How trades can protect their businesses when hiring subcontractors

As a trades business you will likely take on projects for which you don’t have all the skills, in which case you’ll need to hire-in specific subcontractors to fill the skills gaps and get the job done.

For example, if you’re a housebuilder with a small team, you could need extra labourers, an electrician, a joiner or a plasterer. For some projects such as extensions you may need concrete for footings and foundations. All these extra requirements and extra people will increase the liability potential of a job.

In this article we look at the risks involved when hiring-in extra help from subbies and how you can protect your business, the job itself and your clients, and some of the potential pitfalls to be aware of.

What are the different types of sub-contractor?

There are two types of subcontractors and for insurance purposes it’s important you know exactly where you stand.

Labour-only subcontractors

Labour-only subcontractors (LOSC) are usually hired to work on projects when extra help is needed, typically on a short-term basis.

LOSCs become an integral part of your team. They use tools and equipment supplied by your business and work under your supervision and to working hours that you set. Therefore, they become your employees. As such, you become their employer and are required to hold employers’ liability insurance to ensure they are protected and your business is protected should something go wrong.

If you are increasing your workforce, you must inform your insurance provider, so your new hires are covered.

Bona-fide subcontractors

Bona-fide subcontractors (BFSC) are specialists in a particular field. They are usually hired on an ad-hoc basis to assist with certain aspects of building projects that a builder’s company does not have the skills to undertake. Such as when a house builder calls in a plumber, joiner and an electrician.

It’s important to be aware of the difference between a BFSC and a LOSC. A BFSC will not work under your supervision or direction from your company and will work independently on set tasks.

BFSCs will supply their own materials and use their own equipment and will invoice the builder for payment for their services.

Bona-fide subcontractors are self-employed and required to carry their own liability insurances. Because of this, the hiring party needs to check the BFSCs insurances are adequate to the requirements of the job in hand and cover any losses should the worst happen.

As a minimum, a BFSC should carry public liability insurance with a limit of indemnity that is not less than your cover limit.

For further guidance covering how to know if a contractor should be classed as an employee, follow this link

Risks associated when hiring subcontractors 

There are a number of risks associated with hiring subcontractors. Arguably more so when hiring in BFSCs. We highlight a few of the risks as follows:

Liability risk

This is vital for the success of your projects, the welfare of your employees and your business, and the protection of third parties working or visiting your site. As mentioned above, LOSCs will join your team – even if that’s for a limited period of time – so they will work under your business insurances.

BFSCs need to carry their own liabilities insurance, and it’s up to you to make sure the BFSCs cover meets the requirements of the job. Otherwise, you could find your business is liable for something that the BFSC does wrong that has a negative impact on the job, leaving you to foot the bill.

If you’re hiring in subbies from an agency, then you’ll need to ensure you know exactly where the liability risk lies. Check your contract with the recruitment agency for a ‘hold harmless’ clause. A ‘hold harmless’ agreement indemnifies the suppliers from liability. So, if you hire in LOSCs from an agency and they cause a problem such as a theft, property damage or injury to someone, then you could find yourself liable and subject of a compensation claim.

Sub-standard work

Controlling the quality of the subcontractor’s work to meet the expectations of your client is crucial to the success of the project and to your business’ reputation.

Many builders draft in subbies they know, like and trust. They’ve worked together on numerous jobs and the builder knows the subbie will do a great job that meets the expected level of quality, and usually at a reasonable cost so as not to impact on the builder’s profit margin.

There will be times when other BFSCs will be required, and that is when you need to be most vigilant. Even if they come recommended and have references, you should bear in mind that the project has your business’ name on it, so it’s your reputation at stake if something isn’t up to the standards you promise to your clients.

Missing agreed deadlines

Time management is important, not just for your current project, but for your future projects too. Obviously, the UK’s unpredictable weather means that delays can be unavoidable. Even in the summer when we’re supposed to have dry days and clear skies, rain can still make an appearance and wash out a day’s work or more.

What you can influence, is the time and productivity of the workers on site, including the subcontractors. When hiring the services of BFSCs, it’s a good idea to walk them through the site when explaining the job and what is expected of them. The clearer you are with your explanation of the job, the better equipped the subcontractor will be to give you an accurate quote and timeframe for the completion of the job.

Spiraling costs

This may sound obvious, but when hiring a BFSC it’s important to agree a set price beforehand and ensure a signed contract is in place between the two businesses. This will ensure any hikes in the cost of materials and equipment the BFSC will be providing are not passed onto your business.

Incorrect classification

Insurers will take payments to LOSCs and BFSCs into account when quoting for employers’ liability insurance and for product liability insurance. So, it’ important to ensure you classify correctly when informing your insurer, otherwise you may find you’re not covered when you need to make a claim.

Some insurers may only permit certain levels of payment to LOSCs and BFSCs.

Failing to correctly classify a subbie as LOSC may result in failure to comply with employers’ liability insurance regulations.

If you incorrectly classify a subbie, the insurer may charge the wrong premium, apply inappropriate terms, and may even cover for a risk that the insurer would not usually accept.

The consequences of incorrect classification of subcontractors to your insurer could include: claims being unpaid, your insurance being voided, additional premiums becoming payable.

Ensure you have an agreed and signed contract with your subbies

When taking on a LOSC you’ll need to sign a contract of employment, if hiring from a recruitment agency your agreement will be with them. If hiring self-employed labourers, you’ll likely need to onboard them as you would a full-time employee.

When hiring the services of a BFSC, you should ensure you have a clear contract between yourself and the BFSC that is signed, and outlines where the responsibilities lie if something goes wrong.

Some essential points to consider when hiring a subcontractor:

1. Liability and responsibility, including contractual risk transfer. It’s important to ensure you’re not held liable for mistakes made by a subcontractor. A contract that clearly states which party is responsible for certain aspects of a project before work begins could save your company both time and money in the event of litigation. Contractual risk transfer is a legally binding way of transferring risk to the party that is in the best position to control the risks related to the specific service provided.
2. Exactly what work is required.
3. Timeframe for the start and the completion of the work.
4. Agree on a set cost so both parties know exactly where they stand.
5. Payment terms.
6. Rate of pay, specifically for labour only subcontractors.
7. The subcontractor is independent and in business in their own right, with their own liability insurances in place.
8. Dispute clause.
9. Reasons that can be used to terminate the contract.

Point 7 about IR35 is important. You as the hiring party need to know exactly what your responsibilities are in relation to IR35 and hiring in subcontractors.

Why communication is crucial to success when hiring subcontractors 

Practicing good communication with your subbies is vital as the main contractor. In the trade, word spreads fast. If you have a reputation for being clear and delivering on your promises, then you’ll become a sought-after contractor to work for. Especially if you pay on time for subcontractor’s services.

It’s important to be open and straight-forward when discussing a project’s requirements and timescales.

This is the same when you communicate with your clients. Clear communication is key so, if there are points that need discussing about a job, each party will feel comfortable enough to raise them and not skirt around issues.

Sources:

https://www.caunceohara.co.uk/key-differences-between-labour-only-subcontractors-loscs-and-bona-fide-subcontractors-bfscs-and-how-it-affects-your-insurance/

https://wards.uk.com/online-services/legal-guides/using-subcontractors/

https://www.insurance2day.co.uk/bona-fide-and-labour-only-subcontractors/

https://www.gov.uk/government/collections/employed-or-self-employed

https://www.rhinotradeinsurance.com/blog/2022/02/16/how-to-protect-yourself-when-hiring-a-subcontractor/

https://www.towergateinsurance.co.uk/trade-specific-insurance/how-to-protect-yourself-when-hiring-a-subcontractor

https://fsb-insurance-service.com/fsb-insurance-service-blog/employing-labour-only-and-bona-fide-subcontractors/