Contractor vs subcontractor: guide for small businesses

What’s the key difference between contractor and subcontractors?

Principal contractors (also referred to as main contractors) are often hired by clients to complete a project or job and will hire additional subcontractors to carry out various bits of the project. For example, in a building project you may have builders as the main contractors, and they may sub-contract a plumber and a plasterer to complete some aspects of the work.

Let’s take a closer look at how the two roles differ:

Main contractors

Hiring

Hired by the client seeking to complete a specific project

Reporting structure

Will liaise with the client or their head representative and manage expectations

Payment

Usually, will be paid by the client for the project – fees include enough to pay for the needed subcontractors

Insurance needs

Must have their own insurance cover such as Public Liability insurance and, in some cases, Employers’ Liability insurance

Responsibility

If this is a building project, they will have on-site duties in accordance with Construction (Design & Management) Regulations

Subcontractors

Hiring

Could be hired by the employer but is more often hired by the contractor to complete specific aspects of the project

Reporting structure

Will report to the head contractor on project progress

Payment

Usually, will be paid by the contractor for their specific project contribution

Insurance needs

Often will have their own insurance. We’ll cover this in more detail in the “types of subcontractors” section.

Responsibility

Usually, only responsible for their specific part of the project

What are the roles and responsibilities for these jobs?

While a worker can switch back and forth between contracting and subcontracting on different projects, each role has slightly different responsibilities.

Principal contractor

A principal contractor is a contractor who has a larger role than sub-contracting as they may carry out some of the actual labour, but they also manage client relationships and project admin. This means keeping in touch with the client about whether or not the project is on track, setting reasonable deadlines for hitting project milestones, hiring the right subcontractors to get the work completed, and pricing up the job.

They will also have very specific responsibilities under the Construction (Design & Management) Regulations including health and safety responsibilities that they will need to follow to ensure that any sites are safe for work to be carried out.

It may sound a lot like being a project manager – and on smaller jobs in particular, the lines can really blur. Usually, you’ll only see a project manager on larger scale construction projects that need a higher-level coordinator to keep multiple contractors or aspects of a big project in check. They’ll also have their own specific responsibilities that differ from those of a main contractor.

Subcontractor

There are 2 types of subcontractor: Labour only and bona fide. The responsibilities between the two will vary slightly, so it’s worth understanding the difference. Labour only subcontractors are those who will work under the direct control of the main contractor. Meanwhile, bona fide subcontractors will quote for the job, will detail when the job is to be completed, will have completed their own risk assessment and will be responsible for their own health and safety.

Labour only sub-contracting is usually the more labour-intensive role as they’re present purely to complete a specific part of the project while the main contractor or the bona fide subcontractor will have a lot more managerial duties in addition to their physical labour duties. There’s likely no need for direct contact with the client or need to manage anything.

Therefore, a bona fide subcontractor is a much larger role than a labour only subcontractor and may actually have more in common with a main contractor due to the larger responsibility required.

These lists are not comprehensive and there may be other features that need to be considered in a particular situation but can help guide you in understanding whether someone is a BFSC, an LOSC, or an employee.

When is a LOSC an employee?

Even if a subcontractor has been brought on under a contract of service rather than a contract of employment, it is possible that they will be deemed an employee under the law. If a subcontractor is deemed to be a labour only subcontractor, then they are likely to be viewed as an employee. This would make the main contractor responsible for them and their actions and would need to include the subcontractor on their Employers’ Liability and Public liability insurance.

There is no one perfect test for how employee vs subcontractors are distinguished however this article by the Health and Safety Executive runs through the different tests that the legal system would consider when deciding if a worker was an employee or self-employed.

Why is it important to know the different subcontractor types?

Knowing the difference between the different subcontractors will determine what actions you may need to take and can protect you from penalties, fines, reputational damage or claims on your insurance policy. If an LOSC suffers injury while working for you or a third-party is injured by the work they carried out for you, you may be responsible for the claim.

In general a labour only subcontractor will frequently be deemed to be your employee for health and safety and insurance purposes.

By considering which type of subcontractor you work with and the frequency of these works you can ensure that you have both the correct type and the correct level of cover. If in doubt seek the advice of your insurer.

Note: If your business has employees then you are required by law to take out Employers’ Liability insurance. You can find out more about Employers Liability insurance with AXA here.

What are some examples of contractors & subcontractors?

This is not a real-life example but may help highlight how the various tests could be applied in a specific scenario:

Betty has a roofing business and is considered self-employed for tax purposes. She was between contracts when Archer Roofing hired her as a subcontractor to carry out some work for them.

Archer Roofing has agreed a price of £500 with the client to carry out the work and offered Betty a fee of £350 for their work re-roofing one section of a residential property. Archer Roofing didn’t want to take on many long-term employees, so they often subcontracted individual jobs to other workers.

Unfortunately, while completing the work Betty fell from access equipment that Archer roofing had provided her and has made a personal injury claim against Archer Roofing as they did not comply with their employer duty of care. But would Betty be considered an employee?

Here’s a few considerations:

• Betty’s work was not specialist
• Betty was hired by the Archer Roofing Company
• Betty did not complete her own risk assessment method statement (RAMS)
• Archer Roofing offered major equipment such as platforms for completing the job
• Archer Roofing specified when and how the job was to be done

Given all of the above information, it is decided that Betty is considered an employee in regard to personal injury. Probably what swayed this determination is that because Betty is a roofer hired by a roofing company, the employment is simply to do labouring work rather than a scenario where a specialist subcontractor is employed to perform some part of a general building contract. The lack of her own RAMS would also have been a big deciding factor.

Archer Roofing only took out a public liability insurance policy as they believed all their workers to be self-employed and therefore a “third-party” rather than employees. The reality is that Betty is not covered under public liability if she is classed as an employee, so Archer Roofing should have had an Employers’ Liability policy to cover her. Without the right cover in place, they are now liable and will be fully responsible for paying compensation and damages to Betty.

Is a subcontractor the same as being self-employed?

This is, in some ways, a complicated question. While a subcontractor may be considered self-employed for HMRC purposes, they may be considered an employee for insurance and employment law purposes.

The BFSC vs LOSC points above will help steer you in the right direction when it comes to insurance but for financial purposes, contractors are usually not employed by the client – they are just fulfilling a contract and will often be classed as self-employed.

If you’re unsure of a subcontractor’s employment status and what your responsibilities are towards them as far as employment law, then it may be worth checking the UK Government’s guidance on employment status. There is also a useful tax status determination tool that will tell you if a worker is considered self-employed by HMRC standards.

How much do contractors & subcontractors charge?

How much you should charge will really vary depending on your payment structure, experience, and field. As you work on deciding on your rates, look at permanent salaries for the same type of role as a reference point.

Make sure that your rates factor in the need to pay your taxes, national insurance and pension contributions since you won’t have an employer contributing to those for you.

As far as your pricing structure, you can have clients pay based on a day rate, an hourly rate or based on a project rate. Often main contractors and bona fide subcontractors will negotiate a price for the overall job while labour only subcontractors may be more likely to use daily or hourly rates.

Day rates can often go as high as £400 per day while hourly rates may run closer to £40 per hour – but this can all depend on the going rates in your area and how specialist your area of work is.

If you’re not sure how to charge for you time, consider the procs and cons of each structure below:

Do you need a qualification to be a contractor or subcontractor?

This answer will depend on the industry that you’re contracting in and what tools you use. Certain professions or tools may require you to have education in order to use them.

Generally speaking, while qualifications cost time and money, they can help give you further education in your chosen area and make customers feel more confident that you’re the best person to carry out a job.

For plumbers, electricians, builders and other trades, becoming a registered member of one of the Government approved schemes can help give your customers peace of mind that you’re properly educated and regulated.