Contractor vs. Subcontractor: What's the Difference?

Subcontractors work for contractors

Two people discussing a work project in a small office
•••

10’000 Hours / Getty Images

Contractors and subcontractors both are individuals or businesses that carry out specific tasks and projects for those who hire them. Small businesses often work with both to scale operations or can even be considered independent contractors themselves. Knowing which one you identify as could have implications for your work, clientele, and even insurance policy. 

Several key differences make a contractor distinct from a subcontractor. Yet the main distinction comes down to two features: the client they are working for and the scope of work they’re responsible for completing. We compare the two below so you can enter into any such working relationship with clarity and the right processes at hand. 

What’s the Difference Between Contractors and Subcontractors? 

  Contractors Subcontractors
Hiring Hired by the client seeking to fulfill a project Hired by the contractor seeking to fulfill a specific project aspect
Reporting Structure Reports to the client (i.e., business owner or team) Reports to the contractor
Payment Is paid by the client for a specific project or freelance need Is paid by the contractor for a specific element of the project
Skills Offers a suite of skills Offers a specific skill set
Insurance Needs Should have a surety bond to ensure fulfillment of the project Have their work covered by the contractor’s surety bond

Hiring

Often, a client has found the contractor through a business referral or networking opportunity. The client hires the contractor because of positive reviews, strong project management skills, and an understanding of the specific task at hand. It’s in the best interest of a contractor to have a wide network of business clientèle that could lead to work.

Subcontractors network with contractors that work on projects that overlap with their specific skill sets. An example of this would be a graphic designer building a comprehensive network of marketing contractors. A contractor hires the subcontractor based on a need for a targeted skill set.

Reporting Structure

Contractors and subcontractors work simultaneously to complete a specific project or task, yet the reporting structure for a project differs significantly between the two. 

A contractor reports directly to the client with no middleman separating the two. The contractor maintains a good relationship with the client through timely communication and submissions of work. Reporting to the client could mean sharing updates with a business owner, a team of individuals, or an assistant. 

A subcontractor has little to no direct communication with the client. Instead, a subcontractor works and reports directly to the contractor. Subcontractors building a solid reputation will engage in frequent communication with contractors, set expectations around deliverables, and stay within budget and time frame.

“Prime” contractors work specifically with the government to hire subcontractors for jobs. This is how large government entities work with small businesses, allowing them to land a federal contract. Reporting is more extensive for prime contractors, as they are held to government mandates for monitoring and compliance.

Payment

An easy way to recognize the difference between a contractor and a subcontractor is by answering one simple question: Who is paying the worker? A contractor is not only hired but paid by the client. This person is hired to provide a service outlined in a contractual agreement that specifies the pay rate. Some contractors may get paid a lump sum at the start and finish of a project, monthly, or all upon completion. 

A subcontractor is paid by the contractor on the terms stated in writing. The individual often has less negotiating room for how much they get paid, having to align with the contractor’s budget. This differs from contractor and client because the client doesn’t set the subcontractor’s rates.

Skills

Contractors and subcontractors may have the same, or complementary, skill sets. For example, a general contractor in construction has the same carpentry know-how that a carpenter subcontractor would.   

However, this is not a two-way street in all aspects. A contractor needs to offer a suite of skills, including project management, leadership capabilities, and the ability to see the larger picture. This individual needs to be able to manage a team.

A subcontractor is known for specific skills, understanding the inside and out of a particular task. This individual would be hired to complete a part of a project but wouldn’t manage the full-scale initiative. 

Insurance Needs

Contractors in specific should take out surety bonds to guarantee completion of a project. Surety bonds make a contractor more appealing to clients as they act as the legal note ensuring fulfillment. Subcontractors don’t need these bonds, as the contractor’s would cover the full scope of the project.

You’ll want to find a contractor who offers a surety bond at the start of the project. If for any reason the work isn’t completed, the company that issued the bond will fulfill the contract through completion or compensation.

Contractor vs. Subcontractor Examples

Understanding the differences between contractor versus subcontractor becomes clear in specific industries and use cases. You already may be familiar with some examples, such as: 

  • Construction: A general contractor is hired by a new homeowner who wants to remodel their house. The contractor hires subcontractors who accomplish plumbing, painting, carpentry, and electrical projects, respectively. 
  • Marketing: A brand agency is hired by a small business to refresh its brand. The agency, being contracted for the full-scale project, hires subcontractors to complete website redesign, handle photography needs, and build out a newsletter. 
  • Consulting: An individual consultant is hired by a major corporation to identify areas of innovation for its future product lines. The contracted consultant hires a subcontractor for research and another subcontractor for data visualization. 

Contractors and subcontractors are not limited to certain industries or tasks. More pointedly, subcontractors can leap across industries based on skills, such as a web designer who takes on a book design or a carpenter who engages with an events contractor.

Which Do You Need?

As a business owner, you will predominantly work with contractors when you need to outsource specific projects. But you may also work with them on day-to-day business operations, such as outsourcing customer service

A contractor will decide whether subcontractors are needed to complete the contractual agreement between contractor and client. Several factors go into a decision to hire, including the pay rate, a subcontractor’s budget, and the timeline. The contractor may decide it’s not a big-enough task or a sufficient budget to make a subcontractor worth the resources. 

You should abide by the legal rules that make independent contractors distinct from employees to avoid fines or other consequences. The IRS states that if the payer (i.e., you, as the client) only controls the result of the work and not the what or how of the work, then the payee is a contractor.

What Else You Need To Know

Protecting yourself as a business owner is crucial, as it gives you clarity on liability and protection in case of a mishap. This is much easier for a small business that’s incorporated as a limited liability company (LLC) or C-corp with protection from liability built into the business structure.

General liability insurance for contractors is a must, to protect them in the face of lawsuits. If you hire a contractor, you may be able to add the individual to your general liability policy for the length of the project, though your premium may increase. Contractors that have errors and omission insurance are well-prepared to handle clients and protect their own work and professionalism. 

Depending on state laws and type of work, workers' compensation may be a necessity for contractors and subcontractors. This is especially true in dangerous occupations, such as construction or heavy machinery. However, as someone who hires contractors, you are not responsible for workers’ comp benefits.

The Bottom Line

Comparing contractors and subcontractors comes down to the reporting structure. A contractor works directly with the client and is responsible for timely overall project completion. A subcontractor works with the contractor on a specific project basis, and must perform well to continue getting work. 

Your business may have a particular need or day-to-day operation that could use the support of a contractor and their subcontractors. It’s worth making the outreach to find the right person with the right skill sets for the job.

Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning!

Article Sources

  1. U.S. Small Business Administration. “Prime and Subcontracting.”

  2. IRS. “Independent Contractor (Self-Employed) or Employee?

  3. U.S. Small Business Administration. “Surety Bonds.”

  4. IRS. “Independent Contractor Defined.”

  5. U.S. Small Business Administration. “Choose a Business Structure.”

  6. Communications Workers of America. “My Employer Says I Am an Independent Contractor. What Does This Mean?