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Subcontracting is a very well known and long-established business practice. Essentially, the practice involves contracting with someone else to do work that you could do yourself. As with making referrals, it requires qualification of both the other business and your customer, and it allows you to draw on outside resources to better serve your customers.

However, unlike making referrals, subcontracting creates a role and more responsibilities for you; specifically, supervising the completion of the work undertaken on behalf of your customer. Fortunately, you will be compensated for your role.

Contracting out is a form of subcontracting. Its growth over the past few years has resulted in many new opportunities for small businesses.

Subcontracting Is a Well-Established Business Practice

Subcontracting—hiring someone else to perform work that you could or should be doing—is a well-known and widely accepted practice in business. It is, for example, a common feature of major construction projects.

Once ready to proceed with a construction project, the owner hires a general contractor to complete the project in accordance with clearly defined specifications. Although the general contractor might perform some of the construction, most of it is subcontracted out to other businesses. One company might be contracted to excavate the site, another to build the foundation, and others for various major components of the work. Each of these subcontractors works pursuant to a contract with the general contractor.

In most cases, the owner has few, if any, dealings with the subcontractors. It is the contractor, and not the owner, who is responsible for ensuring that the work is completed according to specifications. Similarly, if the subcontractors encounter problems or difficulties, it is the contractor, not the owner, who helps resolve them. The owner is responsible for paying the contractor—usually in installments—who in turn must pay the subcontractors in accordance with the terms of their contracts.

This model will work equally well for your business, regardless of what goods or services you provide to your customers.

Subcontracting Versus Referrals

There are three ways in which referrals and subcontracting are alike. Each approach Requires you to locate and qualify other businesses.

Allows you to provide more service to your customer.

Allows you to use outside resources instead of spending time, energy, and money to develop inside capability.

There are, however, some important differences. The table below outlines the major differences between making referrals and subcontracting. It assumes that you are subcontracting work to others.

Building Block

Once you make a referral, you are not involved in the relationship between your customer and the other business. The other business is responsible for satisfying the customer; the customer is responsible for paying for the work.

On the other hand, when you sub-contract work, you set up two relationships. You are responsible to the customer for ensuring that the work is done as specified, even though you are not personally doing the work. You are also responsible for paying the subcontractor, even though the money comes from the customer.

Differences Between Making Referrals and Subcontracting

Advantages for Your Customers and for You

If your customers need a specific service and you can find a qualified person to provide the service, you can subcontract it. Your ability to subcontract services opens the door to a virtually limitless range of services that you can offer to your customers. The only limitations on these services are your ability and your desire to locate and subcontract appropriate services.

Not only do your customers have a broader range of services, they also leave it to you to locate and supervise the delivery of these services. Thus, they enjoy a double benefit. They will have their needs and wants met by a qualified business, and they will be able to rely on you to make sure that their specifications are met. What customer would not enjoy this?

Subcontracting services increases the range of services that you can offer to your customers. The best part of this increase is that there is no direct cost to you, and it can even produce more revenue for you.

You will be paid for your efforts in locating, qualifying, and supervising the other business: The difference between what the customer pays you and what you pay the subcontractor is your compensation. However, this compensation is not a windfall profit. You will earn it.

Entrepreneur Beware

Because you are ultimately responsible for ensuring that your customer is satisfied, you must make sure that the subcontractor meets your customer’s specifications. This means that your role will change from actually doing the work to supervising or coordinating the work of others. And supervising or managing someone else doing the same work is completely different from doing the work yourself. You will not necessarily be good at it.

Some Other Things to Consider About Subcontracting

As previously illustrated in the Outline of Skills table in Chapter 14, supervision and management are people-related skills. These particular skills are not normally required in a one-person business operation. Do you have or can you develop the skills necessary to supervise other people? If you do have these skills or can develop them, subcontracting can be a useful revenue-producing activity. If you don’t have these skills, don’t count on subcontracting as an additional source of revenue.

If you are like most people who run their own businesses, you like to have control. If control is important to you, subcontracting will be a very attractive strategy. It allows you a great deal of control over your relationships with your customer and the other business and also over the actual delivery of services.

When you make a referral, you pass your customer to another business and exclude yourself from the relationship that they develop. Although the other business may have agreed not to use the referral to entice your customer away, your customer will undoubtedly compare your service to that of the other business. If you come up short on the comparison, your customer might use the referral as an opportunity to end the relationship with you, choosing to do business with someone else instead.

When you subcontract a customer’s work, it is not always necessary for your customer to deal with the subcontractor. It is usually better to prevent them from dealing with each other. This minimizes the opportunity for your customer to use the referral as an opportunity to compare your services to similar services offered by someone else. It also eliminates the possibility of your customer bypassing you and dealing directly with your subcontractor should similar services be required in the future.

You subcontract customer’s work to provide service to your customer. With this in mind, you can limit the information about your customer that you give to your subcontractor. The only information that you will provide is information that the subcontractor requires to do the job. Obviously you will not provide information that would help the subcontractor market its services to your customer. Attracting and retaining customers takes time, energy, and money.

When you subcontract work, the subcontractor works for you. You can and must do whatever it takes to ensure that the work meets your customer’s specifications. You have the ultimate lever: the money to pay for the work done. Thus, you have ultimate control over how the work is performed. Unless the work is done in the manner that you and the client specify, you don’t pay the subcontractor.

Selecting a Subcontractor

You select a subcontractor much the same way as you select a business to which you can make referrals. Start with your own network of contacts to identify any suitable businesses. If there are not any such businesses within your existing network, ask your contacts for help in locating appropriate businesses.

You will consider questions such as, What are its strengths? What does it do well? What is its reputation? Are its customers satisfied with its goods and services? And so on.

Because you will be working with the subcontractor, it is also important to assess how well you and the other business will work together. It might also be appropriate to assess the likelihood of the subcontractor making referrals to you. Always remain alert to such opportunities.

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Before actually starting to work with your subcontractor, clarify and agree upon your and their responsibilities.

Typically, your responsibilities with a subcontractor would include the following:

Provide the subcontractor with appropriate specifications, which your customer would have developed. These specifications include details of what work is to be done, and when and how much it will cost.

Supervise or otherwise monitor the subcontractor’s work. Pay the contractor when the work is completed as agreed.

Your subcontractor’s responsibilities would include the following:

Compete the work as specified.

Report to you and keep you advised of progress.

Although not legally required, it is a good idea to document the terms of the agreement in writing. This will help avoid any misunderstanding. It is not always necessary to involve your lawyers in preparing an agreement. A simple letter such as the sample below should suffice. Obviously, with more complex agreements you may benefit from the assistance of some good legal advice.

Subcontracting Agreement Letter Between Nancy and DDD

Dear David:

As discussed, these are terms of your providing database design work for me. I will

• Provide you with the specifications. When necessary I will contact my client for any necessary clarification.

• Pay you the sum of $2500 plus GST on completion of the project, provided that my client and I are satisfied that the work was completed in accordance with the specifications.

You will

• Complete the work in accordance with the specifications. If you require any clarification, please contact me directly.

I trust this confirms our understanding. If you are agreeable to these terms, please sign the enclose copy of this letter and return it to me.

Yours truly,

Nancy

In addition to the other benefits that accrue from referrals, your subcontractor knows that you are in effect guaranteeing payment of the account. Everyone assumes and expects that the funds for the work will come from your customer. However, by hiring your subcontractor to perform specific work, then if the work is done as specified, you must pay the account as agreed, even if your customer doesn’t pay you. With this added responsibility, it is obviously important to satisfy yourself that your customer has the resources to pay for the work requested.

Entrepreneur Beware

It is important to ensure that the activities of your subcontractor are limited to the activities set out in the contract. Under no circum-stances should your subcontractor be allowed to represent you or to make commitments on your behalf. Should this happen, you may find yourself subject to legal obligations that you do not know about and most likely would not have agreed to.

Contracting Out

Before leaving subcontracting, it is worth discussing the term contracting out. In today’s economic environment, contracting out usually refers to the practice of subcontracting work that was formerly done, or could be done, by employees. The expectation is that subcontracted work is performed less expensively than work done in-house. This expectation is based on the premise that in subcontracting work, only the actual service is paid for because the costs of supervision and employee benefits having been eliminated.

It is not only client work that can be contracted out. Any service that the small business requires— ranging from accounting to writing—can be contracted out. In the past, when business owners needed extra help they hired additional employees. Now, most owners contract out work that they can’t or don’t want to do.

As attractive as contracting out may be, there are occasions when hiring employees is the best option for expanding your business. The next chapter outlines what is involved in hiring employees.

Hot Tip

For the small business owner, contracting out can yield several non-economic benefits. It opens up opportunities to perform, on a fee-for-service basis, contract work that was formerly performed in-house by employees of larger organizations. Further, many skilled people now provide services on a contract basis that are similar to the services that they formerly provided as employees. This has resulted in a wealth of qualified individuals to whom work can be referred or subcontracted.

The Least You Need to Know

Subcontracting is a well-established business practice, and it will allow you to do more for your customers.

Although subcontracting is similar to making referrals, it carries extra responsibilities for you.

Your subcontractor should not be able to make binding commitments on your behalf.

Contracting out offers many new opportunities for small businesses.