A subcontractor is a separate business engaged to carry out part of a job.
Where the cost belongs
In direct costs, against the job they worked on, not in overhead — see cost of goods sold.
Recorded anywhere else, job margin is overstated on subcontracted work and understated on work done in house, which makes the two impossible to compare and can lead to expanding the less profitable one.
They are not employees
The distinction is legal and tested on the facts of the arrangement rather than on what the parties call it. Someone directed like an employee may be one, whatever the agreement says, and the liability for misclassification sits with the engaging business.
The tests are set out in employee or contractor.
Insurance
A subcontractor without their own coverage is frequently treated as an employee for insurance purposes, and their work charged against the engaging business's workers compensation premium at audit.
The protection is a current certificate of insurance obtained before work starts and tracked to its expiry date. Collected once and never checked again, it lapses silently.
Lien rights
An unpaid subcontractor generally has lien rights against the property they worked on, whether or not the main contractor has been paid.
A property owner can therefore face a lien over money they have already paid out, which is why waivers are commonly required down the chain.