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Navigating Subcontractor Risk in Supply Chain Networks (Part One)
Subcontractors are essential to supply chains but present significant risks that require active management and modern tools to ensure safety, compliance, and project success.
- By Avetta Staff
- Sep 17, 2024
Key Takeaways:
- Subcontractors are crucial for efficient, specialized, and sustainable project completion but introduce significant supply chain risks related to qualifications, safety, and financial health.
- Almost one-third of supply chain disruptions originate from subcontractors, highlighting the need for rigorous subcontractor management and risk mitigation strategies.
- Effective subcontractor management requires clear definitions and responsibilities for prime contractors and subcontractors, emphasizing the importance of communication and oversight to ensure project success and safety.
- Subcontractor risks can be addressed with modern tools and integrated systems, enhancing visibility, accountability, and overall network stability.
Subcontractor Risk in the Supply Chain
Subcontractors have become more important than ever in today's complex supply chains. Subcontracting allows client organizations to engage in local sourcing, diversity, and environmental initiatives as well as complete projects more efficiently with specialization. However, it also introduces risks such as not knowing subcontractor qualifications, safety practices, labor practices, and financial health. This is because in subcontracting, one or more prime contractors always stands between the client organization and the subcontractor.
Almost every company uses subcontractors. It's estimated that 60-70% of contract work is outsourced to subcontractors, who handle most kinds of tasks. Considering how vital they are, it’s concerning that 32.3% of supply chain disruptions come from subcontractors. An Avetta client experienced this recently when an unlicensed subcontractor worker ran a forklift into a newly installed water tower on their site, causing a puncture that required a replacement, resulting in a six-month delay and millions in additional costs. In another tragic case with a different Avetta client, a subcontractor failed to ensure safe trenching operations, resulting in a fatality from a trench collapse.
To maximize the potential of subcontracting—mainly to complete work more efficiently and sustainably—client organizations must maintain visibility into subcontractor management and be accountable to their investors for their decisions. Likewise, prime contractors and subcontractors can go a long way in reducing risks by mapping their practices to ESG initiatives, quantifying their ESG value proposition, and making those metrics visible to their supply chain network.