The word “primary contractor” is often heard in the IT industry. I think there are many new employees in the company who have questions such as “What is the prime contractor?” And “What is the problem with the multiple subcontracting structures?” Therefore, this time, I will explain the IT prime contractor in an easy-to-understand manner. We will introduce in detail the difference between the prime contractor and the subcontractor, and the points to note when contracting with the prime contractor, so please check it out.
table of contents
- 1. What is the difference between a prime contractor and a subcontractor?
- 2. What are multiple subcontracting structures?
- 3. Subcontracting includes “contract contract” and “quasi-delegation contract”
- 4. Problems with multiple subcontracting structures
- 5. Common troubles between prime contractors and subcontractors
What is the difference between a prime contractor and a subcontractor?
A prime contractor is a company that receives a direct request from a client. In addition, a company that has been requested to work by a prime contractor is called a subcontractor. In the IT industry, a pyramid structure that entrusts work to subcontractors has become mainstream. Here, I will explain the differences between IT prime contractors and subcontractors.
● What is a prime contractor?
The prime contract means to undertake the work directly from the orderer. Especially in the IT industry, it is a system development company that undertakes work such as system development directly from the ordering party.
It may also be referred to as primary contract, prime, or direct contract. In addition, the company or person who is the prime contractor is sometimes called the “primary contractor” or “primary contractor”. Many IT prime contractors mainly work directly with clients. We will meet with the client to propose a system, budget, and schedule. After that, my main job is to request work from a subcontractor that suits my budget and development and manage until the delivery date. In other words, most IT prime contractors are mainly pre-stage work that entrusts development to subcontractors.
● What is a subcontractor? What is the difference from the prime contractor?
A subcontractor is a company that undertakes all or part of the work that the prime contractor undertakes from the customer. Sometimes referred to as a secondary contract. Also, subcontracting companies and people are sometimes called “subcontractors” or “subcontractors.” Subcontractors code according to the requirement definition documents, specifications, design documents, etc. created by the main contractor through hearings and consultations with the ordering party. We also undertake the operation test of the developed program, the creation of specifications, and the creation of operation manuals. Since the prime contractor holds meetings and reports on the progress, the subcontractor generally does not receive work instructions directly from the ordering party.
What are multiple subcontracting structures?
The multiple subcontracting structures is a structure in which the main contractor company flows the work entrusted by the ordering party to the secondary contractor company and the companies below it.
Multiple subcontracting structures is a word often used in the workflow of the construction industry. A major general contractor receives an order for a large job, divides the ordered job, and distributes the job to several medium-sized companies. The mid-sized companies that undertake the work are further divided into small and medium-sized enterprises, and then micro-enterprises. So to speak, it is a pyramid-shaped structure with a major general contractor at the top.
This structure is called a multiple contract structure, and a similar trend exists in the IT industry. The main job of the subcontractor is to create specifications and design documents and to perform programming and testing, but sometimes we ask a third-party contractor for testing and programming that we cannot handle in-house.
The IT industry generally has a hierarchical structure like the construction industry. It consists of a pyramid type consisting of a primary contractor, a secondary contractor ordered by a primary contractor, and a company called a tertiary contractor below it. The major IT companies at the top of this hierarchical structure and hierarchical structure are sometimes referred to as “IT general managers” in analogy to the construction industry, which has a similar structure.
Subcontracting includes “contract contract” and “quasi-delegation contract”
There are two types of subcontracting in the IT industry:
- Contract contract
- Semi-delegation contract
● Contract contract
It is a contract that promises the completion of the deliverable (including the system). You will be paid for the deliverables by the due date. A set of development systems is often the deliverable. As long as the specified deliverable is delivered, it does not matter what procedure and who worked it.
In addition, since there is no problem with the contract as long as the deliverables are delivered, it is possible to make requests to subcontractors, secondary contractors, and tertiary contractors as described above. The contract can be canceled by the ordering party as long as the deliverable is delivered. However, this is subject to compensation and compensation for damages to the ordering party.
● Semi-delegation contract
This is a contract regarding performing the work requested by the ordering party. In many cases, we provide technical capabilities as support for user-centered requirement definition and operational testing in the system development process. The quasi-consignment contract includes a “performance ratio type” that pays a reward for the provided working hours, skills, and man-hours regardless of the quality of the deliverable or success or failure, and a reward when the work is requested by the orderer is completed. There is a “result completion type” to pay.
Semi-consignment contracts cannot be requested by subcontractors. This is because there are many cases where the contractor has an intention such as “I want you to work using this skill of your company”. However, this is not prohibited, so this does not apply if there is a condition that “subcontracting is possible at the responsibility of the ordering party (primary contractor, etc.)”. About cancellation during the business, either the ordering side of the order receiving side can make an offer, but if the cancellation is made at a timing that is disadvantageous to the other party, damages must be compensated or compensated.
If you would like to know more about the forward delegation contract, please read the article ” What kind of contract is a quasi-delegation contract? What is the difference between contract types? “.
● What is the difference between the “results completion type” of the contract and the quasi-delegation contract?
At first glance, the contract and quasi-delegation contracts look like the same contract. The big difference is whether or not contract nonconformity liability arises. Contract nonconformity liability means that the ordering party is responsible for any defects in the deliverables. Formerly known as defect liability. Even if the result is complete, the quasi-delegation contract is a contract that provides the working hours and man-hours to perform the requested work.
Problems with multiple subcontracting structures
The IT industry is often talking about multiple subcontracting structural issues. Here, I will explain the problems of the multiple subcontracting structures that the IT industry has.
● The salary of the engineer who works will be reduced.
The problem with the multiple subcontracting structures is that the compensation of the end engineer is reduced because the company in the middle level deducts its share and throws the project to the subcontractor.
For example, in the case where the development work entrusted by the user company is carried out by the fourth contractor, the primary to third contractor companies deduct their share. And when multiple subcontractors are occurring, the rewards of the engineers who do the work will inevitably be below. In the case of multiple subcontracting structures, each company in the middle places an order with the subcontracting company at a price lower than the amount ordered by subtracting profit.
● In case of problems, additional personnel may not be available.
The problem with the multiple subcontracting structures is that the more subcontracted you are, the more budget you are working on, so if a problem occurs, you cannot add personnel, which may lead to long working hours for existing personnel. It can be mentioned as a point. The multiple subcontracting structures are responsible for social problems such as the working environment, employment conditions, worsening treatment, and a shortage of engineers due to the decline in the attractiveness of the industry.
● Whether or not there is illegality is regarded as a problem
It is debated whether multiple contracts are illegal. In conclusion, multiple contracts themselves are not illegal. However, multiple contracts in the IT industry are often found to be illegal. The reason why multiple subcontracting is often illegal in the IT industry is that “although it is a business consignment contract, it is essentially a worker dispatch contract.” This is called a camouflage contract. Since the command is given at the dispatch destination, you have to make a dispatch contract. However, it is formally disguised as if it were a contract. The result is multiple dispatches, and multiple dispatches are illegal. Fake contracts are illegal on their own, but multiple contracts themselves are not illegal on their own.
The trouble that tends to occur in prime contractors and subcontractors
Mechanisms such as prime contractors and subcontractors are routinely used in the IT industry. It’s a convenient way to get the job done efficiently, but there can often be trouble between the prime contractor and the subcontractor. Here, we will introduce the troubles that are common between prime contractors and subcontractors.
● The subcontract price is not paid
Most of the troubles between the prime contractor and the subcontractor are financial problems. As the number of contractors involved in one job, such as prime contractors, subcontractors, and grandchildren, increases, the profits of each contractor will decrease. If you don’t make a firm contract in advance, subcontractors and subcontractors may not be able to get a fair reward. In some cases, even though the work has been completed, only the deficit remains under the subcontractor. In some cases, it led to a trial.
● The prime contractor must be responsible for any mistakes in the subcontractor.
The disadvantage of the prime contractor is that you may have to take responsibility not only for the work you do in-house but also for the subcontractor.
When outsourcing to a subcontractor, a mistake in the subcontractor may hinder the work and cause damage to the ordering party. In that case, the prime contractor is generally responsible. Even if the delivery date is slightly delayed, the ordering party may claim late damage. Even if the cause of the delay in delivery is the subcontractor, it is the prime contractor who is held responsible by the ordering party. It is important to select and manage a reliable subcontractor to prevent this from happening.
● Additional charges will be incurred for specifications that have not been ordered.
In the field of system development, it is often necessary to change the specifications as the work progresses. The problem with changing specifications is cost. In system development, it is often the case that specifications are changed at will and additional costs are charged without confirming the intention of the ordering party. It would be confusing if the subcontractor added the specifications that were not ordered and made an additional request. In particular, the larger the system development, the more specification changes will be made. Let’s make a contract between the parties in advance for the additional cost caused by the specification change.
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