Subcontracting

Subcontracting is the practice by which a primary contractor hires another firm to perform part of the work originally awarded to the contractor by a client. The subcontractor works under the terms of the prime contract, and the prime contractor remains legally responsible to the client for the overall project.

Subcontracting is common in construction, manufacturing, information technology, and professional services. Subcontractors provide specialized skills, capacity, or phased work. A subcontract agreement typically carries flow-down provisions that require the subcontractor to meet the same obligations as the prime contractor, including schedules, quality standards, safety, and compliance with laws.

Process and governance: After award, the prime contractor selects a subcontractor, negotiates terms, and issues a subcontract. Work is tracked via milestones and acceptance tests, with changes managed through change orders. Payment is usually progress-based, with retainage and penalties for non-performance.

Advantages and risks: Subcontracting can increase capability and speed delivery while sharing risk and reducing fixed costs. Risks include quality control, schedule slippage, regulatory compliance, liability for subcontractor actions, IP exposure, and potential subcontractor insolvency. Mitigation includes clear contracts, performance metrics, insurance and bonding, and proactive oversight.

Legal and regulatory considerations: Compliance with labor laws, wage requirements, safety regulations, licensing, and public procurement rules is essential. In many jurisdictions, flow-down clauses and prompt payment provisions govern relationships between the parties.