A subcontractor is a person or entity that has been awarded by the general contractor the performance of part of the work or services of an existing contract entered between the general contractor and the (original) contracting party. Furthermore, the subcontractor may award to another subcontractor part of the work contracted with the general contractor. In this case, the subcontractor would be subcontracting with another subcontractor.
The general contractor will enter a contract with each subcontractor to establish the scope of the works or services that the subcontractor will perform thereunder. If the subcontractor hires another subcontractor, there will be a chain of contracts descending from the original contract entered by the general contractor with the (original) contracting party. In any case, before entering a sub-contract, the parties must determine if the original contract or any of the descending contracts prohibit or allow subcontracting. It might be the case that the original contract only allows the general contractor to subcontract only a part of the work. It may also be possible that the original contract or the contracts entered between the general contractor and the subcontractors prohibit that a subcontractor hires other subcontractors to perform its work.
Subcontracting is common in building contracts and large-scale projects. For example, in construction, when a general contractor gets hired to build a house, the general contractor may subcontract with one or several subcontractors to perform different pieces of the construction. For instance, one subcontractor may install the plumbing, and another may lay the floors in the house, creating multiple independent subcontracting relationships.
[Last updated in September of 2021 by the Wex Definitions Team]