Contractor vs. subcontractor: Main differences explained

The job market is moving faster than ever, and many workers and organizations want to keep their options open. If you’re hiring outside help, it’s vital to understand the differences delineating a contractor versus a subcontractor.

Contractors and subcontractors offer businesses flexibility and access to specialized skills, helping them adapt to changing project demands. But to fully utilize contractors while minimizing exposure to potential risks, companies must first review the basics. The differences between contractors and subcontractors govern insurance, how deliverables are assigned across external hierarchies, and the legal obligations of contracted work.

What is a contractor?

A contractor is an individual or company that enters into a contractual agreement to provide services or complete client projects.

Despite the term’s popular association with construction workers, contractors operate across many sectors (e.g., technology, healthcare, finance, and many more), providing essential services tailored to specific project needs. Regardless of their industry, contractors typically work independently, managing their tasks and responsibilities to fulfill the contract terms.

Distinguishing between contractors and employees is crucial when onboarding contractors, whether they’re individuals or an autonomous company. Unlike employees, who work under an employer’s direct supervision, contractors operate autonomously. They are responsible for their own taxes, insurance, and benefits, and they often bring specialized skills, such as writing, computer programming, graphic design, etc., to move a project forward.

What is a subcontractor?

A subcontractor is an individual or company hired by a contractor to perform specific tasks within a larger project. In this case, their specialized skills help the contractor complete smaller components of the project.

For example, if an executive editor is hired to increase a website’s traffic in a few months, they may, in turn, hire subcontractors as writers or social media coordinators to supplement their services and achieve the goals set forth by the client and the primary contractor.

Contractors hire subcontractors when they need diverse expertise. In an IT project, a contractor could hire several subcontractors, each specializing in different areas, such as cybersecurity, software development, and network installation.

Whereas contractors ensure project execution and interact directly with clients, subcontractors are engaged for their specific skills and are managed by the contractor. This hierarchical structure helps divide the workload efficiently and ensures that professionals with the right skills and expertise handle all aspects of the project.

Contractor vs. subcontractor: What’s the difference?

Beyond their skill sets and roles, contractors and subcontractors differ in several crucial ways:

Responsibilities

Contractors manage the overall project, coordinate with clients, oversee subcontractor work, guide workflows to meet project timelines and budgets, and handle issues that arise throughout the project.

Subcontractors focus on specific tasks within a project, such as legal consultation, IT services, or marketing. They adhere to the contractor’s instructions and schedule.

Client interaction

Contractors interact directly with clients, negotiate contracts, and manage client expectations throughout the project.

Subcontractors rarely interact directly with the client. Instead, they primarily communicate with the contractor who hired them. Limited client interaction allows subcontractors to focus more on their specialized tasks, ensuring high-quality outcomes in their areas of expertise.

Insurance policies

Depending on the industry, contractors may need comprehensive contractor insurance, including general liability, workers’ compensation, and sometimes specific coverages like cyber liability insurance and errors and omissions (E&O) insurance to protect against industry-specific liabilities and risks.

Subcontractors may also need insurance, but it’s typically specific to their trade. They may also need E&O insurance if their work involves professional services.

Cyber liability insurance is necessary when contractors handle sensitive digital information.  For example, data scientists and software developers should have cyber liability insurance to protect against data breaches or cyberattacks.

For additional protection, companies should consider nondisclosure agreements to safeguard intellectual property once the contractor’s relationship with the company ends. Non-compete agreements are more challenging to enforce but can also enhance security.

Liabilities

Independent contractors bear full responsibility for project delays, cost overruns, or issues arising from subcontractor performance. They are liable to the client for the entire project.

Subcontractors are also liable—but only to the contractor. They are responsible for the quality and timeliness of their specific work. If their portion of the project causes delays or issues, the subcontractor could face legal or financial repercussions from the contractor.

Contractors and subcontractors must mitigate risks, provide specialized services, and maintain a strong working relationship to satisfy all involved parties.

Tips for hiring a contractor

Contractors provide invaluable benefits for organizations of all sizes—provided you know when and how to hire them. Follow this advice to make the most of your contractor relationships:

Verify necessary permits and licenses

Contractors must have all the required permits and licenses to legally perform work. This guarantees compliance with local regulations and proves the contractor can meet industry standards.

Check referrals and reviews

Ask for and check referrals and online reviews before hiring contractors. Previous clients may have valuable feedback that lends insight into a prospective contractor’s performance, including their reliability, quality of work, and professionalism. Review platforms like the Better Business Bureau provide additional transparency.

Estimate costs and timelines

Detailed estimates from contractor candidates should break down the labor, materials, and other foreseeable costs. The contractor should also provide a realistic timeline for project completion, which will assist in budgeting and planning in case of disruptions.

Set clear contract stipulations

A well-defined contract is indispensable. It should outline the scope of the work, payment schedules, timelines, and specific terms governing changes and disputes. An explicit 1099 subcontractor agreement is also vital should the contractor need to hire others to bring the project to fruition.

Confirm insurance coverage

A comprehensive contractor vetting process involves verifying that the contractor has adequate insurance, including personal liability and workers’ compensation. This will help companies protect themselves from potential liability.

Navigate contracts with confidence

Clarity on the roles of contractors, subcontractors, and full-time employees helps projects reach completion while avoiding misclassification. Understanding the differences between types of contractors ensures streamlined project management and compliance with legal obligations. Without these, you risk substantial financial and legal losses, including penalties and back taxes.

With detailed knowledge and expertise, companies can make informed decisions, build a strong project team, and turn their eyes to the next project.

Fortunately, you don’t have to do it alone. With Oyster’s global employment platform, you can compliantly hire, pay, and manage contractors in 180+ countries. In addition, Oyster offers comprehensive solutions to manage global teams, with tools to streamline contract management, ensure compliance, and support all project needs. Whether you’re negotiating with contractors or subcontractors, Oyster simplifies the complexities of contracts, putting your projects on track for smooth execution.

About Oyster‍

Oyster is a global employment platform designed to enable visionary HR leaders to find, engage, pay, manage, develop, and take care of a thriving distributed workforce. Oyster lets growing companies give valued international team members the experience they deserve, without the usual headaches and expense.

Oyster enables hiring anywhere in the world—with reliable, compliant payroll, and great local benefits and perks.