• Enquiry
• Quote
• Agree
• Work
• Invoice
• Paid

Subcontractors and the Chain

The moment you bring somebody in, you are on both sides of the arrangement. You owe them on your terms and you are owed on somebody else's, and the gap between the two is where small firms get squeezed.

For a software-side reference alongside this discussion of pre-work decisions, contracts, and small-business administration, Monitask provides guidance on remote employee monitoring software.

The position you are now in

You are liable to your customer for their work.

Not partly. Entirely. From the customer's side there is one supplier, and a subcontractor who does a poor job has created your problem, not theirs.

And you owe the subcontractor regardless of whether you have been paid. Unless something specific says otherwise, their entitlement does not depend on your customer's behaviour — and clauses that try to make it depend are restricted or unenforceable in several jurisdictions. Check the position where you work rather than assuming.

The squeeze

QuickBooks reports 42% of small businesses saying outside pressures delayed the payments they in turn owed to their own contractors, suppliers or vendors. (Vendor research — Intuit sells accounting software.)

That is the chain effect measured, and it describes the position you enter the moment you subcontract.

One slow customer at the top produces pressure two or three links down, and each link absorbs it by delaying the next — which is how a single late payment becomes several firms' problem.

Why paying them late is the expensive option

It looks like the free way to manage cash and it is not.

You lose the good ones first. A subcontractor with a choice works for the people who pay, and the ones who stay for late payment are the ones without options.

You lose the favour economy. The person who fits you in at short notice, comes back for a snag without invoicing, or covers a day when you are stuck is doing so because the relationship is worth it. That stops immediately and quietly.

And you inherit their pricing. A subcontractor who expects to wait prices for waiting, and the increase appears on every future job rather than only on the ones where you were slow.

Against which: paying on time costs the money slightly earlier than you would like.

What to agree before they start

The same things you would want from your own customer. The symmetry is the point, and it is easier to be a good customer when you have written down what you expect from yours.

A price and a scope, in writing.

Payment terms, stated — including what happens if your customer is late, which is a conversation to have rather than a term to impose silently.

Who supplies materials. Same question as with your own customer and the same consequences.

Insurance and status. Whether they are insured, and whether the arrangement is genuinely subcontracting rather than employment — which is a tax and employment law question with real consequences and varies by jurisdiction.

Where the margin actually goes

Marking up subcontracted work is normal and is payment for something real: finding them, managing them, carrying the liability, and being the single point of contact for the customer.

Where it goes wrong is pricing the markup as though the management were free. A subcontractor who needs supervision, who has to be chased for dates, or whose work needs checking is consuming your hours, and those hours are the cost the markup is supposed to cover.

If a subcontractor is cheap and requires two hours a week of your attention, they are not cheap. The calculation is the same one that applies to your own time.

Retentions down the chain

Where your customer holds a retention, decide before you engage anybody whether you pass it on.

Passing it on is common in construction and is one of the mechanisms by which pressure travels downwards. It is also, in some jurisdictions, increasingly restricted.

Not passing it on means you carry it, which is a real cost and belongs in your price rather than in your working capital.

Either way the subcontractor should know before starting. A retention that appears at the point of their invoice is a dispute, and it is a dispute with somebody you will need again.

When the work is defective

Deal with it as a supplier problem, not a payment problem.

Withholding payment as a way of getting a subcontractor back works once and costs the relationship. A conversation about a snag, with a date, works better and keeps the person who can fix it willing.

Where the work is genuinely bad and they will not return, that is a dispute — and it is subject to the same reasoning as any other: the evidence you have is what you recorded at the time, and a photograph on the day beats a description a month later.

What does not work is silence followed by a deduction from the final payment. From their side, nothing was ever said and the invoice was short.

Telling the customer

Say that work will be subcontracted, at quoting stage.

Most customers do not mind and some do, and the ones who do would rather know now. A customer who discovers on the day that somebody else is doing the work has been surprised, and surprise is the emotion that produces queries at the end.

It also lets you name the arrangement: you remain responsible, they deal with you, and the invoice comes from you. Which is the position anyway — stating it just removes the ambiguity.

The short version

• Subcontracting puts you on both sides: liable to your customer entirely, and owing your subcontractor regardless of whether you have been paid
• Clauses making their payment depend on yours are restricted or unenforceable in several jurisdictions — check locally
• 42% of small businesses report outside pressure delaying what they owed their own suppliers, which is the chain effect measured
• Paying late loses the good subcontractors first, ends the favour economy, and raises their prices on every future job
• Agree price, scope, terms, materials, insurance and status in writing before they start
• A cheap subcontractor who needs two hours a week of management is not cheap

For broader background on pre-work decisions, contracts, and small-business administration, see Citizens Advice.