What is a Contractor?

Broadly speaking, a contractor can be anyone who agrees to fulfill the terms of a legally binding agreement. Most commonly, the term is used to describe an expert in the construction industry who hires skilled and unskilled workers to actually construct a financed project. A contractor must be licensed by an examining board before he or she can bid on the project. This bid is based on the estimated cost of the building materials, the wages of subcontractors and laborers and the professional's fee for coordinating the project.

Although a contractor's main concern is hiring qualified subcontractors (specialized craftsmen), he or she may also perform some of the construction work as well. Most develop good working relationships with other construction specialists, so they often hire the same specialized companies and workers for each contracted project. The contractor is ultimately responsible for the quality of the work performed by the people he or she hires, so it doesn't always pay to hire unknown entities to cut down on expenses.

A professional contractor should also have an understanding of his or her limitations. The client works with an architect and financier long before the first shovel of dirt is removed. During the bidding process, a contractor may have to work with the building's architect to discuss potential problems with a design element. If the complexity of the building's design or the potential cost overruns threaten to overwhelm the person's skills, he or she needs to step back and allow someone else to win the bid. A good contractor understands that the success of the project depends on his or her ability to hire the right independent subcontractors and follow the wishes of the client.

In a different sense, a contractor could also be anyone who agrees to perform work for a fee. This occurs frequently in businesses that cannot afford to assign or hire a new employee to perform a specific job. The job itself may not be long-term enough to justify the expenses of a new hire, or the wages may not be sufficient for established employees. Companies in this situation often hire independent contractors to perform the job without a formal employment agreement. The pay rate is discussed with each independent worker and a legal agreement may be produced. After completing the job, an independent contractor receives the entire amount of pay without tax deductions or other withholdings. At the end of the tax year, the company issues a federal 1099 form showing the worker's miscellaneous income earned.