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Hidden Subcontractor Risks Lurking in the Supply Chain (Part Two)
Common Subcontractor Risk Scenarios
- Safety incidents: Without direct vetting, a hiring company can’t know the qualifications of subcontractors working on a project. Untrained workers and unsafe work conditions endanger everyone on a job site, making accidents more likely.
- Workforce and human rights issues: When a hiring company lacks oversight into its extended network of subcontractors and lower-tier suppliers, workforce issues such as working conditions, fair wages, child labor, modern slavery, and more can hide beneath the surface.
- Financial instability: Subcontractors are often small businesses that tend to be more financially vulnerable. Without direct vetting, a hiring client can’t know if a sub of a sub of a sub is on the verge of bankruptcy which may lead to delays or poor-quality work.
- Quality:When a prime contractor outsources manufacturing, production, distribution, or labor to one or more subs, the hiring company loses crucial visibility into the quality of all components that result in the end product.
- Cyber threats:Every member of a value chain is a potential vulnerability when it comes to cyber threats. A cyber-attack on even the smallest subcontractor could have severe ramifications up and down the supply chain.
Impact of Subcontractor Incidents
The above examples can have serious consequences for the hiring company, regardless of direct financial or legal liability:
- Severe reputational damage due to widespread media coverage of an incident or event
- Project delays when a subcontractor becomes unable to fulfill a job due to bankruptcy, an accident, or other adverse event
- Business disruption in the face of cyber threats, recalls, investigations, and more
- Customer, employee, and investor displeasure
- Penalties, fines, and project shutdowns due to subcontractor regulatory violations
Examples of Subcontractor Incidents with Massive Fallout
In 1999, a massive crane collapsed in Milwaukee, WI, during the construction of a new baseball stadium for the Milwaukee Brewers. A subcontractor was operating the crane when the collapse killed three workers. The subcontractor and prime faced millions in lawsuits and OSHA penalties. The Milwaukee Brewers (the hiring client) were on the hook for $100 million in repairs and significant negative media coverage, ultimately leading to a project completion delay of one year.
In 2013, Nestle was forced to suspend product deliveries and issue recalls for all products that contained beef from a particular subcontractor. Traces of horse DNA were found in quality tests of these products. Though the quality issues came from a subcontractor, not a direct contractor, Nestle still had to endure the severe reputational and financial consequences of the recall and negative media coverage.
Conclusion
Subcontractors are vital to most companies’ supply chains but also bring risks that should not be ignored. Relying on prime contractors to ensure subcontractor qualifications and compliance is an outdated model of managing subcontractor risk. Instead, hiring companies should be proactive in applying the same rigorous vetting and compliance requirements to subs as they do to their prime contractors.
In our next post we will discuss best practices and strategies for managing subcontractor risks.
About the Author
Avetta is a SaaS software company that provides supply chain risk management solutions. Its platform is trusted by over 130,000 suppliers in over 120 countries. Visit Avetta.com to learn more about its subcontractor management tools, prequalification services, and marketplace offerings.