Subcontracting 101: Ultimate Guide for SMEs | TranZact

Jun 18, 2022 in Documents

7 MIN READ

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If you are an SME and have a manufacturing business, you have probably thought of subcontracting as a way of scaling your operations and growing your organization. Subcontracting is a great way to expand your capabilities, but it can be challenging to get started.

This guide will take you through the basics of subcontracting, what subcontracting is, how it works, and the benefits and risks of subcontracting for SMEs.

What is Sub-contracting?

Subcontracting is an agreement in which one firm contracts with another to provide goods or services that are required for the production of the company's own final products or services.

The company that subcontracts the work is referred to as the Prime Contractor. While the company that actually performs the task is known as the Subcontractor.

The prime contractor is responsible for the overall project, including quality control and delivery.

The prime contractor only hires the subcontractor to provide specific goods or services. The subcontractor is not responsible for the overall project, but they are liable for their part of the project.

Subcontracting can be used to expand a company’s capabilities, reduce costs, or both. When done correctly, subcontracting can be a win-win for both the prime contractor and the subcontractor.

Why Use Subcontractors?

Sub-contractor

There are many reasons why you might choose to use subcontractors instead of performing the work yourself or hiring employees to do it. Some of the most common reasons include:

  1. You don't have the necessary skills or resources to do the work yourself.
  2. You want to save time or money by outsourcing the work to someone who can do it more efficiently.
  3. You need to scale up or down your workforce quickly to meet changing demands.
  4. You want to reduce your overhead costs by using someone who already has the necessary equipment and workspace.
  5. You need to complete a project by a certain deadline, and you don't have the time to do it yourself.

What are the benefits of Subcontracting?

Benefits of Subcontracting

There are many benefits of subcontracting, including:

1. Access to new markets: Subcontracting can help you enter new markets. For example, if you are a manufacturer of medical devices, you might subcontract with a company that specializes in the marketing of hospitals.

2. Expand your capabilities: Subcontracting can help you expand your capabilities. For example, if you are a manufacturer of metal parts, you might subcontract with a company that specializes in powder coating.

3. Reduce costs: Subcontracting can help you reduce costs. For example, if you are a manufacturer of plastic parts, you might subcontract with a company that specializes in injection moulding.

4. Improve quality: Subcontracting can help you improve quality. For example, if you are a manufacturer of medical devices, you might subcontract with a company that specializes in sterilization.

5. Reduce risk: Subcontracting can help you reduce risk. For example, if you are a manufacturer of aerospace parts, you might subcontract with a company that specializes in heat treatment.

6. Free up internal resources: Subcontracting can help you free up internal resources. For example, if you are a manufacturer of automotive parts, you might subcontract with a company that specializes in packaging.

7. Access to expertise: When you subcontract, you can access the expertise of another company that you may not have in-house. This can be particularly helpful if you need to complete a project that is outside of your company's core competencies.

What are the Challenges of Subcontracting?

There are also challenges with subcontracting, including:

1. Loss of control: When you subcontract, you lose some control over the project. The prime contractor is responsible for the overall project, and the subcontractor is responsible for their part of the project.

2. Dependence on the subcontractor: When you subcontract, you become dependent on the subcontractor. If the subcontractor fails to deliver, you may be stuck with a half-finished project.

3. Communication problems: When you subcontract, communication problems can arise. For example, the prime contractor might not communicate changes to the subcontractor in a timely manner.

4. Quality problems: When you subcontract, quality problems can arise. For example, the subcontractor might use inferior materials or might not follow the prime contractor’s quality standards.

5. Cost overruns: When you subcontract, cost overruns can occur. For example, the subcontractor might underestimate the cost of the project or might add unexpected costs.

6. Schedule delays: When you subcontract, schedule delays can occur. For example, the subcontractor might not be able to start the project on time or might not be able to meet the deadlines.

Before you decide to subcontract, it's essential to weigh the benefits and risks to determine if it is the right decision for your company.

What are the Types of Subcontracting?

There are two types of subcontracting:

Competitive: Competitive subcontracting is when the prime contractor solicits bids from multiple subcontractors and awards the contract to the low bidder.

Competitive subcontracting is when the prime contractor solicits bids from multiple subcontractors and awards the contract to the low bidder.

Non-competitive: Non-competitive subcontracting is when the prime contractor awards the contract to a specific subcontractor without soliciting bids from multiple subcontractors.

Competitive subcontracting is more common than non-competitive subcontracting.

How does Competitive Subcontracting work?

Competitive subcontracting is when the prime contractor solicits bids from multiple subcontractors and awards the contract to the low bidder.

The prime contractor issues a request for proposal (RFP) to multiple subcontractors. The RFP describes the project and includes the specifications, timeline, and budget.

The subcontractors submit their proposals, and the prime contractor awards the contract to the low bidder.

The prime contractor and the winning subcontractor sign a contract. The contract specifies the scope of work, timeline, and price.

The prime contractor provides the subcontractor with the resources they need to complete the project. The subcontractor completes the project and submits invoices to the prime contractor.

The prime contractor pays the subcontractor according to the terms of the contract.

How does Non-competitive Subcontracting work?

Non-competitive subcontracting is when the prime contractor awards the contract to a specific subcontractor without soliciting bids from multiple subcontractors.

The prime contractor identifies a potential subcontractor and contacts them to discuss the project.

The prime contractor and the potential subcontractor negotiate the terms of the contract.

The prime contractor and the subcontractor sign a contract. The contract specifies the scope of work, timeline, and price.

The prime contractor provides the subcontractor with the resources they need to complete the project. The subcontractor completes the project and submits invoices to the prime contractor.

The prime contractor pays the subcontractor according to the terms of the contract.

What are the Steps in the Subcontracting Process?

The subcontracting process generally consists of the following steps:

1. Define the scope of work.

The first step in the subcontracting process is to define the scope of work. The scope of work is a description of the work that needs to be done.

The scope of work should include a description of the work, the objectives of the work, the deliverables, the timeline, and the budget.

2. Select the subcontractor.

The second step in the subcontracting process is to select the subcontractor. The prime contractor should select a subcontractor that has the capabilities to do the work and that is a good fit for the prime contractor’s business.

3. Negotiate the contract.

The third step in the subcontracting process is to negotiate the contract. The prime contractor and the subcontractor should negotiate the terms of the contract, including the scope of work, the price, the timeline, and the payment terms.

4. Sign the contract.

The fourth step in the subcontracting process is to sign the contract. The prime contractor and the subcontractor should sign the contract.

5. Provide resources.

The fifth step in the subcontracting process is to provide resources. The prime contractor should provide the resources that the subcontractor needs to do the work.

Read more about - Bill of Materials (BOM) Management - Guide for SMEs

6. Monitor progress.

The sixth step in the subcontracting process is to monitor progress. The prime contractor should monitor the subcontractor’s progress to ensure that the work is being done according to the contract.

7. Accept the work.

The seventh step in the subcontracting process is to accept the work. The prime contractor should accept the work when it is complete and meet the standards specified in the contract.

8. Pay the subcontractor.

The eighth step in the subcontracting process is to pay the subcontractor. The prime contractor should pay the subcontractor according to the terms of the contract.

Conclusion.

To manage the whole process from inviting the proposals of bid, then to dispatching the raw materials with delivery challans, further instructing the process of production with the specific bill of materials (BOM), to monitoring the whole process. Subcontracting can be smoothly managed with the help of a software solution only. And TranZact is one such tool that helps SMEs and Indian manufacturing businesses in their Subcontracting tasks.

It is a zero-effort digital transformation and inventory management tool that digitizes the entire business process right from sales inquiry to dispatch. TranZact offers a Sub-contracting module that will help you manage your organization's whole subcontracting process on a real-time basis and makes your manufacturing effective and efficient.


TraZact

TranZact is a team of IIT & IIM graduates who have developed a GST compliant, cloud-based, inventory management software for SME manufacturers. It digitizes your entire business operations, right from customer inquiry to dispatch. This also streamlines your Inventory, Purchase, Sales & Quotation management processes in a hassle-free user-friendly manner. The software is free to signup and gets implemented within a week.