4 Types of Subcontractor Risks in Your Supply Chain

Supply chain disruptions often tend to originate at lower-tier suppliers that work under your tier 1 suppliers. 

In fact, many of your key suppliers subcontract their work, creating multiple tiers in the supply chain that expose your business to a greater degree of risk.

And worse, many a time, businesses assume that their contractors and subcontractors are complying with environment, health and safety, quality control and other necessary regulations. 

Without screening protocols in place, it is difficult for a business to monitor compliance and discern a subcontractor’s skills and experience required for the project.

So, while subcontractors may play a vital role in the supply chain, managing them can be extremely challenging. 

How can a business identify and mitigate risks associated with subcontracting?

The Many Forms of Subcontractor Risk 

Here is how the involvement of subcontractors enhances the risk in your supply chain:

1. Performance and quality risk

How can a business ensure that the subcontractor performs up to the mark and delivers on the promises made? Poor quality work often results in rework and delays. To deal with this challenge, include a clause making the subcontractor responsible for providing regular updates on work progress and well-documented reports. Also check if the subcontractor has quality control procedures and resources to ensure that work is performed as per the required specifications.

2. Schedule risk

The subcontractor may not succeed in completing the work within the agreed timeframe. Lack of funds and resources may derail the subcontractor’s work schedule and impact the entire project. If the subcontractor does not complete the work on time, there is every chance of the project getting delayed. This can lead to cost overruns and impact relationships with key stakeholders. To mitigate this risk, you must include clear timelines and milestones in the project plan. Additionally, maintain regular communication to check the progress of subcontractors’ work.

3. Financial risk

The subcontractor may experience financial difficulties during the project. Rising input costs and high interest rates have squeezed subcontractor margins. And, with growing uncertainty in the business environment, there is a high risk of subcontractor insolvency. To eliminate financial risk, businesses must assess the financial strength of a subcontractor beforehand. Examine profit and loss statements and cash flow forecasts to determine their liquidity. Additionally, contractors should negotiate and include clauses that address liabilities arising out of the subcontractor’s work. These clauses should be well-written and include language that is clear and specific.

4. Relationship risk

There is always a risk of primary contractor and subcontractor relationship turning sour because of varied reasons. Poor working relationships between the two parties can impact the success of the project. For example, the subcontractor may have a dispute regarding payment or terms and conditions of the contract. Such disputes can cause significant delays and may take a long time to resolve. 

The Takeaway  

Continuous engagement with contractors and subcontractors is key to monitoring risks and ensuring that they are following necessary standards. At the same time, it is important not to assume that compliance checks and procedures are in place merely because the contractor has completed a questionnaire.

Businesses must periodically conduct thorough analysis of contractor policies, procedures and behaviors. This should be an ongoing exercise and done as part of contractor relationship development. Additionally, businesses must also have a contingency plan to deal with contract violations and unexpected events.

Learn how GEP can help your company reduce vendor risks.