Procurement Glossary
Subcontracting: definition, methods and strategic importance in Procurement
November 19, 2025
Contract processing refers to the outsourcing of production steps to external service providers, where the company provides the materials and only purchases the processing services. This form of contract manufacturing enables companies to bridge capacity bottlenecks and use specialized manufacturing processes without having to make their own investments. Find out below exactly what contract machining means, which methods are available and how you can successfully manage risks.
Key Facts
- Material remains the property of the client, only processing services are remunerated
- Enables access to specialized manufacturing processes without investment
- Typical application for surface treatment, heat treatment and precision machining
- Legally structured as a contract for work and services with defined quality requirements
- Cost advantages through variable capacity utilization and specialization effects
Contents
Definition: Subcontracting
Subcontracting is a special form of contract manufacturing in which companies outsource certain production steps to external service providers.
Basic principle and delimitation
In the case of contract processing, the client provides the materials and pays exclusively for the processing service. The material remains the property of the client. This form differs fundamentally from contract manufacturing, in which the service provider also procures materials.
- Provision of materials by the client
- Remuneration for processing services only
- Ownership of the material remains with the client
- Legal structure as a contract for work and services
Subcontracting vs. outsourcing
In contrast to complete outsourcing, the company retains control over material quality and costs with subcontracting. The subcontractor only takes over defined production steps without responsibility for material procurement.
Importance of contract processing in Procurement
For strategic Procurement , contract manufacturing offers the opportunity to make make-or-buy decisions flexibly. Companies can use specialized manufacturing processes without having to make long-term investments in equipment and expertise.
Methods and procedures for subcontracting
The successful implementation of contract processing requires a structured approach to supplier selection, contract design and quality assurance.
Supplier evaluation and selection
Suitable subcontractors are selected on the basis of specific criteria that go beyond standard supplier evaluations. Technical competence and capacity planning are of particular importance.
- Technical qualification for specific machining processes
- Available capacities and flexibility
- Quality management system and certifications
- Logistical connections and transportation options
Contract design and pricing models
Subcontracting contracts require precise specifications of the processing steps and quality requirements. Pricing is typically based on unit prices or time compensation depending on the complexity of the processing.
Quality assurance and control
As the material remains the property of the client, comprehensive quality controls and liability regulations are required. Engineering change notices must be communicated promptly in order to avoid quality problems.
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Key figures for controlling subcontracting
Measuring the success of subcontracting requires specific key figures that take both cost and quality aspects into account.
Cost-oriented key figures
In addition to direct processing costs, the cost transparency of subcontracting also includes transportation, handling and coordination costs. A complete total cost of ownership analysis is required.
- Processing costs per piece or time unit
- Transportation costs and logistics expenses
- Coordination and monitoring costs
- Costs for quality assurance and controls
Quality and performance indicators
Quality indicators measure process stability and result quality at the subcontractor. Scrap rates and adherence to deadlines are particularly important.
Strategic performance indicators
Long-term key figures evaluate the strategic advantage of contract processing compared to insourcing alternatives. Flexibility and capacity utilization are the focus of the evaluation.
Risk factors and controls for subcontracting
Subcontracting involves specific risks that must be minimized through appropriate control mechanisms and contract design.
Quality and process risks
As the subcontractor has a direct influence on product quality, there are considerable quality risks. Inadequate process controls can lead to rejects and rework.
- Quality fluctuations due to inadequate process control
- Loss of or damage to material at the subcontractor's premises
- Delays due to capacity bottlenecks
Dependency risks
Strong dependencies on individual subcontractors can lead to supply risks. This is particularly critical for specialized processing methods with few available suppliers.
Legal and liability risks
The transfer of ownership of the material and liability for damage require precise contractual regulations. Service contracts are less suitable here than work contracts, as a specific work result is owed.
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Practical example
A mechanical engineering company outsources the heat treatment of gear parts to a specialized subcontractor. The company supplies the pre-machined gears and receives them back after hardening. Contract processing saves the company €2 million in investment in its own hardening shop and allows it to react flexibly to fluctuations in orders.
- Material provision and transportation to the subcontractor
- Carrying out the heat treatment according to defined parameters
- Quality control and return transportation of the treated parts
- Integration into your own production process
Current developments and effects
Subcontracting is currently undergoing significant changes due to digitalization, sustainability and new production technologies.
Digitalization and Industry 4.0
Digital technologies enable closer integration between client and subcontractor. Artificial intelligence supports the optimization of processing parameters and quality forecasts.
- Real-time monitoring of machining processes
- Predictive maintenance to avoid failures
- AI-supported quality control and process optimization
Sustainability and circular economy
Environmental aspects are becoming increasingly important in subcontracting. Companies are demanding sustainable production processes and energy efficiency from their subcontractors.
Nearshoring and regionalization
After years of globalization, there is a trend towards regional contract processing. Shorter transport routes and better control are leading to a reassessment of local suppliers, which also simplifies ramp-up management.
Conclusion
Subcontracting offers companies a flexible way to outsource specialized manufacturing steps without losing control over material quality and costs. Success depends largely on careful supplier selection, precise contract design and continuous quality controls. Current trends such as digitalization and sustainability open up new potential for optimisation, but also require control mechanisms to be adapted. For strategic Procurement , contract processing remains an important tool for flexible capacity management and cost optimization.
FAQ
What is the difference between contract processing and contract manufacturing?
In contract processing, the client provides the material and only pays for the processing service. In contract manufacturing, the service provider also procures the materials and delivers finished products. Ownership of the material remains with the client in the case of contract processing.
Which type of contract is suitable for subcontracting?
Contract processing is typically structured as a contract for work and services, as a specific work result is owed. The contract must contain precise specifications of the processing steps, quality requirements and liability regulations. Service contracts are less suitable, as they only owe the work performance, not the result.
How is the quality of contract processing ensured?
Quality assurance is achieved through detailed specifications, regular audits of the subcontractor and incoming inspections of the machined parts. Clear liability regulations for quality defects and material losses are also important. Certified quality management systems at the subcontractor are recommended.
When does subcontracting make economic sense?
Subcontracting is advantageous for specialized manufacturing processes, fluctuating capacity requirements or high investment costs for in-house systems. Profitability depends on processing costs, transportation costs and the strategic importance of the production step. A make-or-buy analysis should take all relevant factors into account.
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