Subcontractor Explained: What is a subcontractor?
If you outsource work that is already outsourced to you, then you will be using a subcontractor. This means that the person carrying out the task has no direct relationship with the end client. In short, subcontracting means working on someone else’s behalf who, themselves, is already contracted to perform certain tasks.
You can be an employee as a subcontractor or you can be self-employed. All sorts of industries make use of subcontractors meaning that this system of service procurement is widespread. It differs from direct employment in many tax regimes, however.
This guide explains the subcontractor meaning in plain language. It also shows what the term means on real projects, both for main contractors and for the trades they hire. Read on to find out more about subcontracting.
Topics in this article:
- What is a subcontractor?
- Supply Chains and Commercial Relationships in Subcontracting
- Three Types of Subcontractors in Construction Contracts
- Which Industries Typically Use Subcontracting?
- What Is the Difference Between a Contractor and a Subcontractor?
- Before You Subcontract: Check What Your Main Contract Allows
- Tax Issues and Subcontracting
- What Subcontracting Means for Your Next Project
- Frequently Asked Questions About Subcontractors
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What Is a Subcontractor?
A subcontractor is a business that carries out part of another business’s contract. That other business is the main contractor. The subcontractor is paid by the main contractor, not by the end client.
To begin with, a subcontractor is a business. The business could be an individual operating as a freelancer or it could be a large corporation. Either way, when a business operates as a subcontractor, it fulfils some of the contractual obligations of another business, known as the main contractor.
Legal sources describe it the same way. According to the Legal Information Institute at Cornell Law School, a subcontractor is an outside company or individual hired by a general contractor to perform part of the work under an existing contract with a client. Subcontractors stay independent and are not employees of the general contractor.
A simple example from the construction industry
A simple example of subcontracting in operation would be in the construction industry. There might be a housing developer, that has bought land and drawn up plans to build houses. He will sell those later. The housing developer appoints a construction firm to build these homes for it. Along with connecting the utilities, such as sewers, electricity and the gas supply.
The construction firm in question may have its own workforce to do the groundworks and to build the walls and roofs of the houses but it may not have the skill base to do all of the necessary plumbing work. It could hire some plumbers to carry out this work in-house or the main contractor could subcontract this work to a specialist plumbing firm.
In this simple example, the end client, the housing developer, will have specified in its contract with its main contractor, the construction firm, what sort of plumbing needs to be installed and where. So long as this is supplied in accordance with the contract, it will not matter to the end client whether the plumbing is fitted by the construction firm itself or by an outsourced third party, in other words, a subcontractor.
Indeed, the end client may not even know that subcontracting has taken place. So long as the work carried out by the subcontractor meets the contractual requirements set out by the main contractor, the work should be completed without issue.
Who counts as a subcontractor in construction
In UK construction, the term is defined by the tax authority itself. HMRC’s Construction Industry Scheme manual counts the following as subcontractors:
- a company, corporate body or public body
- a self-employed person running a business or a partnership
- a labour agency or staff bureau that supplies workers to a contractor
- a foreign business, if the construction work takes place in the United Kingdom
- a local authority or public body carrying out construction work for someone else
- a gang leader who agrees the work and is paid for the work of the gang
Source: HMRC, Construction Industry Scheme Reform Manual, CISR13020.
The practical point matters for anyone hiring teams. A specialist firm with its own employees is a subcontractor. So is a one-person business. The label follows the contract, not the size of the company.
Supply Chains and Commercial Relationships in Subcontracting
Money and instructions follow the contract chain. Typically, subcontracting firms will invoice main contractors for their work and the main contractor will invoice their customer. This is an important part of subcontracting. It is worth noting that main contractors do not simply pass on the instructions of what services and goods need to be supplied.
The main contractor has a commercial relationship with both its client and the subcontractor. However, the subcontracted party has no commercial relationship with the end client.
Put simply, if a subcontractor were to be paid directly by the end client, thereby bypassing the main contractor, then the business concerned would no longer be acting in a subcontracting capacity. It would have become a contractor instead.
Pay when paid clauses and what they mean for your cash flow
Note that some contractors will make use of so-called ‘pay if paid’ clauses in their dealings with their subcontractors. What this means is that the subcontractor will only receive payment for their work once the main contractor has been paid by the end client.
This sort of arrangement can cause delays in payment and passes some business risk from the main contractor to the subcontractor concerned. That said, it tends to suit subcontractors who do all, or most, of their work for the same, trusted main contractor.
Whether such a clause actually holds up depends on the country, and on how precisely it is written. In the United States the wording decides the outcome. A New Jersey appeal court ruled in December 2022 that a pay-if-paid clause is enforceable where it clearly and unequivocally makes payment by the owner a condition for paying the subcontractor. Florida courts take a similar line: the risk-shifting wording must be clear and unambiguous, and an ambiguous clause is read as merely setting a reasonable time for payment.
Source: JPC Merger Sub LLC (Jersey Precast) v. Tricon Enterprises, Inc., 474 N.J. Super. 145 (App. Div. 2022); DEC Electric, Inc. v. Raphael Construction Corp., 558 So. 2d 427 (Fla. 1990).
The practical advice is simple. Read the payment clause before you sign, and check who carries the risk if the client pays late. A clear subcontractor agreement is the place to settle this.
Some businesses operate in several capacities
It is worth bearing in mind that many businesses operate in several capacities. Some will work as main contractors for their own clients and also as subcontractors for other contracting firms depending on the project at hand.
HMRC describes the same reality. Many businesses both pay firms below them and are paid by firms above them in the chain. For some transactions they follow the rules for contractors, and for others the rules for subcontractors.
Indeed, some subcontracting firms will take on a job from a main contractor only to subcontract part or all of it once more to another firm. In this way, subcontracting firms can make flexible supply chains of manpower that can alter rapidly to meet the demands of the sector they are working in.
Three Types of Subcontractors in Construction Contracts
Not every subcontractor is appointed in the same way. UK building contract law, particularly the JCT standard form contracts, distinguishes three types. The difference decides who picks the firm and who carries the responsibility for its work.
| Type | Who selects the firm | What it means in practice |
|---|---|---|
| Domestic subcontractor | The main contractor | The standard case. The firm contracts with the main contractor to supply materials or carry out work that forms part of the main contract. |
| Named subcontractor | The main contractor, from the client’s list | The client lists at least three acceptable firms and the contractor picks one. The contractor stays responsible for the work. |
| Nominated subcontractor | The client or the architect | A historical model. JCT contracts dropped the option in 2005 because it left the client carrying responsibility for the firm’s performance. |
For everyday projects the domestic route is the common one. You choose the specialist firm, you agree the scope, and you carry the coordination. That is also the situation in which a subcontractor in the construction industry is usually appointed.
Which Industries Typically Use Subcontractors?
As mentioned, the construction industry is one that relies heavily on subcontracting. Nearly all of the main building trades, from bricklaying to electrical installation work, are covered by subcontracting businesses and even big contracting firms with large workforces will make use of subcontractors from time to time. This might be because they need additional manpower to meet deadlines. Or because they require specialist skills that they do not possess in-house.
Other industries that make extensive use of subcontracted working methods include the IT sector and the catering profession. In IT, there are many specialist skills which are expensive to keep trained up in. Employers, therefore, tend to want to only have those skills available to them when they are needed for certain projects, such as updating IT infrastructure or carrying out a data audit.
Many companies don’t want to pay out for skills they don’t always need on their payroll so pay a fee to an outsourced IT contracting firm instead. In the main, such firms will not have lots of IT professionals on their payroll but they will have lots of skilled individuals they can turn to as subcontractors.
In the catering industry, it is much the same. A main contractor may have won a contract to supply food and drink at a concession stand, for example, but only fulfil its contractual obligations by using subcontractors. Chefs, kitchen staff, waiting personnel and bar staff may all be subcontracted in such a setup. In many cases, cleaning contractors will also use subcontractors to actually carry out the cleaning work. If so, then the cleaning contractor is more likely to fulfil a supervisory or quality control role.
Learn more about the industries we cover here:
Other industries that use subcontracting
In many cases, gardening and other horticultural services are carried out by subcontracted firms, too. Some larger agricultural businesses also rely on subcontracting their workloads, typically at busy periods, such as harvest time. The recruitment industry also operates on a subcontracting model in many ways. Although some recruitment professionals are employed, many are effectively self-employed and working as subcontractors.
The same goes for the security services industry. Although security contractors may employ individuals to monitor places remotely, patrolling security guards will often work on a subcontracted basis.
Subcontractors can work in any industry from healthcare to marketing. Even a supply teacher or trainer may be subcontracted in certain circumstances. So long as they are paid by an intermediary, or main contractor, then they are working in the capacity of a subcontractor. It is simply that some sectors of the economy are more geared up to this way of procuring services and skills than others.
Trades where subcontracted teams are the norm
In technical construction and industry, whole trades are covered by subcontracted teams. That is where our own network sits:
What Is the Difference Between a Contractor and a Subcontractor?
The difference is the direct relationship with the end client. A contractor has one. A subcontractor does not.
A contractor has a direct commercial relationship with an end client or customer. Typically, this will be to provide services within a given period for an agreed fee. Subcontractors differ because they do not have such a contractual obligation with the end customer, only with the contractor concerned.
| Contractor | Subcontractor | |
|---|---|---|
| Contract with | The end client | The main contractor |
| Sends the invoice to | The end client | The main contractor |
| Responsible for | The whole project and its deadlines | Its own agreed scope of work |
| Reports problems to | The client | The main contractor |
| Known to the client | Always | Sometimes not at all |
A subcontracted firm could feasibly carry out all of the agreed work that the end client has asked for. But the difference is that he or she will not then invoice the end customer for their service provision, but the contractor instead. Subcontractors can outsource some or all of their work to other subcontractors if they like which effectively makes them both contractors and subcontractors at the same time. That said, it is the direct relationship with the end client that is the principal differentiator between these two commercial models.
Before You Subcontract: Check What Your Main Contract Allows
Subcontracting is not automatically permitted. Each subcontracting relationship usually requires its own contract that defines the scope of work. Before you pass work on, check whether the original contract allows it at all. Some contracts limit subcontracting or prohibit it beyond the general contractor.
Source: Legal Information Institute, Cornell Law School.
Public contracts are a special case. EU procurement rules explicitly make room for subcontracting, and one stated aim is to give small and medium-sized firms access to public sector work. Under the current public procurement directive, the contracting authority may ask bidders to state which share of the contract they intend to subcontract and to name the proposed firms. Handing work to a subcontractor does not reduce the main contractor’s own liability for delivery.
Source: Directive 2014/24/EU, Article 71. It replaced the earlier 2004 directive and had to be transposed into national law by April 2016.
Three questions are worth answering before you hand work over:
- Does the main contract permit subcontracting, and does the client have to approve the firm?
- Is the scope of work described precisely enough to be handed over?
- Who carries the risk if payment from the client is delayed?
Tax Issues and Subcontractors
Tax treatment depends on the legal form of the subcontractor. Many subcontractors work as sole traders. In such cases, they are self-employed and responsible for their own yearly tax assessments. However, outsourced work may also be taken on by limited companies operating, in part or in whole, as subcontractors, too. If so, then corporation tax will also come into play alongside the personal taxation rules that affect sole traders.
That said, there are a number of areas in tax law, especially in the UK, where some interpretation of the rules is needed. People who provide consultative work, collaborative research functions for multiple enterprises or who supply outsourced manpower on a subcontracted basis may need further specialist tax advice to ensure their interpretation of the regulations is correct.
Tax issues when you work across borders
There is another tax issue that can catch some subcontracting firms out. It is when they work for main contractors in more than one tax jurisdiction. This could affect Irish nationals who provide subcontracted services for contractors in Northern Ireland as well as the Republic, for example.
Cross-border work inside the EU also raises the question of who owes the VAT. In construction, the answer is often the recipient of the service rather than the supplier. Our article on the reverse charge procedure explains how that works.
The Construction Industry Scheme (CIS) in the UK
In the UK, the taxation of subcontractors working in the construction industry is very different from other sectors. It relies on what is known as the construction industry scheme (CIS).
CIS is a deduction-at-source scheme, similar in principle to pay as you earn (PAYE). The main contractor deducts tax from the subcontractor’s payment and passes it to HMRC. It was introduced to combat widespread tax avoidance in the sector. Important: the scheme does not turn the subcontractor into an employee. It is purely a tax mechanism.
The deduction is taken from the labour element, excluding VAT and the cost of materials. The rate depends on registration status:
- 0 per cent for subcontractors with gross payment status
- 20 per cent for registered subcontractors
- 30 per cent for unregistered subcontractors
The deductions count as advance payments towards the subcontractor’s tax and National Insurance. Any excess is reclaimed at the end of the tax year through Self Assessment or Corporation Tax.
Source: GOV.UK, Construction Industry Scheme.
For more detail on the tax side, see our overview of subcontractor tax issues.
What Subcontracting Means for Your Next Project
For a main contractor, subcontracting is a way to match capacity to the order book. You buy the skills you need for the period you need them. That keeps fixed payroll costs out of the calculation.
The main advantages of working with subcontracted teams
Capacity when the order book is full. You can accept projects that your own workforce could not deliver on time. When the pipeline runs at a trickle, you carry no idle salary costs.
Specialist skills on demand. Some tasks need a highly qualified specialist who would be overqualified in your day-to-day business. You pay for that expertise only when the project calls for it.
No training burden. Keeping certifications and specialist skills current is expensive. A subcontracted firm brings its own qualifications and its own equipment.
Less administration than direct hiring. A subcontracted firm handles its own payroll and its own staff. You manage one contract instead of a set of employment relationships.
Flexibility across locations. Teams can be deployed where the project is, including abroad, without you setting up a local workforce.
The risks, kept short
Subcontracting also brings duties. Coordination takes effort, quality has to be checked, and communication between site and team has to be clear. Documentation and legal compliance need attention, especially for cross-border work. Careful selection of the firm and a precise scope of work take most of these risks off the table.
If you would rather not run that selection process yourself, we do it for you. We know our teams personally and check them before they reach your site. You can see who is currently available on our teams overview, or read how the arrangement process works.
Frequently Asked Questions About Subcontractors
What does it mean if you are a subcontractor?
It means you carry out work for a main contractor rather than for the end client. Your contract, your invoice and your instructions all run through that main contractor. You stay an independent business and are not an employee of the firm that hired you.
What is the difference between a contractor and a subcontractor?
The contractor has the contract with the end client. The subcontractor has a contract with the contractor instead. The contractor is answerable for the whole project, while the subcontractor is answerable for its own agreed scope of work.
What is the role of a subcontractor?
The role is to deliver one clearly defined part of a larger project. That part is usually a specialist trade, such as electrical installation, pipework or welding. The subcontractor supplies its own people, its own tools and its own expertise.
What is a subcontracting example?
A construction firm builds a housing development and hires a specialist plumbing company for the pipework. The plumbing company is the subcontractor. Other common examples are electrical installation, HVAC work, cleaning services and IT projects.
What does subcontract mean?
To subcontract means to pass part of a job you have been contracted to do on to another business. The original contract stays in place, and you remain responsible to your client for the result. The new firm you bring in works under a separate contract with you.
What is a subcontracting company?
A subcontracting company is an independent business that takes on work from main contractors. It usually specialises in one trade and employs its own skilled workers. Many such firms work for several main contractors at once, and some act as main contractors on their own projects.
Conclusion
A subcontractor carries out part of another company’s contract, and is paid by that company rather than by the end client. That single relationship explains the invoicing, the responsibility and most of the legal detail around the term. For main contractors, subcontracting is the fastest way to add qualified capacity and specialist trades without expanding the payroll.
Looking for a reliable team for your next project? Tell us the trade, the location and the timeframe, and we will find the right subcontractors for you.