Subcontractors often specialize in one specific area of construction and try to network with contractors who negotiate for larger jobs that include this area of specialty. In this way, a successful subcontractor will always have work, thanks to their network of contractors.
Managerial Contractors — They make things happen! While contractors need to generate referrals and engage in networking with customers to find business, subcontractors are mostly looking to network with the contractors that have work for them.
As a result, contractors need to be far more customer-focused than subcontractors to function effectively. Furthermore, subcontractors tend to specialize in one specific area, like drywalling, tiling, insulation, or a different trade.
This makes subcontractors especially good at product and service delivery for their area of expertise. As a contractor however, you need to see the big picture of a project more than your subcontractors do. Subcontractors can be very effective workers, but contractors must be organized planners and effective managers.
This is what entitles contractors to earn profits on the work of the subcontractors that they deal with. Dangers and Pitfalls of Subcontracting. As a contractor, it is important to make careful decisions when hiring a subcontractor.
Imagine that you hire a subcontractor who lays carpet for your next project. Typically, payment chain visibility will get pretty murky after the first-tier subcontractors. This makes sense — when a subcontractor hires a supplier or another subcontractor, the contractor might not necessarily know.
Still, those lower tiered parties will have the right to file a lien. In order for payments to be released, the contractor will often need to collect lien waivers from everyone along the payment chain. Even after everyone has been identified and contacted, gathering paperwork from that many different sources can be like herding cats.
Another big one is retainage. However, retainage is still regularly withheld from contractors. When an owner has their hands on the retainage funds, a contractor might have to bend over backward to collect it. As construction margins grow slimmer, retainage becomes a bigger problem. That means contractors run the risk of breaking even or even losing money on the job if their customer plays games with retainage funds.
For a sub or a supplier, when funds are making their way through the payment chain much more on the payment chain below , it can feel like a game of Plinko. Whether or not payment actually makes it all the way down into their hands might be a matter of luck.
The higher the party is in the payment chain, the closer they are to the money. In order for a subcontractor or supplier to receive payment, the owner has to make good on their promise to pay the contractor, then that contractor has to make payment too. Adding any other links to the payment chain only complicates things further. Construction is notorious for payments moving at a glacial pace. This credit-heavy system places an excruciating burden on a subcontractor or supplier.
In order to keep working, often, the project costs will come out of pocket until payday. In an industry with razor-thin margins, that creates a LOT of risk. Unfortunately, the threat of non-payment in the construction industry is all too real. And the further down the payment chain you go, the greater the risk of non-payment becomes.
Because the subs are among the furthest away from the money that originates at the top of the payment chain. Again, construction is an industry where margins are tight. Each party on a construction project is not only interconnected through the work done on the project jobsite but also through the financial aspects of the project. Read more: The Payment Chain Explained.
A prime or general contractor is typically its own separate entity. That is, the contractor is a business that must look out for its own interests. This continues down the line of the payment chain to the sub-subcontractors , suppliers , laborers , etc.
Each party on a construction project must look out for themselves when it comes to payment. At the same time, in order for everyone to do their job and get paid, everyone must cooperate. Now, the contractor receives payment first from the owner.
That contractor is responsible for making sure money gets where it needs to go for those parties down the chain. At the same time, the contractor wants to be sure that all work has been satisfactorily completed before they make payment, and they want to limit any potential liabilities more on that below. However, some parties take it overboard.
Because a contractor holds the money, potentially, that contractor can force other parties to do things they might not want to do — like doing change orders on the fly or taking a discount. No, any party who holds the payment due to another party might resort to bullying others on the payment chain and often, without much consequence. With the risk of nonpayment also comes some tools that can help keep that risk at bay. We could talk about any one of these topics for days and at times, we probably have.
Instead, here are some articles discussing each tool. There are plenty of other options , too. The takeaway here is that no one on the payment chain is helpless.
It only takes one lien or one lawsuit to put an entire project on the brink of disaster. These disputes have a ripple effect that can affect a job top to bottom and can even spread issues onto other job sites.
Thus, keeping a project free and clear of payment disputes should be the top priority for everyone along the payment chain — including both contractors and subcontractors. The tools listed above can be very helpful when payment disputes pop up. While each party along the payment chain will have their own interests, generally, everyone wants the same thing: to do their job, get paid, briefly admire what they built, then move on to the next job site.
Independent contractors are employed and paid directly by the employer while subcontractors are employed by an independent contractor and are paid by them. Independent contractors labor for themselves, but are employed by an employer to do a project or for a specific period of time.
These contractors set their own rates and schedules for labor and payment. Typically, they are paid through the accounts payable department at a company.
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