Using subcontracted labor can reduce your costs and enable your company to take on more jobs, but it comes with risks as well.
Here’s how it often works in short-cycle construction jobs such as roofing, siding, and window replacement. A company first sells a job, and then finds a crew to install it. This is a perfectly workable business model and more the rule than the exception.
It’s also a fact that companies employing in-house crews are quick to leverage a competitive advantage in their marketing and selling. And why shouldn’t they? In-house crews paid by the hour can be supervised to ensure installation to the employer’s (and manufacturer’s) specs. As the company’s employees, they can also function as its ambassadors, generating the customer service levels that lead to referrals and repeat business.
Lower Labor Cost
That said, why do so many roofing, siding, and window companies choose to use subcontracted labor when installing their products?
If you said reduced cost, bingo. It goes back to that business truism about not hiring people you don’t really need. “Reducing costs is undeniably subcontracting’s greatest and most obvious benefit,” writes management expert Emilie Filion. “There are two avenues for saving money: remuneration and performance of the work.”
You save money because “outsourcing is a cost that only occurs when you need help, rather than being a regular cost, 12 months a year.” In addition, you’re spared the expense of “fees like employment insurance, social benefits, and union fees.”
So when using subcontractors, payroll expenses—generally 15–30% of gross revenue for most types of businesses—are substantially reduced, enabling a lower labor cost and lower consumer price of project. “Payroll is the total amount a business pays out for labor, including bonuses, benefits, and owner draws," writes Clayton Browne. "For some businesses, like highly automated production facilities, labor is a relatively small percentage of the costs of producing the product. But for other labor-intensive businesses, like restaurants and theme parks, labor costs are a much greater percentage of costs, ranging up to 20 to 40 percent.”
Replacing a roof or the siding on a house is on the high side of labor costs (though not quite as high as McDonald's or Disney World). Here’s a rough example: if a $12,000 roof replacement project costs approximately $6,000 to produce, count on half of that cost being labor, or about a quarter the price that homeowner pays.
You can’t much reduce materials costs without compromising the quality of the job, but by subcontracting you can potentially lower your labor costs.
Benefits Beyond Cost
Senior client relationship manager Stephen Tomicki outlines further advantages of subcontractor use. For instance, say you sign a contract to replace all the roofing on a condominium complex. Even if you have on-staff installers, you’re probably going to need a lot more labor for a job that size.
“Subcontractors or team partners can be a valuable resource in these scenarios and allow you to take on new, larger clientele,” Tomicki writes. “This allows you to find those additional ‘helping hands’ for larger or specialized contracts and create a custom team for every new client or project.”
Tomicki cites another reason for using subcontractors: their expertise. “In most cases, they have been working in a specific field for a number of years and have had ample opportunity to hone their skills," he says. "Furthermore, a subcontractor is likely to have done similar work before and will be able to get the job done quickly and efficiently.”
That is, the window or door crews you hire likely do only that, and you can count on them to know how to meet just about any installation challenge they encounter. “Often subcontractors specialize in a field rather than work as a jack-of-all-trades,” notes Rachel Novotny. “It’s because of that specialization that independent or general contractors seek out subcontractors.”
There other reasons to use subcontractors. For instance, it leaves you, the general contractor, to focus on core business functions, which often means generating leads and converting them to sales.
Quality Inside and Out
But the advantage in paying subcontractors piece rate—you know when the job will be finished and, to the penny, what that labor will cost—can become a disadvantage. What if those crews are so backed up that they’re rushing to finish up your 30-square roof or 18-opening window project, and do a mediocre job? How likely are you to get a referral if the homeowner’s relieved that they’re finally gone, and on top of that has to sweep up the mess?
On the other hand, if your business has expanded to the point where you need to hire subcontractors to augment your employee installation crews or hire new subcontracting crews to cover the work on your schedule, plainly there’s little choice.
It doesn’t need to be a dilemma. After all, some of the best companies in any given market use only subcontractor crews. Regular inspections by a production manager and/or project manager while the job’s underway and when it’s completed establish levels of oversight that guarantee a job is installed to a company’s written standard.
A well-defined scope of work in a written subcontractor agreement also helps. You can’t legally tell subcontractors how to do a job, but you can tell them what it looks like when completed. “With an independent contractor, one is paying for a product or result,” writes attorney Robert W. Wood. “With an employee, one is paying for him or her to do what is asked, whatever that might be. With employees, one controls not only the nature of the work, but the method, manner, and means by which they do it.”
And if you’re looking to hire additional subcontractor crews, go on more than a recommendation or the perception that these guys know what they’re doing. Thoroughly vet that business before hiring.
In “How to Identify a Reliable Subcontractor in Construction,” Juan Rodriguez lists essential points to cover in any RFP you send to a local subcontracting company. These include: safety, financials, staffing, equipment, project plan and schedule, past performance, comparable projects, references/recommendations, and project cost and payment terms.
“When all is said and done,” Tomicki points out,” hiring a subcontractor is about 20 to 30 percent more cost effective than hiring full-time additional staff.” But inexperienced, unreliable, or not-so-conscientious subcontractors could wipe that savings out in what they cost your company’s reputation and the additional customers it brings in.