With contingent labor comprising 15% of the average company’s workforce — and as much as 50% at some companies — it is usually the starting point when a company seeks to cut costs. When companies still require resources to get projects done, they will seek to cut those costs via pay- and bill-rate reductions. However, changing economic trends — unemployment rates at pre-recession lows, a strong stock market and federal policies that encourage independent contractor status —have swung the market into the talent’s favor.

The demand for skills and expertise especially in some key competitive areas has managers pulling their hair out. In fact, the candidate shortage is affecting roles at all skill levels, from light industrial and call center to more professional skill sets such as IT and creative and marketing. Program offices, expected to deliver this talent, are putting more pressure on their suppliers to deliver. And those suppliers may be using subcontractors.

Subcontractor relationships are not new. Before the visibility brought by VMS technology, some resources I had engaged through my program were four layers removed — or more — from my “preferred supplier.” At the time, we weren’t as aware as we are now of the risk these relationships could pose. Now, with supplier agreements, VMS data, and requirements that are asked of preferred suppliers one might assume the use of subcontractors would be a thing of the past. But no. With increasing demand on preferred suppliers to deliver candidates and program managers holding them to their SLAs and KPIs, we are hearing more and more of resources being multiple layers away from the preferred supplier. But with those SLAs and KPIs, does it really matter? Yes. Here’s why.

Legal. The preferred supplier may not have a legal agreement in place with the subcontractor or if it does, the agreement may not include all the language, indemnification and insurance requirements that you require of your preferred suppliers.

Cost. Each vendor layer is charging a fee for the resource. This affects not only what you as a buyer are paying, but the contingent worker is affected financially as well. Every supplier layer effectively reduces the worker’s pay. There is also an added risk with payment. Although you as the buyer may have a very defined process (usually within the VMS for timecard submittal, approval and payment), remember that payment goes to the preferred supplier. Every other layer must be paid timely for the contingent worker to get paid. I have heard stories of contingent workers threatening to leave because they have not been paid, only for the CW program office to learn then of the sub-vendor relationships. This is not when you want to find this out.

Status. Another concern that has become more prevalent with the Trump administration is that of H-1B visa holders. With the increased scrutiny of these resources, you could find your program and your organization at risk of losing some critical talent. Do you know your vulnerability based on reliance on these workers? If some of your resources are actually provided by subcontractors, you may be more reliant on H-1Bs than you think.

Brushing Up

Now that the employment headwinds are less in your favor, it’s a good time to brush up on your program’s situation. Check your agreements for any language that prohibits subcontracting — or if not, does it specify how many “layers” are permissible? If there is no language pertaining to subcontracting at all, this might be something that you would want to consider adding.

If subcontracting is addressed, you need to be aware whether your suppliers have adhered to it. If you have an MSP partner, have them audit the suppliers or if you are an internal program, conduct your own. If the number of suppliers is too overwhelming, conduct a spot audit to determine whether you need to conduct a more thorough one.

Rogue subcontracting. If you identify any unapproved subcontractors, what you do will depend on your agreement as well the repercussions of disrupting the work being done. Upholding any penalties will send a message to other suppliers in the program. In lieu of financial penalties, you might preclude the supplier from bidding on any new requisitions for a certain period of time. Or you may just use this as an educational process and remind your suppliers that this is not an acceptable practice.

Taking the time to understand if your program has any of this risk is critical both for the organization and the contingent workers.