Contractor vs. Subcontractor: What Are The Key Differences?

Business owners might choose to hire general contractors, independent contractors, and subcontractors for a variety of different construction projects. However, deciding which type of contractor is the best fit for a project requires understanding the key differences between each type.

Types of contractors

Contractor vs. Subcontractor

In the construction industry, contractors and subcontractors occupy different steps in the chain of command.

General contractors are typically small business owners who oversee construction jobs and the job site. They work with clients to negotiate contracts, calculate project cash flow, and coordinate the work that is to be completed. Subcontractors work underneath them, as the prefix “sub” suggests. They are considered self-employed and perform more hands-on, specialized labor.

What is a general contractor?

A general contractor supervises a construction project, often directly employing workers and frequently subcontracting with specialists to complete particular jobs.

General contractors function much like manager roles in most businesses, except they work on a contractual basis. They communicate with the people paying for the project and the people completing the hands-on labor while also assessing their clients’ needs and coordinating the work performed by subcontractors and employees working on specific aspects of the project.

In addition, they also manage vendors and may arrange for equipment rental within the budget parameters set by the client funding the project.

What is a subcontractor?

A subcontractor works underneath a contractor to carry out the specific tasks required to complete a construction project. Subcontractors are typically hired based on their area of expertise.

For example, a contractor may subcontract out portions of a job ranging from electrical work to drywall and roofing to complete a project. A subcontractor could be a plumber, electrician, or carpenter.

Is a subcontractor still a contractor?

Yes. Subcontractors are usually hired based on the specific skill sets required to complete a given project. General contractors may employ their own workers, but because different projects contain distinct components, they might not have someone on their payroll who’s qualified to complete the work.

General contractors may also prefer to subcontract out to someone with more experience than workers on their staff. Subcontracting could save project delivery time and ensure that the job’s completed correctly, averting delays and do-overs while enhancing the general contractor’s reputation.

Some general contractors work primarily with subcontractors rather than maintaining a staff of their own because it’s more affordable. Since a subcontractor isn’t on the payroll, the general contractor isn’t responsible for supplying workers’ compensation benefits, Social Security, and full-time salaries.
The subcontractor (a contractor, too) contracts with the general contractor to fill a specific job.

Who is responsible for insurance policies: contractor or subcontractor?

Contractors and subcontractors should both carry contractor insurance coverage for protection against lawsuits and liability issues. Insurance is a must-have because construction can be a dangerous business. In all, 20% of worker deaths are in construction, even though construction workers form just 6% of the U.S. workforce. In 2018, the construction sector reported a total of 195,6000 injuries.

Construction contractors typically need several types of insurance, such as property insurance, business vehicle insurance, workers’ compensation insurance, and general liability insurance, for instances where someone is injured on the job or worksite.

Liability Coverage

Owners and Contractors Protective Liability Coverage shields a general contractor from potential liability relating to negligent acts conducted by an independent contractor or subcontractor. A subcontractor buys the policy, but the protection also benefits the general contractor.

Errors and Omissions Insurance

E&O insurance, which stands for errors and omissions, covers a contractor if a client claims they are responsible for the service they performed — or failed to perform to the client’s expectation. Most of these policies cover the cost of judgments, court settlements, legal advice, and defense against legal actions.

Insurance isn’t just essential to protect contractors against liability; it’s required to be eligible for some jobs. An insurance company or broker will issue a certificate of insurance that specifies policy limits, the extent of coverage, and effective dates to verify that a contractor holds the required insurance coverage.

In addition to holding insurance, contractors might be required to have licenses and certificates, depending on the states in which they operate. Licenses are typically required for commercial and residential contractors, electricians, HVAC technicians, water and gas plumbers, road workers, and remediation workers in asbestos, mold, and hazardous waste.

Obtaining a license usually requires passing an exam to demonstrate criteria that establish a contractor’s competence to perform a specific project or trade.

What is a prime contractor?

A prime contractor could be used as a synonym for “general contractor.” Virginia law, for example, defines a prime contractor as “a licensed contractor that performs, supervises, or manages the construction, removal, repair, or improvement of real property pursuant to the terms of a primary contract with the property owner/lessee.”

However, the term prime contractor more specifically refers to a contractor who works directly with the government. Like general contractors, prime contractors project managing licensed subcontractors and ensure the work is completed, as defined by the contract. They might also employ their own employees.

According to the IRS, for cases where a prime contractor’s contract is with the government rather than a private business entity, the contractor must register their business entity with the System for Award Management to be eligible for bids and payments.

Contractors are also required to have a surety bond for construction work performed for the government. These bonds are backed by a surety company that guarantees to the party paying for the work that the contractor will complete on time. The purpose is to safeguard against any financial loss caused by potential delivery disruptions, delays, and failures to meet the project conditions stipulated in the contract.

What is an independent contractor?

Independent contractors are self-employed and perform services that a payer can directly control. They are subcontractors who work directly with the client, whereas general contractors hire subcontractors.

Is an independent contractor the same as a subcontractor?

An independent contractor is a type of subcontractor. However, not all subcontractors are independent contractors who work with the client.

For example, a homeowner might hire an independent contractor for kitchen plumbing work. In this case, the subcontractor is an independent contractor working directly for the client. In other cases, however, a general contractor might hire the same plumber to work as a subcontractor of a larger project, constructing an office building, which also involves other subcontractors with different expertise.

How to hire a general contractor

How to hire general contractor

Before hiring a general contractor, research companies in your area with experience relevant to the type of project you’re planning. Some general contractors specialize in areas more than others while also offering an array of generalized skills. So, if you’re focused on a specific skill requirement, you’ll want to look at general contractors who tailor their services to that area.

Once you’ve identified contractors with relevant experience, compare the reviews of general contractors in your area. The Better Business Bureau offers an online search engine that compiles a list of reviews for your location. Several other services, such as HomeAdvisor, offer contractor referrals. Although Yelp is more widely known for restaurant reviews, it also provides customer reviews for construction services.

And don’t forget word-of-mouth referrals. Ask your neighbors and friends who might have experience working with contractors for company recommendations.

It’s worth considering independent contractors as well as those who have worked with larger construction companies. Compare services, rates, experience, and expertise. Ask for references, and don’t forget to ask them for a projected delivery timeline and completion date.

You might also want to ask a contractor about their level of training or what training they require from workers. According to OSHA, safety programs can save a construction company $4 to $6 for every $1 invested. Plus, safety programs can reduce the potential for liability and construction delays if accidents occur.

Check, to be sure, that the contractor you’re considering for a project is licensed to do the kind of tasks you need and that they have insurance for personal liability, workers’ compensation, and property damage.

Conclusion

Planning, licensing, and insurance are all crucial components that go into making sure a construction job is done correctly. General contractors and subcontractors are people who are hired to perform different aspects of a construction project. General contractors work with clients to plan a construction project and determine what needs to be done.

Depending on the project needs and goals, they may hire subcontractors to help them complete the job.

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