Subcontractors

The term 'subcontractor' means any person, partnership, or corporation engaged in building construction and who, pursuant to a subcontractor agreement, customarily furnishes labor, materials or services, for a building or structure’s construction to a general contractor. The list of subcontractor categories includes: carpentry, communications, concrete, doors, drywall, electrical, environmental services, excavating, flooring, fire protection, glass, HVAC, insulation, masonry, mechanical, painting, plumbing, roofing, waterproofing and demolition.

General contractors bid on jobs to make a profit. They hire subcontractors generally with competitive bidding to make the most profit possible. This puts the subcontractor in a challenging environment. The greater the competition, all other things being equal, their bid price will determine whether or not they win the contract. This squeezes profit margins of subcontractors. Once the job begins, the subcontractor must pay for materials and labor for a considerable period of time, 30 to 60 days or more before payment is tendered for their work.

When a subcontractor factors their invoices they are selling their right to be paid from the general contractor to a commercial finance company. Factoring invoices accelerates cash flow to pay for labor and materials without waiting for the general contractor to be paid. Approximately 75% of the subcontractor’s invoice will be advanced, less any retentions or setoffs. When the general contactor eventually pays the invoice the funds will go the commercial finance company. They will deduct their fees and rebate the difference to the subcontractor.

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 hired by a general contractor (or prime contractor) to perform a specific task as part of the overall project. Whilst the most common concept of a subcontractor is in building works and civil engineering, the range of opportunities for subcontractor is much wider and it is possible that the greatest number now operate in the information technology and information sectors of business.

The incentive to hire subcontractors is either to reduce costs or to mitigate project risks. In this way the general contractor receives 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.

Building construction is a common example of how the contractor-subcontractor relationship works. The general contractor takes prime responsibility for seeing that the building is constructed and signs a contract to do so. The cost of the contract is usually a fixed sum and may have been derived from a bid submitted by the contractor. Before offering the bid or before contract negotiations begin, the general contractor normally asks the subcontractors to estimate the price they will charge to do their part of the work. Thus, the general contractor will collect information from electricians, plumbers, dry wall installers, and a host of other subcontractors.

Once construction begins, the general contractor coordinates the construction schedule, making sure the subcontractors are at the building site when needed so that the project remains on schedule. The sequencing of construction and the supervision of the work that the subcontractors perform are key roles for the general contractor.