Hidden Subcontractor Risks Lurking in the Supply Chain (Part Two)

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Hidden Subcontractor Risks Lurking in the Supply Chain (Part Two)

Unchecked subcontractors can introduce hidden risks that result in serious safety, financial and reputational consequences for hiring companies, requiring proactive management.

  • By Avetta Staff
  • Sep 17, 2024

Key Takeaways

  • Many companies only vet and prequalify their prime contractors and suppliers, leaving subcontractors unchecked. This can lead to hidden risks due to a lack of visibility.
  • Relying solely on prime contractors to manage subcontractor compliance and risks is problematic as the hiring company may be unaware of the qualifications, safety records, or compliance of all subcontractors involved.
  • Subcontractors can introduce various risks, including safety incidents, workforce and human rights issues, financial instability, quality concerns, and cyber threats.
  • Incidents involving subcontractors can lead to severe consequences such as reputational damage, project delays, business disruptions, and dissatisfaction among customers, employees, and investors.‍

Subcontractor Risks are Inherently Hidden

Subcontracting is more prevalent than ever in today’s supply chains, with estimates showing that 60-70% of outsourced work is performed by subcontractors. This practice can be efficient for hiring companies and prime contractors to meet project needs, but it also comes with significant risks. One report found that 32.3% of supply chain disruptions originated not from prime contractors but from lower-tier subs.

The key reason for subcontractor risk is a lack of visibility for the hiring company (and sometimes even for the original contractor, as subcontracting can often go down multiple tiers). Many companies vet, prequalify, and require MSAs/contracts only with their prime contractors and suppliers, with no direct link or visibility to subcontractors.

In our previous post we explained the key terms, responsibilities, and common challenges related to subcontractor management.

In this post we will examine:

  • Why hiring companies shouldn’t rely on their primes to vet and manage subcontractors
  • The risks that subcontractors introduce to a supply chain
  • The potential fallout for a hiring company

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