Why excess capacity is a hidden cost
In many Swiss SMEs — machine shops, engineering firms, laboratories, assembly businesses or IT service companies — demand does not follow a steady rhythm. Peak periods alternating with weeks of partially idle teams or underloaded machinery generate fixed costs (salaries, rent, depreciation) that produce no revenue if capacity remains unsold.
Outbound subcontracting means providing part of your own production capacity to a third-party client under contract: skilled labour, CNC workstations, project management capacity or turnkey deliveries. It is a lever distinct from purchasing inbound services (when you outsource what you do not do in-house) and requires dedicated commercial and accounting management.
This guide explains how to identify monetizable capacity, structure offers and contracts compliant with Swiss law, manage VAT and measure real margins — with criteria that are also useful for year-end closing and dialogue with auditors.
Types of capacity and operational signals
Before offering subcontracting on the market, it is worth quantifying what is actually available without compromising long-standing clients or quality:
| Resource | Typical indicator | Risk if overloaded |
|---|---|---|
| Specialist hours | Billing rate < 75% over 3 months | Delays on core jobs, unrecovered overtime |
| Machinery / department | OEE or machine hours below annual budget | Frequent setups, planning conflicts, deferred maintenance |
| Delivery capacity | Free logistics or project slots | Contractual penalties, reputational damage |
| Documented know-how | Repeatable procedures not tied to a single client | Loss of trade secrets, breach of non-compete clauses |
A common mistake is treating subcontracting as “filler work” with no minimum price and no allocation of indirect costs. In cost accounting, every hour provided should cover at least full variable cost plus a share of fixed costs and a target contribution margin; otherwise you transfer income from your main client base to clients who pay less.
Contract, liability and boundaries of subcontracting
The relationship with the subcontracting client is generally governed either by a contract for work and services (Art. 363 et seq. CO) or by a mandate (Art. 394 et seq. CO), depending on whether you deliver a work product or a due result or a service or labour without a guarantee of result. Elements to define in writing:
Scope and standards
Description of services, technical standards, acceptance of parts or milestones, handling of scrap and rework. For regulated work (medical devices, automotive), clarify who holds compliance and traceability.
Volume limits (weekly cap) and priority clauses for internal jobs prevent a single external client from monopolizing strategic capacity.
Price, revisions and risk
Hourly, per-piece or fixed-price lists with material and energy indices where relevant. Payment terms aligned with cash flow (30–60 days net are common in Swiss B2B).
Professional and product liability insurance, allocation of responsibility for defects and intellectual property (who owns drawings, code and know-how generated on the subcontract).
Also review contracts with main clients: many B2B engagements prohibit assigning work without consent or impose confidentiality. Outbound subcontracting to direct competitors can breach contractual obligations even if the resources are legally yours.
VAT on outbound subcontracting in Switzerland
Subcontracting services supplied to clients with a registered office or domicile in Switzerland are in principle taxable at the standard rate (8.1% from 2024) or at the reduced rate if the law so provides for the nature of the final good or service — the intermediate service usually follows the rate applicable to the work or product you are performing, except in special cases.
If the client is abroad, the place of supply under the VAT Act may apply (Art. 8 para. 1: for B2B services, as a rule the place of the recipient). Services supplied by a Swiss taxable person to a foreign client may be non-taxable in Switzerland but require documentary compliance and, in scenarios with foreign establishments or exceptions under para. 2, review with your VAT adviser.
A subcontracting chain (you in turn subcontract part of the work) requires invoices meeting the requirements of Art. 26 VAT Act, showing VAT, sequential numbering and reporting under the effective method (unless the net tax rate method is authorized). VAT on inbound subcontracting costs generally remains deductible if your outbound services are taxable — watch for exempt or excluded supplies and mixed activities: the choice between the effective reporting method and the net tax rate method, as well as any limitations on recovery of prior tax, affects deductible input tax.
Quick tax checklist
- Invoice with date, amounts, rate and tax base; reference to contract or order.
- Check VAT liability: mandatory if the relevant turnover reaches CHF 100,000 per year (supplies not excluded from tax); voluntary registration below the threshold is also possible.
- For supplies with place abroad: retain proof of the client’s status (VAT number or foreign identifier, master data; tax residence certificate if required). For clients in Switzerland: UID (CHE-…).
- Alignment between cost accounting (cost center “Subcontracting”) and periodic VAT return.
Margin control: from quote to financial statements
Monetizing excess capacity only makes sense if the contribution margin exceeds the alternative (no work, short-time working, investment in client acquisition). Recommended calculation framework for SMEs:
| Line item | Includes | Accounting note |
|---|---|---|
| Subcontracting revenue | Net VAT turnover for the period | Revenue account by category or “External subcontracting” center |
| Direct costs | Dedicated materials, allocated internal hours, inbound subcontracting | Allocation to job or internal order |
| Variable indirect costs | Department energy, tooling, marginal shipping | Driver: machine hours or % of revenue |
| Fixed cost share | Rent, depreciation, administrative overhead | Allocation key consistent with the budget |
| Net job margin | Revenue − all allocated costs | Comparison with minimum threshold and core client mix |
At year-end, subcontracting revenue flows into the income statement under Swiss accounting rules (CO / Swiss GAAP FER or US/IFRS where applicable). Accruals and late invoicing must align with the accrual principle. For companies subject to audit, an order register with actual margins reduces the risk of understating liabilities (warranties, rework) or artificially inflating capacity utilization with below-cost pricing.
Accounting and traceability in Accountex
Separating outbound subcontracting in the accounts from “standard” sales enables clean reporting for management and tax. Practical setup: distinct client code or dedicated project for each subcontracting client; chart of accounts with revenue sub-accounts; team hours charged to analytical items.
On collection, reconcile open invoices with bank statements and monitor DSO by client — subcontracting often arrives in irregular volumes and can weaken working capital if payment terms are longer than for core suppliers.
Documents to archive digitally: contract, orders, delivery notes, inspection reports, invoices and any credit notes. In a VAT audit or financial audit, the document trail demonstrates place of supply and correctness of the rate applied.
When it pays off — and when it does not
Green signals
- Contribution margin above internal threshold and reliable payments.
- Skills or machinery not deployable on the main market in the short term.
- Contracts that do not expose you to disproportionate product liability risks.
- Residual capacity after serving strategic priorities.
Red signals
- Prices that do not cover full and fixed costs — erosion of operating income.
- Conflict with exclusivity or confidentiality clauses toward long-standing clients.
- Subcontracting peaks that delay high-margin jobs.
- Dependence on a single external client for more than 30–40% of department turnover.
Operational summary
Excess production capacity is not a simple “bonus”: it is an asset to be priced with the same rigour as main jobs. Well-contracted outbound subcontracting, correctly taxed or excluded from VAT as the case may be, and monitored with actual margins turns otherwise lost hours into cash flow and absorption of fixed costs.
Integrating cost centers, invoicing and bank reconciliation in a single flow — as in Accountex — reduces rate errors, speeds up monthly reporting and gives management a clear view: how much turnover comes from subcontracting, at what net margin and with what impact on liquidity. Periodic reviews of pricing policy and client mix keep the lever under control without sacrificing core business growth.