Subcontracting in Project Operations

Subcontracting — engaging external companies or individuals to deliver part of a project — is standard for services businesses managing peak demand, niche skills, or geographic coverage. Dynamics 365 Project Operations handles subcontractor engagement with first-class objects for resource sourcing, time and expense, billing, and accounting reconciliation.

Why subcontracting is harder than employees. Internal employees come with known cost rates, accessible time-entry tools, and integrated approval flows. Subcontractors come from external vendors with their own rate negotiations, different time-capture experiences, separate accounting flows, and contract-bound deliverables. Project Operations models the differences explicitly.

The subcontracting flow.

1. Identify the need. A project requirement that can't be filled internally — the resource hub flags it as unfilled or the project manager explicitly requests external sourcing.
2. Engage a vendor. The vendor is a Dataverse Account; the agreement is a purchase agreement specifying rate, terms, deliverables.
3. Bookable resource for the subcontractor. The subcontractor's named individual is created as a bookable resource of type Account (or Contact for a specific individual), tied to the vendor.
4. Booking against the project. The subcontractor is booked to project tasks like any other resource, with skill match and capacity.
5. Time and expense capture. The subcontractor enters time and expense, either directly (through a Power Pages portal granting limited access) or via the prime contractor's project manager entering on their behalf from invoices received.
6. Approval. The customer's project manager approves time and expense.
7. Vendor invoice posts. A purchase invoice from the subcontractor's company posts in F&O or BC, referencing the project. The cost lands in the project's cost ledger.
8. Customer billing. The customer is billed for the work (possibly with markup) as part of the regular project invoicing.

Cost vs price. The subcontractor's cost (what you pay them) and the customer price (what the customer pays for that work) are distinct. Typical pattern: the project has a "Subcontractor Hours" billable plan billable at the customer rate; the actual cost posts at the subcontractor's vendor rate. Margin equals the difference. Reporting shows both.

Three engagement models.

• Time and Materials subcontracting — pay the subcontractor for their time at agreed hourly rates; bill the customer at the customer rate.
• Fixed-fee subcontracting — pay the subcontractor a fixed amount for a deliverable; bill the customer on the project's terms (possibly fixed-fee, possibly T&M).
• Capped T&M — pay the subcontractor T&M up to a capped total; protect against overruns.

Sourcing through purchase requisitions. For larger organisations, formal sourcing through purchase requisitions and POs gives procurement oversight on subcontractor engagements. The PO references the project and the resource requirement, creating a paper trail.

Portal access for subcontractors. A Power Pages portal can give subcontractors restricted access to log time and expense against the projects they're booked to. Pre-configured permissions limit what they see to their own work, with no exposure to other client projects.

Compliance. Subcontractor engagements often have regulatory dimensions:

• IR35 / worker classification in some countries — is the subcontractor genuinely independent or effectively an employee for tax purposes?
• Background checks — required by customer or industry.
• Confidentiality agreements — managed as contract documents.
• GDPR / data protection — subcontractors processing customer data need explicit data-protection agreements.

Document these alongside the engagement record.

Reporting. Subcontractor margin per project, per vendor; subcontractor utilisation; subcontractor performance ratings against deliverables; spend by vendor over time.

Common pitfalls.

• Subcontractor cost not posted to project — billed to customer but no offsetting cost, inflating margin.
• Time captured without approval — subcontractor invoices for hours the customer didn't approve.
• Markup transparency — some customer contracts require disclosing subcontractor rates; others forbid the customer from knowing.
• Currency mismatches — pay in one currency, bill in another; FX gains/losses surprise.

Operational discipline. Subcontracting works when the engagement is paperwork-disciplined and the time-and-cost flow is honest. Skip the discipline and subcontractor work becomes a profitability mystery.