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Manufacturers face rising demand, limited capacity, and pressure to control costs without adding fixed assets. Subcontracting has become a practical way to meet these challenges.

Subcontracting allows manufacturers to outsource specific production operations to external vendors while retaining ownership of materials and finished goods. This provides flexibility without losing financial or operational control.

In Microsoft Dynamics 365 Business Central, subcontracting is a structured manufacturing process. External vendors perform defined routing operations, while planning, costing, and inventory remain fully controlled within the ERP. Subcontracting in Business Central improves cost visibility, process control, and scalability. Record external work as production capacity cost, workflows remain auditable and preserve inventory accuracy.

As supply chains become more distributed, Business Central enables manufacturers to treat vendors as extensions of the factory floor without compromising financial discipline or production planning.

Our Business Central consultants have explained how subcontracting works in Business Central, how to configure it correctly, and how manufacturers can use it to scale production without increasing risk.

1. What Is Subcontracting in Business Central?

Subcontracting in Microsoft Dynamics 365 Business Central is a manufacturing process where external vendor performs the production steps, while ownership of materials and output remains with the manufacturer.

Unlike standard purchasing, subcontracting is part of the production order itself. Define outsourced work in the routing, plan with lead times, and cost as part of manufacturing operations.

Business Central treats sub-contractors as external work centers. Link each sub-contracted step to a vendor, a cost, and a delivery date. This ensures outsourced operations follow the same planning and control rules as internal production.

How Subcontracting Differs from Standard Purchasing

In a standard purchase order, the vendor supplies a finished item and ownership transfers at receipt. In subcontracting, the vendor performs a service on your materials and returns them to your production flow.

Materials sent to a sub-contractor remain on your balance sheet. Business Central tracks them using production orders, routing operations, and optional vendor locations.

This distinction is critical for audit, valuation, and compliance. Vendor never sells or consumes inventory; it is processed on your behalf.
Why Business Central Is Built for Subcontracting

Business Central embeds subcontracting into its manufacturing design. It supports vendor-linked work centers, routing-based costing, and automated purchase order creation.

Costs flow directly into work-in-process and finished goods. Inventory movements remain visible, even when materials are at vendor sites.

This makes subcontracting in Business Central structured, auditable, and predictable. It allows decision-makers to outsource work without losing control of cost, inventory, or production timelines.

2. Sub-contract work centers

A Work Center is configured as Subcontracted to indicate that the operation is performed externally. Subcontract work centers are set up the same as regular work centers with additional information. The "Subcontractor No." field is used to designate a work center as a subcontract work center.

Screenshot of a Work Center Card in Microsoft Dynamics 365 Business Central highlighting the 'Subcontractor No.' field assigned to vendor

When subcontracting with a vendor having different rates for each process, you can select the Specific Unit Cost" field. Enabling it allows the system to calculate costs for the vendor based on the routing operation. If you subcontract at a single rate per vendor, you can leave the "Specific Unit Cost" field blank. In this case, the costs will be determined by filling in the "Direct Unit Cost," "Indirect Cost %," and "Overhead Rate" fields on the Work Center Card page.

3. Routing Setup for Subcontracted Operations

In the Routing for an item, assign the subcontracted Work Center to any operation that is outsourced. Subcontract work centers can be utilized for operations on routings just like regular work centers. When subcontracting with a vendor and having different rates for each process, selecting the "Specific Unit Cost" field in the work center card allows you to establish a cost on each route. The cost specified on the routing line is then used for calculation, instead of the cost indicated in the work center cost fields.

Screenshot of a Routing Card in Microsoft Dynamics 365 Business Central showing the Lines section with the Run Time and Unit Cost per fields highlighted for a subcontracted operation.

4. Subcontracting Process Overview

In Business Central, subcontracting follows a structured production and purchasing flow designed to maintain auditability and cost accuracy.

The subcontracting process typically includes the following steps:

Setting up a subcontracting work centers
Define external vendor as a subcontracted work center, allowing outsourced operations to be planned like internal capacity.
Defining subcontracting operations in the routing
Specific production steps are assigned to the subcontract work center within the item routing.
Running the subcontracting worksheet
Business Central analyses released production orders and identifies subcontracted operations that require purchase orders.
Creating and posting purchase orders
Purchase orders are generated, received, and invoiced, with costs posted directly to the related production order.

This structure ensures subcontracted work remains fully linked to production planning, inventory movement, and manufacturing cost tracking.

5. Creating Purchase Orders Using the Subcontracting Worksheet

Once the production order is ready, create the purchase order by using the subcontracting worksheet.

Screenshot of a Routing Card in Dynamics 365 Business Central for PCBWAY, with red boxes highlighting the 'Run Time' and the 'Unit Cost per' in the routing lines.

To calculate the subcontracting worksheet in Business Central, follow the following steps:

Search for "Subcontracting Worksheet" and select the related link.
Choose the "Calculate Subcontracts" action.

Screenshot of the Subcontracting Worksheets page in Dynamics 365 Business Central highlighting the 'Calculate Subcontracts' action under the Process menu.

On the Calculate Subcontracts page, set filters to specify the subcontracted operations or the work centers where they are performed. This helps to calculate only the relevant production orders.
Click the OK

Review the lines on the subcontracting worksheet page. This information is derived from the production order and production order routing lines. It will flow to the purchase order when it is created.

Screenshot of the Subcontracting Worksheet results showing a suggested action linked to a Work Center and a Vendor No.

To create the subcontract purchase order, Choose the "Carry Out Action Message" action.
Click the OK

If all subcontracted operations are for the same vendor’s location, only one purchase order will be created.

Screenshot of a Purchase Order generated for a vendor highlighting, the a Quantity and a Direct Unit Cost.

6. Receiving, Invoicing and Cost Posting for Subcontracted Work

After creating subcontractor purchase orders, they can be posted to record the necessary transactions. When the order is received, it generates a capacity ledger entry on the production order. Invoicing the order posts the direct cost of the purchase order to the production order.

Screenshot of a BC production order interface displaying details for an order number, including posting date, order type Production, work center, operation number, item number, and quantities with order quantity and scrap quantity.

When receiving a subcontracting purchase order, Business Central automatically completes the related operation on the production order. If the subcontracting operation is the final operation, it results in the product being added to inventory. However, if this outcome is undesired, an additional operation can be added to the routing after the subcontracting operation.

Screenshot of a released BC production order interface for QuartzD 2.4.6 PCBA Pcbway, showing detailed fields such as description, source type, source number, due date, and last modified date.

Screenshot of Capacity Ledger Entries in Business Central showing a posted production entry for a Work Center with an output quantity.

Subsequently, the remaining tasks of the production order are finished by posting the consumption of the production order, recording the output of the outstanding operation, and changing the status of the production order to "Finished."

7. Best Practices for Successful Subcontracting in Business Central

Subcontracting works best when it is treated as a controlled production process, not an informal vendor activity. In Business Central, discipline in setup and execution protects cost accuracy and inventory control.

Establish Clear Vendor Communication

Define expectations before work starts. Provide vendors with clear documents that list materials supplied, process steps, lead times, and quality rules. Include drawings, specs, and inspection criteria. Clear input reduces rework, delays, and cost disputes.
Use Dedicated Vendor Locations

Create a warehouse location for each key sub-contractor. This keeps inventory visible even when materials are offsite. Vendor locations support better audits, cleaner reporting, and smoother planning. They also reduce errors during receipt and consumption.
Apply Routing Link Codes Consistently

Routing link codes connect materials to specific production steps. Use them for all sub-contracted operations. This ensures only the right components are consumed at the right time. It also simplifies issue tracking when costs or usage vary from plan.
Avoid Subcontracting as the Final Operation

Do not place sub-contracted work as the last routing step. Add a final check or output step after the vendor process. This prevents early output posting and protects actual versus planned production data.
Track Planned Versus Actual Costs

Subcontracting costs are posted as capacity charges. Review capacity ledger entries on a regular basis. Compare routing unit costs with vendor invoices. Investigate gaps early to protect margins and pricing models.
Separate Planning and Procurement Roles

Keep production planning and sub-contract purchasing distinct. Production teams manage demand and schedules. Procurement teams manage vendors, pricing, and lead times. This split reduces errors and improves accountability.
Standardize the Subcontracting Workflow

Always use the subcontracting Worksheet to create purchase orders. Avoid manual purchase orders for outsourced work. This preserves the link between the production order, routing operation, and vendor cost.
Plan for Growth and Repeat Vendors

For long-term vendor relationships, use SKUs and planning rules. This helps keep vendor stock levels stable. Automated planning reduces manual follow-ups and prevents line stoppages.

Contact our experts if you have any questions regarding subcontracting in Business Central for your organization.