary contractor.

References for “Subcontracting

www.businessdictionary.com/definition/subcontracting.html

https://www.investopedia.com/terms/s/subcontracting.asp

https://www.inc.com/encyclopedia/subcontracting.html

https://smallbusiness.chron.com › … › For Profit Businesses

https://dictionary.cambridge.org/dictionary/english/subcontracting

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