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How to Successfully Subcontract

Many of you want to maximize your profit by minimizing your overhead, which usually means no full-time staff. But how do you provide for the support and resources that a growing practice demands? Through sub-contracting, which I define as hiring talent on a situational or project basis. If you visit your local printing franchise to have copies made, you’re not subcontracting, merely using a retail vendor. But if you hire a graphics professional to design a client’s materials, or hire someone to conduct focus groups, or hire an instructional designer to produce a training program, you’re subcontracting.

Here are the hallmarks of a successful subcontracting relationship:

  • The client, the subcontractor and you all feel justly rewarded.
  • You maintain the client relationship.
  • The subcontractor works for a fixed fee for a finite period.
  • Your philosophies, materials, language, etc., are complementary.

Here are some of the most important criteria I’ve found in attracting and utilizing subcontracting help. It’s not a bad idea to have such a template handy when you’re interviewing candidates or drawing up agreements:

  1. Always have a written contract, which should be simple and clear. The contract should include the expense reimbursement policy, client contact procedures, deadlines, payment terms and any related, practical matters. (If you find you need a 12-page contract, then you didn’t find the right subcontractor.)
  2. For first-time subcontractors, demand specific references and check them assiduously. If products are involved, demand a sample of their work. (If someone is doing something for the first time, then they’re really an intern and you shouldn’t pay them at all. You only pay for experience and talent.)
  3. Make sure that frequently-utilized subcontractors are not making the predominant portion of their earnings solely from you, or the IRS may consider them actually as employees and demand that taxes be withheld and certain reporting be done. This defeats the purpose of avoiding full-time employees.
  4. Demand a fixed fee or, if hiring by the day or hour is cheaper, demand that you control the time and/or that a cap be placed on time which can’t be exceeded without your prior approval. Always negotiate fees. Never pay in advance, but only as work is performed. However, pay very promptly when payment is due to stimulate loyalty and to conform with proper professional behavior. Never agree to a percentage of the project as compensation.
  5. Never empower the subcontractor to deal directly with your buyer. Ensure that all communications go through you or be approved by you. Always identify the subcontractor as a resource employed for the project by your firm.
  6. Specify what expenses are reimbursable (if any) and how they will be reimbursed (i.e., after expense reimbursements are received from the client). Never advance expenses.
  7. Never allow the introduction of any materials, visuals, letterhead, etc. with the subcontractor’s name without your express approval. (This is more to prevent client confusion than because the subcontractor might pilfer business.)

Subcontracting is a highly leveraged technique which I use on a regular basis. If you take the right precautions, you should be able to provide value to the client, the subcontractor and your own bank account.

Here are some guidelines form the General Accounting Office (Pub. No. GAO/T-GGD-96-130) that indicate to the IRS that someone is an employee, not a subcontractor:

  • follows set hours of work
  • must submit regular reports
  • employer provides materials/site
  • works solely for one employer
  • can be fired by employer
  • works only on employer’s premises
  • receives pay at set intervals
  • does not personally make profit/loss
  • makes no offerings to general public
  • receives training directed by employer

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