For many companies, providing goods and services to other firms by virtue of a contractual relationship is central to the heart of their business, and it is often quite lucrative. Of course, companies cannot always make their products or provide their services without the help of subcontractors. Companies with a high volume of contracts often enter into subcontracting agreements with other firms to manufacture goods or deliver services in a faster, cheaper, and/or more efficient manner.
Granted, relying on the actions of an external party can be risky, as that party’s failure to perform properly or punctually will generally have an unwanted ripple effect on the rest of the process. For this reason, it is imperative for companies to keep a very tight rein on both their primary contracts and subcontracts. This is something that can be accomplished by thinking about subcontract management throughout the contract lifecycle, as explained below.
Negotiations: Assess Capacity and Risks
As companies negotiate with other businesses to form a contracting relationship, both sides will need to assess whether their respective firms have the resources, people-power, and operational capacity to perform as required. It is during this reflective assessment that companies must be realistic about their abilities to ensure that they do not enter into a contract that they will be unable to honor.
Thus, it is also during this time that companies should be analyzing whether or to what extent they may benefit from the use of subcontractors to deliver on some part of the contractual requirements. This may be as simple as sourcing certain parts from another vendor or outsourcing telesupport to trained professionals in other countries. In addition to determining whether such assistance is needed, it is vital to consider the risk that such subcontracting relationships pose. For example, obtaining a product from a company that is in a country with known transportation issues likely will not be worth the risk regardless of how cheap the product may be. Ultimately, the negotiation phase of the contract lifecycle is the time to figure out what is feasible and what is not, including how best to fit in any needed subcontractors.
Drafting: Analyze Proposals and Prior Performance
After negotiations have finished and the parties begin to work on drafting the written agreement, the decision to use subcontractors will likely have been made. This does not mean the actual subcontractor will have been chosen, but it is during the drafting phase that the selection process should begin. As the attorneys work on ironing out the details of a contract, the company needing the services of a subcontractor should start identifying prospective candidates, perhaps even putting out a request for proposal.
During this time, the interested and qualified subcontracting firms should submit information regarding their skills, abilities, and price, as well as data regarding past performance in similar roles, if applicable. Given that the drafting phase can take some time as the agreement must go back and forth or circulate amongst the legal team, there should be ample time to research and vet potential subcontracting partners.
Management: Monitor Compliance and Costs
As with any contract relationship, subcontracts must be managed and evaluated to ensure there is proper, timely performance and that there is value added by virtue of the arrangement. This aspect of subcontract management should generally coincide with the management of the primary contract, as there will likely be concurrent performance. It is during the management phase of all contracts that compliance must be monitored. Of course, one of the most important components is ensuring cost containment because subcontracting can sometimes end up eroding the profitability of the primary contract relationship.