A subcontractor is an individual or (in many cases) a business that signs a contract to perform part or all of the obligations of another’s contract.
A subcontractor is a company or person whom a general contractor (or prime contractor, or main contractor) hires to perform a specific task as part of an overall project and normally pays for services provided to the project. While subcontracting often occurs in building works and in civil engineering, the range of opportunities for subcontractor is much wider and it is possible[original research?] that the greatest number of subcontractors now operate in the information technology and information sectors of the economy.
One hires subcontractors either to reduce costs or to mitigate project risks. In employing subcontractors, the general contractor hopes to receive the same or better service than the general contractor could have provided by itself, at lower overall risk.
Many subcontractors do work for the same companies rather than different ones. This allows subcontractors to further specialize their skills. Some subcontractors also work under “Pay-If-Paid” clauses where a general contractor will work with subcontractors and the subcontractor is only paid if and when the general contractor is paid for their duties.
In United Kingdom building industry contract law, particularly when using JCT standard form contracts, three subcontractor types are identified:
- Domestic subcontractor
- A subcontractor who contracts with the main contractor to supply or fix any materials or goods or execute work forming part of the main contract. Essentially this contractor is employed by the main contractor.
- Nominated subcontractor
- Certain contracts permit the architect or supervising officer to reserve the right of the final selection and approval of subcontractors. The main contractor is permitted to make a profit from the use of nominated subcontractors on site, but must provide “attendance” (usually the provision of water, power, restrooms, and other services to enable the nominated subcontractor to do his job). In effect the appointment of nominated subcontractors establishes a direct contractual relationship between the client and the subcontractor.
- Named subcontractors
- Effectively the same as a domestic subcontractor — A subcontractor who contracts with the main contractor to supply or fix any materials or goods or execute work forming part of the main contract. Essentially this contractor is employed by the main contractor.
Under UK tax law, certain activities that might appear to be subcontracting are actually treated differently. This is a subtlety of corporate taxation that may easily be missed or misunderstood, and may be relevant to research and development tax relief.
Examples of activities that involve outsourced work that do not count as subcontracting for tax purposes include:
- Collaborative research – research carried out across two companies that benefits both companies.
- Externally provided workers.
- Self-employed consultants.