Meaning
Procurement strategies that divide a single project into multiple separate agreements for different phases or components allow owners to optimize tax structures and choose specialized providers. When implementing split contracting, an organization signs one agreement for supply and another for installation. This separation prevents single-point responsibility but can reduce overall project costs.
It requires careful management of the interface between different suppliers.
Risk Allocation
Dividing the scope changes the legal exposure of each party. Under split contracting, the owner holds the interface risk between the suppliers. If one vendor delays the other, the owner resolves the claim.
Tax Optimization
Import duties and local sales taxes often differ between services and physical goods. Through split contracting, companies separate the onshore construction services from the offshore supply of materials. This can reduce the local tax liability in many jurisdictions.
It must be structured carefully to satisfy local tax authorities.
Coordination Overhead
Managing several distinct contracts requires a larger internal project team. Because split contracting removes the single contractor buffer, the owner must act as the general manager. This increases administrative costs and requires skilled project managers to prevent disputes.
The savings on the contract prices can be eaten up by these management costs if the project is complex.
