28 September 2026
Mind The Risk Gap – Best Practice When Using Subcontractors
Using subcontractors can be a practical way for UK businesses to bring in specialist expertise, increase capacity and deliver projects without taking on additional permanent staff.
But handing work to a subcontractor does not necessarily mean handing over the risk.
If something goes wrong, your customer may still look to your business to put it right. The subcontractor may have made the mistake, missed the deadline or caused the loss, but if your contract is with the customer, you could remain responsible for the consequences.
That is where businesses can find themselves exposed to a subcontractor risk gap: the obligations you have accepted from your customer do not always match the obligations you have passed down to the subcontractor carrying out the work.
Reducing that risk means looking at more than simply whether a subcontractor can do the job. Their contract, insurance, employment status, responsibilities and the wider contractual chain all need to work together.
In this guide, we look at subcontractor liability in the UK, the insurance businesses should check, what a subcontractor agreement should cover and some of the common legal risks to consider before work begins.
What is a Subcontractor?
A subcontractor is a person or business engaged by another contractor to carry out some or all of the work that contractor has agreed to perform.
For example, a company may win a contract to deliver a project for a customer but bring in an independent IT consultant, engineer, electrician or another specialist to complete part of it.
The customer has a contract with the main contractor. The main contractor then has a separate agreement with the subcontractor.
This distinction is important because each contract creates its own rights and responsibilities.
What is the Difference Between a Contractor and a Subcontractor?
A contractor normally has the primary contractual relationship with the customer or client.
A subcontractor is engaged by that contractor to perform part of the contractor’s obligations.
The terminology can sometimes become blurred: A business might be a contractor on one project and a subcontractor on another.
What matters legally is not simply the label being used but the actual contractual relationship between the parties and the obligations each has accepted.
The same principle applies when someone is described as a self-employed subcontractor. Calling someone “self-employed” in a contract does not automatically determine their employment or tax status. The way the relationship operates in practice also matters.
Who is Liable for Work Carried Out by a Subcontractor?
This is one of the most important questions to consider before subcontracting work.
Imagine that your business agrees to provide a particular service to a customer. You subsequently appoint a subcontractor to carry out part of that service.
If the subcontractor performs badly, your customer may still have a contractual claim against your business, because it is your business which promised the customer that the service would be provided.
Your ability to recover the resulting loss from the subcontractor will then depend heavily upon the agreement you have with them.
This is where a significant risk gap can arise.
Your customer contract may impose an obligation upon you which has never been passed down to your subcontractor.
You could therefore be responsible to your customer without having an equivalent contractual right against the person who actually caused the problem.
Making Subcontractor Agreements “Back-to-Back”
A well-drafted subcontractor agreement should be considered alongside the contract you have with your customer.
Suppose your customer contract requires:
Work to meet particular specifications, certain deadlines to be achieved, confidential information to be protected, particular levels of insurance to be maintained or intellectual property rights to be transferred.
Your subcontractor agreement should reflect the relevant obligations where the subcontractor is responsible for delivering them.
This is commonly referred to as making contracts back-to-back.
It does not mean copying the customer contract word for word. The subcontract should instead allocate the relevant risks and responsibilities appropriately.
Without this exercise, contractual gaps and disputes can easily develop.
What Liability Does a Subcontractor Have?
A subcontractor can potentially be liable for a number of different issues.
The precise liability will depend upon the work being undertaken, the subcontractor agreement and the circumstances surrounding the loss.
Typical areas include:
- Breach of contract
- Defective or incomplete work
- Negligence
- Damage to property
- Personal injury
- Breach of confidentiality
- Infringement of intellectual property rights
- Failure to comply with regulatory or health and safety obligations
Professional subcontractors such as engineers, consultants, architects, designers and IT specialists may also face professional liability where their advice, designs or professional services cause financial loss.
A comprehensive subcontractor agreement should make the responsibilities of both parties clear before work begins.
Can a Customer Sue a Subcontractor Directly?
Potentially, but not simply because the subcontractor happened to work on the project.
Normally the customer has a contractual relationship with the main contractor rather than the subcontractor.
Whether a customer or another third party has a direct claim against a subcontractor will depend upon the circumstances and the legal basis of the claim.
There may, for example, be questions involving negligence, personal injury, property damage, collateral warranties or contractual rights granted to third parties.
The contractual structure should therefore be examined carefully rather than assuming that liability automatically stops with either the contractor or subcontractor.
Can a Business be Vicariously Liable for a Subcontractor?
Vicarious liability describes circumstances in which one party can become legally responsible for the actions of another.
Businesses are commonly exposed to vicarious liability for acts carried out by their employees in the course of their employment.
The position with genuinely independent contractors is different and businesses are not automatically vicariously liable simply because an independent contractor has been engaged.
That does not, however, mean that using a subcontractor removes liability.
A business might remain liable because of its own contractual obligations to the customer, its own negligence or because particular legal duties cannot simply be delegated to someone else.
The actual relationship and circumstances therefore need to be considered.
Do Subcontractors Need Public Liability Insurance?
Public liability insurance is generally not a compulsory form of business insurance in the UK.
However, it can be extremely important when subcontractors carry out work which could cause injury to another person or damage their property.
It is also common for customer contracts and subcontractor agreements to require a specified minimum level of public liability insurance.
Businesses should not simply ask a subcontractor whether they are insured.
Evidence should be obtained and checked.
The business should consider the level of cover, what activities are insured, important exclusions, the policy expiry date and whether the insurance is appropriate for the work being undertaken.
A £5 million insurance certificate is of little comfort if the activity causing the claim is excluded from the policy.
Does Your Public Liability Insurance Automatically Cover Subcontractors?
Not necessarily as insurance policies can differ significantly. Some policies also provide cover for certain activities undertaken by subcontractors while others distinguish between different types of subcontractor.
Insurers may also distinguish between labour-only subcontractors and bona fide subcontractors.
Broadly speaking, a bona fide subcontractor is usually an independent business undertaking work on its own account and maintaining its own insurance. Labour-only subcontractors may operate much more closely within the contracting business.
However, these definitions can vary between UK insurers.
Businesses that regularly use subcontractors should therefore check their own liability insurance policy rather than assuming that every subcontractor and every activity is covered.
It can also be sensible to tell your insurer or broker how subcontractors are used within the business.
Public Liability vs Contractors’ All Risks Insurance
These policies protect against different risks.
Public liability insurance is primarily concerned with legal liability for injury to third parties or damage to third-party property arising from business activities.
Contractors’ all risks insurance is commonly associated with construction projects and can provide protection for contract works, materials, equipment and other risks associated with the project.
One should not automatically be regarded as a substitute for the other.
Businesses operating within construction should establish exactly what insurance is required under both the main contract and subcontract.
When Should a Subcontractor Have Professional Indemnity Insurance?
Professional indemnity insurance should be considered where a subcontractor provides professional advice, design work, specifications, consultancy or other professional services.
This may be particularly important for engineering contractors, architects, designers, IT consultants and other technical professionals.
Public liability insurance and professional indemnity insurance cover different risks.
A subcontractor causing physical damage while carrying out work may create a public liability issue.
An engineering subcontractor producing a negligent design which subsequently causes the customer financial loss may create a professional indemnity issue.
Where professional services form part of your obligations to a customer, the insurance requirements imposed on your subcontractor should reflect that exposure.
How to Verify a Subcontractor Before Appointing Them
Verification should go beyond finding somebody with the right technical ability.
Before substantial work is subcontracted, businesses should consider checking the subcontractor’s:
- Legal identity and trading status
- Relevant experience
- References
- Professional qualifications or trade accreditations
- Financial stability where appropriate
- The insurance policies relevant to the work
Where health and safety is particularly important, competence, training, risk assessments and safe working practices should also be considered.
Insurance documents should be checked rather than simply requested and filed away.
Expiry dates should also be monitored. Checking insurance when the relationship begins but never checking it again leaves an obvious gap if the policy subsequently expires or the subcontractor changes insurer.
For subcontractors who are used regularly, an annual compliance review can be a useful minimum.
Construction Subcontractors and CIS Verification
Businesses operating within the construction industry also need to consider the Construction Industry Scheme (CIS).
Contractors may need to verify subcontractors with HMRC before making payments and apply the appropriate CIS deduction.
It is important to appreciate that CIS verification and employment status are separate issues.
Someone being registered as a subcontractor under CIS does not automatically establish that they are genuinely self-employed.
Employment and tax status should therefore be considered separately.
Self-Employed Subcontractors and Employment Status
Businesses sometimes assume that describing somebody as an “independent contractor” or “self-employed subcontractor” within an agreement solves the employment status question.
It does not.
A properly drafted independent contractor clause can help explain what the parties intend their relationship to be, but the practical reality of the arrangement remains important.
Factors such as who controls the work, whether the individual can provide a substitute, whether they work for other customers and how they are integrated into the business can all become relevant.
Depending upon the arrangement, employment status, tax rules or off-payroll working rules may need to be considered.
The contract and the actual working relationship should therefore tell the same story.
What Should a Subcontractor Agreement Include?
There is no single subcontractor agreement suitable for every business.
A construction subcontract, IT consultancy agreement and agreement with a freelance marketing consultant may require very different provisions.
A properly drafted agreement will commonly address the:
- Scope of the work
- Standards and specifications
- Deadlines and milestones
- Fees and payment arrangements
- Responsibility for correcting defective work
- Insurance requirements
- Liability and indemnities
- Confidentiality
- Intellectual property rights
- Data protection where relevant
- Regulatory responsibilities
- Health and safety
- Restrictions on further subcontracting
- Employment status
- Termination rights
- What happens when the relationship ends
The agreement should also specify the law governing the contract and how disputes will be resolved.
Most importantly, these clauses need to work alongside the commitments your business has already made to its customer.
Should Subcontractors Be Allowed to Use Their Own Subcontractors?
This question deserves particular attention.
You may carefully select a subcontractor because of their experience, qualifications, insurance and reputation only to discover that they intend to pass the work to somebody else.
The contract should therefore state whether further subcontracting is permitted.
Depending upon the circumstances, you might prohibit it completely or require your written approval before another subcontractor can be appointed.
Where further subcontracting is permitted, the original subcontractor may also need to remain responsible for the actions and performance of the people or businesses it appoints.
Otherwise, another risk gap can appear further down the supply chain.
Intellectual Property and Subcontractors
Intellectual property is an area in which poorly aligned contracts can cause significant problems.
Imagine that your customer contract requires your business to transfer ownership of certain intellectual property created during a project.
You engage a subcontractor to create some of that work.
If your subcontractor agreement does not give your business the rights necessary to fulfil its obligation to the customer, you may have promised something you cannot actually deliver.
Copyright, designs, software, technical drawings, written materials and other intellectual property should therefore be considered when preparing the subcontract.
Ownership, licences and the timing of any transfer of rights should be clearly addressed.
Confidentiality and Data Protection
Subcontractors may also receive commercially sensitive information belonging either to your business or your customer.
The agreement should contain appropriate confidentiality obligations and explain how confidential information may be used, stored and returned or destroyed.
Where the subcontractor processes personal data on your behalf, additional obligations under UK data protection law may also be required.
If you have promised your customer that particular information will be kept confidential, the businesses and individuals you appoint to perform the work need to be subject to appropriate obligations too.
Liability Clauses in Subcontractor Agreements
Liability clauses determine how contractual risk is divided when something goes wrong.
Depending upon the agreement, they may address liability limits, excluded losses, indemnities and particular risks which remain uncapped.
These clauses should not simply be copied from another contract.
A liability limit appropriate for a £5,000 consultancy project may be entirely inappropriate for a subcontract involving work worth hundreds of thousands of pounds.
There are also legal restrictions on the extent to which certain liabilities can be excluded or limited.
A liability waiver is therefore not a magic document which prevents somebody from bringing a claim.
The wording, circumstances and applicable law all matter.
What Happens if a Subcontractor Does a Poor Standard of Work?
The starting point should usually be the subcontractor agreement.
It should establish what the subcontractor was required to deliver, the standard expected, any procedure for rejecting defective work and whether the subcontractor has an opportunity or obligation to remedy the problem.
Document the issue carefully.
Photographs, correspondence, specifications, reports, project records and evidence of additional costs may all become important if a dispute develops.
Before engaging somebody else to redo the work or withholding money which would otherwise be payable, it can be sensible to check the contract and obtain legal advice.
Your business may simultaneously be dealing with a claim from its customer and pursuing a separate contractual remedy against the subcontractor.
This is another reason why back-to-back contractual protection matters.
What Happens If a Contractor Does Not Pay a Subcontractor?
The subcontractor should first examine the payment provisions within the agreement.
The options available may depend upon the type of contract and industry involved.
In ordinary commercial arrangements, an unpaid subcontractor may ultimately have a contractual debt claim.
Construction contracts can be subject to additional statutory payment and adjudication rules.
Businesses should therefore avoid informal payment arrangements and clearly define how invoices are submitted, when payment becomes due and how disputes regarding payment will be handled.
When Should a Subcontractor Agreement Be Reviewed?
Subcontractor agreements should not be regarded as documents which are written once and forgotten.
Your customer contracts may change. Your business may start working on larger projects. Insurance requirements may increase. New services may be introduced or subcontractors may begin handling confidential information or personal data.
The subcontractor itself may also change from a sole trader to a limited company or begin using its own subcontractors.
Regular reviews help ensure that the agreement continues to reflect how the relationship actually operates.
A Practical Approach to Managing Subcontractor Risk
Using subcontractors successfully requires more than having a signed contract sitting in a folder.
Good subcontractor management starts before appointment and continues throughout the working relationship.
The key principle is to understand the contractual chain.
Ask what your business has promised the customer, identify which of those obligations will be performed by the subcontractor and make sure the subcontractor agreement gives your business appropriate protection if those obligations are not met.
Insurance, compliance and competence should then be checked alongside the contract rather than treated as separate exercises.
Get Legal Advice on Subcontractor Agreements
Subcontractors can be an extremely effective way to expand capacity and access specialist expertise, but unclear contractual arrangements can leave businesses carrying risks they thought had been transferred elsewhere.
Feakes & Co advises businesses on commercial contracts, subcontractor agreements, contractual liability and disputes arising from commercial relationships.
We can review the contractual chain between your business, customers and subcontractors, identify gaps in liability or responsibility and prepare agreements which reflect the way your business actually operates.
If you are employing subcontractors, reviewing an existing subcontractor agreement or dealing with a dispute following defective work or non-payment, contact Feakes & Co for an initial discussion about your position.
This article provides general information only and should not be treated as legal advice. The legal position will depend upon the facts and contractual arrangements in each case.