When your workload exceeds your waking hours, you might consider hiring employees. The catch? They cost more than just their salary. You have to factor in Social Security and Medicare taxes, unemployment compensation insurance, and Workers' Compensation Insurance (depending on where your business is located).
That's why many busy IT contractors turn to subcontractors instead. In fact, our TechInsurance Market Index Report (TIMI) shows 26 percent of our customers subcontract work out. It's easy to see why: subcontractors come in, do the work, and move on to their next gig – no long-term commitments necessary.
But when you want to hire your first subcontractor, you absolutely need two things:
- A written contract.
- Proof of their subcontractor insurance.
Let's find out why.
Get Your Subcontractor Agreement in Writing
Always use a written contract when working with subcontractors. Without one, you won't have much recourse if a subcontractor doesn't complete a project. Your contract sets clear guidelines and expectations so there's little room for confusion.
While this may seem like a no-brainer, our research found that 54 percent of our customers don't use formal contracts when hiring a subcontractor. We get it. A lot of folks like to keep things informal and think a verbal agreement is enough. But that's a pretty big gamble, considering the Court Statistics Project estimates that the average cost of a dispute over a contract is $91,000.
Make Sure the Subcontractor Contract Covers These Items
The contract may vary depending on the project, but as a rule of thumb,
Sally A. Piefer, an
attorney with the
(@tsglaw1), recommends that written contracts include…
- The project scope.
- Payment terms.
- Important terms and conditions.
She also recommends that you specify that the person is a subcontractor, not an employee, to avoid confusion down the road.
You might also want to make sure your subcontractor agreement has…
- A clear outline of the project with key milestones.
- Deadlines and what steps will be taken if they are missed.
- Subcontractor insurance requirements (more on that soon).
If you've never drawn up a contract before, don't worry. We offer a sample subcontractor agreement that you can download and use as a guide.
Check for Subcontractor Insurance
Subcontractors can help your business complete projects more efficiently, but they also increase your risk if something goes wrong. To limit your liability, require subcontractors to carry their own coverage, such as Professional Liability Insurance. That way if you're sued over a subcontractor's error, your business won't bear the full brunt of the lawsuit costs.
"With liability, there's a chain of responsibility," says
Nina Kaufman (@NinaKaufman),
Ask the Business Lawyer.
"An IT provider contracts with the client. The client has no control over the subs – they may not even know who they are – so they'll hold responsible whomever they contracted with."
That means you. But if you're sued over a subcontractor's error and they have insurance, you can potentially recoup your losses. More on that in "How Not to Get Sued When Working with Contractors."
To check for your contractor's insurance, ask for their insurance certificate. This is a document that lists their coverage and its limits, exclusions, and expiration date.
Our eBook Need Subcontractors? How to Hire Like a Boss gives a more in-depth look at the ins and outs of hiring and working with subcontractors.