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Hidden Subcontractor Risks Lurking in the Supply Chain (Part Two)
Relying on Primes to Manage Subcontractor Risk is Risky
When a hiring client has a network of subcontractors without full visibility, the risks are significant. For many clients, the answer is to rely on prime contractors to properly vet potential subs, ensure adequate qualifications, and enforce compliance requirements. This expectation may even be written into contracts with the prime, holding them liable for any damage caused by their subcontractors. Unfortunately, such an approach does not fully insulate an organization from risk by today’s standards or stakeholder expectations.
Hiring Clients are Still on the Hook
Organizations that rely on prime contractors to manage subcontractor compliance usually justify that approach with strong contractual agreements with the prime, releasing the hiring company from legal or financial liabilities arising from a subcontractor.
In theory this should protect the hiring client from any associated risks with subcontractors. In practice, however, many other consequences can significantly impact a hiring company when a subcontractor is involved in an incident within its network, including project quality concerns, project delays, cyber threats, reputational fallout, and regulatory violations.
It will not matter to shareholders, workers, customers, investors, and regulators whether or not the hiring company is “contractually liable” if there are labor violations, massive project delays, or devastating media coverage about an incident associated with that company.
Common Risks Posed by Subcontractors
All the risks associated with hiring a contractor are present with lower-tier subcontractors. In the same way any prime could have a safety incident, quality issues, or a cyber threat, so could a subcontractor. The difference is that hiring companies generally have much more robust vetting, qualification, and monitoring processes to manage those risks with their direct contractors.
When the risk is at the subcontractor level, however, it can often be left unnoticed or unmanaged due to the lack of direct visibility and communication with the hiring client. The signal attenuation that takes place between the client, contractor, and subcontractors leads to a larger number of hidden and unmitigated risks that can have enormous financial and reputational consequences.