Businesses of all sizes sometimes lack the resources to accomplish the tasks facing them. At other times, companies realize that they don't have the required expertise in-house to obtain the required results. Finally, management can determine that external suppliers who specialize in a particular field can carry out work at a lower cost than internal departments. In all these cases, companies look at subcontracting as a possible option. It solves the immediate problem the company faces but has disadvantages of its own.
Businesses using subcontractors can take on projects that are much larger than those they can handle on their own. They earn a profit on the parts of the project handled by subcontractors and can greatly grow their overall revenues. Larger projects come with higher risk. When more subcontractors receive orders, the risk that one of them will not perform as required is higher. Coordination is another headache. The company acting as the principal must ensure that the extra profit and revenue is sufficient to make the higher-risk project worthwhile.
Many tasks and projects require the services of professionally qualified specialists who sign off on the work. A company may not have the required professionals on staff and has no ongoing need for them. In that case, it is an advantage to subcontract the professional services and avoid having to hire professionals like engineers, architects or lawyers. The disadvantages of subcontracting this work lie in costs: The hourly expenses are high, and the professionals are independent in that they don't report to supervisors inside the company. These factors make it challenging to control the costs of these subcontracts.
When the involvement of professionals is not legally required, it may still be advantageous for a company to subcontract specialized consulting services. Companies who develop special skills in areas like environmental disciplines, traffic management or archaeology can usually get the work done more rapidly and at lower cost than non-specialists. The disadvantages of subcontracting this work lie in quality issues: the tasks may not be executed the way the principal company wants them done. Since the main contractor lacks the expertise in these fields, he is at the mercy of the subcontractors in that respect.
Companies producing large volumes of one or a few products or services generally have lower costs than principals or main contractors who have to handle many tasks and goods. Subcontracting to these high-volume companies generally saves substantial amounts of money. In construction, high-volume companies typically handle cement work and steel structures. Companies often subcontract direct mail campaigns or data processing. While such subcontracts save money, the contracts must specify the levels of performance and the quality that the principal company requires. The disadvantage of such subcontracts centers on the risk that the subcontractors may not meet schedules or quality requirements.
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