THERE ARE TWO
TYPES OF CONTRACTORS

The two types of contractors for doing business with the federal government are the prime contractor and the subcontractor. 

One of the most important decisions a new or existing small business must make when entering the federal government marketplace is whether to pursue opportunities as a prime contractor, a subcontractor, or both.

The federal government spends billions of dollars each year purchasing products, services, construction, technology, consulting, transportation, maintenance, and many other goods and services. These purchases create opportunities for businesses of different sizes and industries.

However, not every business is ready to compete for a federal government contract as a prime contractor. Some businesses may benefit from starting as subcontractors, gaining valuable experience, building relationships, and developing a record of successful performance before pursuing their own federal contracts.

Understanding the differences between these two types of contractors or business arrangements can help you determine which approach is best for your company's capabilities, experience, financial resources, and long-term goals.

TWO TYPES OF CONTRACTORS
PRIME vs SUBCONTRACTOR

1. WHAT IS A PRIME CONTRACTOR?

A prime contractor is a business that enters into a direct contractual agreement with a federal government agency to provide products, services, or construction work.

When a company wins a federal contract as the prime contractor, it becomes directly responsible to the government for fulfilling the requirements outlined in the contract.

For example, suppose the Department of Defense needs a company to provide facility maintenance services at one of its installations. A small business submits a proposal, wins the award, and signs a contract directly with the government. That business is now the prime contractor.

As the prime contractor, the company is responsible for managing the entire contract, meeting deadlines, providing the required products or services, maintaining quality standards, submitting invoices, and complying with applicable federal contracting requirements.

A prime contractor may also hire other businesses to perform portions of the work. Those businesses become subcontractors.

Advantages of Being a Prime Contractor

There are several advantages to pursuing federal contracts as a prime contractor:

1. Direct Government Contract Relationships

You establish a direct business relationship with the federal agency and its contracting personnel. This can help your company develop a reputation within the federal marketplace.

2. Greater Control Over the Contract

You manage the contract, coordinate the work, oversee performance, and make decisions about how your company fulfills its responsibilities, subject to the contract requirements.

3. Potential for Greater Revenue

Prime contractors generally receive the full contract payment from the government and pay their subcontractors and other expenses. This can create opportunities for greater revenue, but it also comes with additional costs, responsibilities, and financial risks.

4. Building Your Company's Past Performance

Successfully completing federal contracts can help establish your company's performance history. Relevant past performance may strengthen future proposals when an agency evaluates a company's experience and ability to perform.

5. Opportunities to Build a Team

Prime contractors can develop relationships with other businesses, suppliers, and specialized service providers to help complete larger or more complex projects.

Responsibilities of a Prime Contractor

Being a prime contractor is not simply about winning a government contract. It requires the ability to manage the entire business relationship and deliver what was promised.

Responsibilities may include:

  • Maintaining an active SAM.gov registration when required.
  • Understanding and complying with applicable Federal Acquisition Regulation (FAR) requirements.
  • Managing employees, suppliers, and subcontractors.
  • Meeting contract deadlines and performance standards.
  • Maintaining accurate financial and business records.
  • Following applicable cybersecurity, insurance, licensing, and reporting requirements.
  • Managing contract changes and communicating with the contracting officer.
  • Submitting accurate invoices and supporting documentation.

A prime contractor must be prepared to accept responsibility for two types of contractor work performed under the primary contract, including work assigned to subcontractors.

2. WHAT IS A SUBCONTRACTOR?

A subcontractor is a business that enters into an agreement with a prime contractor to provide a specific product, service, or portion of a federal government project.

Unlike a prime contractor, a subcontractor generally does not have a direct contractual relationship with the federal agency for that portion of the work. Instead, it works for the prime contractor under a separate subcontract agreement.

For example, suppose a large construction company wins a $5 million federal building renovation contract. The prime contractor may hire a small electrical company, a plumbing company, a painting contractor, and a cleaning company to perform different portions of the project.

Each of these businesses may serve as a subcontractor.

Subcontracting provides small businesses with an opportunity to participate in federal government projects without having to compete for and manage the entire prime contract.

Advantages of Being a Subcontractor

There are several advantages to pursuing federal contracts as a subcontractor:

1. An Opportunity to Gain Experience

Subcontracting allows businesses to gain experience working on federal projects and understanding government contract requirements.

2. Less Responsibility for Managing the Entire Contract

The prime contractor manages the overall government contract. The subcontractor is responsible for completing the work assigned under its subcontract agreement.

3. Building Business Relationships

Working with established federal contractors can help small businesses develop relationships with companies that regularly pursue government opportunities.

4. Developing Past Performance and References

Successful subcontracting work can help demonstrate relevant experience and capabilities to prospective customers. Keep records of your work, project scope, performance, and references. Remember that subcontracting experience is not automatically treated the same as a federal prime contract past-performance record; its relevance depends on the solicitation and evaluation criteria.

5. Access to Larger Projects

A small business may not have the workforce, equipment, financial resources, or experience to complete a large federal project independently. Subcontracting can provide a way to participate in projects that would otherwise be beyond its current capabilities.

Responsibilities of a Subcontractor

Although subcontractors do not manage the entire prime contract, they still have important responsibilities.

These may include:

  • Meeting the performance requirements in the subcontract.
  • Providing products or services on schedule.
  • Maintaining appropriate insurance and licenses.
  • Following applicable safety and quality standards.
  • Communicating with the prime contractor.
  • Submitting accurate invoices and required documentation.
  • Protecting confidential or sensitive information.
  • Complying with applicable flow-down clauses and other contractual requirements.

Subcontractors should know that there are two types of contractors and they should always carefully read every word of their contract agreements before accepting work. They should understand payment terms, deadlines, insurance requirements, liability, termination provisions, and the exact scope of work they are responsible for performing on the assigned contracted projects.