You may have heard the terms “contractor” and “subcontractor” interchangeably used. Often, these terms simply mean a hired person to complete a job. In the construction industry, however, these terms mean very different things and should not be mixed up for one another.
On large-scale construction projects, there are usually multiple teams involved. Teams and services can range from electricians, plumbers, roofers, and more. That’s why it’s important to understand the difference between a Contractor and a subcontractor. Who does what? Who’s in charge of the complete project? Who handles payments?
In this article, we’ll review the main differences between contractors and subcontractors, and how both of these parties should be covered with proper liability insurance.
Contractors vs Subcontractors
On the surface, there may not seem to be much of a difference between contractors and subcontractors in the construction industry. After all, they both work on construction projects. On closer inspection, however, these two parties mean completely separate things.
|A contractor is a company that a property owner hires directly.||A subcontractor is anyone hired to work on a specific construction project that the property owner themselves did not hire.|
|Contractors may complete the entire project with their own crew or hire subcontractors.||Subcontractors are usually hired by the contractor to perform specialized tasks as part of a larger construction project.|
|Contractors manage and coordinate the entire project, including payroll, deadlines, etc.||Subcontractors may hire their own suppliers and additional subcontractors to complete work.|
What are contractors?
Contractors, sometimes called general contractors, are companies that a homeowner or property owner hires directly to complete a construction project.
The general contractor works to secure contracts with additional suppliers and service providers (subcontractors) while overseeing the entire project scope. Contractors typically handle these main responsibilities:
- Oversees and manages the bottom line/budget.
- Remains in direct contact with the homeowner.
- Coordinates all the work, either with their own team, or subcontractors where necessary, to complete the project to the homeowner’s satisfaction.
Coordinates all the work, either with their own team, or subcontractors where necessary, to complete the project to the homeowner’s satisfaction.
Why are subcontractors?
Subcontractors, on the other hand, are businesses or self-employed individuals that general contractors hire to take care of the smaller, trade-specific projects necessary to meet the homeowner’s requirements. Many subcontractors are business owners who work with multiple general contractors to keep a steady flow of jobs.
Subcontractors typically have specialized skill sets or an area of expertise. When a construction project requires plumbing, drywall installation, roofing, or electrical work, the construction manager or contractor will likely hire subcontractors to take care of these specific jobs.
A subcontractor’s work is on a contractual basis, just like the general contractor. The key difference, however, is that the subcontractor is under contract with the construction company, not the homeowner (the construction company is under contract with the homeowner, and the subcontractor is under contract with the construction company).
Are you a subcontractor and are being asked to carry on your own insurance?
Main Differences & Takeaways Between Contractors and Subcontractors
Even though both contractors and subcontractors are business owners who play a role in the construction projects, there are some crucial differences between the two.
|Has contract and direct relationship with the property owner.||Does not have a direct contract or direct relationship with the property owner.|
|Performs general construction work/tasks.||Performs specific/specialized construction work/tasks.|
|Has the responsibility of paying suppliers and subcontractors.||Is on the receiving end of payments from contractors.|
|Collects lien waivers from the team.||Completes and signs lien waivers in exchange for payment.|
The biggest difference? The payment chain
The biggest difference is that subcontractors are not exactly employees, but independent contractors. This distinction is important for both tax and labor laws. However, even though subcontractors aren’t employees, the general contractor has certain rights and responsibilities based on the relationship with the subcontractor.
In most cases, the lender or property owner requires the general contractor to obtain lien waivers from all subcontractors and suppliers who’ve worked on the project. This is fairly easy for the first tier, but when you’re dealing with subcontractors who engage in further subcontracting, the contractor may not be aware. This can complicate things since the lower-tier subs still have the right to file liens.
Before payments are released, the contractor may need to collect the lien waivers from everyone in the payment chain. Collecting and managing the paperwork for everyone in the chain can be quite complex.
Retainage, or a sum of money that’s held back from contractors and subcontractors during the construction project, is another issue. Many construction contracts stipulate that a certain amount (typically 5% to 10% of the total contract price) is withheld until the project is nearly complete. This leads to cash flow issues, of course, but also means that contractors may have to go above and beyond (possibly losing money in the process) to collect it from property owners.
Subcontractors, conversely, often have to deal with issues of slow payment or in some cases, non-payment. Since they don’t have any direct connection to the homeowner, it means they’re waiting for the contractor to receive payment, then forward payment to them. The further down the chain a subcontractor is from the general contractor, the greater the threat of non-payment.
Everyone on site needs Contractors Liability Insurance
Regardless of what type of contractor you may be, whether you’re a general contractor in charge of the entire project, or a subcontractor handling only a small portion of a larger project, the reality is this: Everyone involved needs contractors liability insurance.
There’s always the risk of property damage or bodily injury on a construction job site. Even though you may be a subcontractor, you’re not an employee and are responsible for your business’s actions.