As residential home builders, remodelers, and general contractors, we should be asking ourselves the same question every day: Which is better for our business; employees or subcontractors? Often our profitability rests on how we answer this question.
Both forms of labor have pros and cons, so as building professionals, how do we decide which to hire? Often the decision comes down to the type of work, availability of labor, and proper research.
With the limited time we have, we tend to assume yesterday’s price is still good today. This attitude can lead to confusion and unprofitable projects.
Here we will delve into some recent research conducted by Buildbook, a leading construction management software company. Buildbook gathered revenue, project count, and team sizes for 5 unique company types in residential construction. The goal was to shed light on the division of labor between employees and subcontractors.
Remodelers create more revenue and complete more projects with a subcontractor to employee ratio of about 2:1
Here we will interpret this data into a usable format that home builders, residential remodelers, and general contractors can act upon. The information was gathered through an informal survey and represents roughly $240,000,000 in total revenue generated over nearly 2,200 projects completed per year.
The research compared each company type by the average revenue per team member and found that general contracting companies generated the highest revenue per team member at an average of approximately $364,000 per person. This makes sense because the general contractor is counting revenue based on the revenue of the total project, not just a part of it.
Custom home builders hired the largest number of subcontractors while maintaining a low number of employees on staff. Back office operations tend to account for most of the direct hires, while skilled labor accounts for the majority of the construction operations.
The survey found that for every company type the number of subcontractors was greater than the number of employees. This corresponds to past research, as the construction industry as a whole usually reacts to the current economy.
The main advantage of hiring subcontractors is that they are hired as needed, as opposed to full-time employment. Residential remodelers and general contractors respond to market conditions, so keeping an in-house staff can get expensive during slowdowns.
Using subcontractors not only negates much of the risk, but they will usually work independently. Home builders and remodelers do not usually need to supervise subcontractors as they would employees, so the process also saves the builder time.
Assuming as else is equal, the only real downside to hiring subcontractors is the cost. Obviously, the subcontractor will make the profit from the work instead of the general contractor. However, the general contractor will usually mark up the subcontractor’s work, so it remains profitable for the general contractor.
Hiring employees provides the benefits of close supervision, reliable labor, and loyalty. Employees have a vested interest in seeing their employer succeed, while subcontractors are interested in profits. Employees generally have a fiduciary responsibility to their employer, while subcontractors do not.
Employees are hired because they are profitable and make the company money. As such, the remodeler or builder may have more control over the expense of an employee. In contrast, general contractors using subcontractors will generally pay whatever the market will bear, so there is less control.
Employees will have certain rights depending on the state in which they are hired. Some states make it relatively difficult to terminate an employee’s employment without due cause. “At Will” states tend to do just the opposite, so employees can quit or be fired with, or without cause.
As a result, some remodelers and builders opt for temporary labor instead of hiring full-time employees. Temporary labor is actually employed by a third party like a temp service, so the general contractor has no responsibility for keeping the workers employed.
Because the construction industry responds to the economy, construction work tends to be feast or famine. Employing workers in economic downturns can be very expensive for the builder, so it’s usually worth paying a bit more to hire temporary help.
Worthy of note, employee taxes and benefits can be considered either a pro or a con. For example, having dedicated, satisfied workers can be a major selling point for a builder. Buyers tend to relate happy employees with good products.
Conversely, if a general contractor tends to work in the lower end of the market, overhead and costs are usually monitored very closely. Often the expense of payroll taxes, FICA, and Medicare contributions can greatly affect the bottom line. The expenses related to gathering, organizing, and processing the information can be significant.
In these situations, some builders prefer to avoid the hassle altogether and hire subcontractors. The same taxes and fees are paid, but by the subcontractor instead of the remodeler. The remodeler or builder avoids the expenses related to payroll management, accountants, and human resource departments and simply pays the invoice.
Pro Tip: Check out our free Construction Labor Cost Calculator to quickly calculate your labor burden for any construction project
Of the five company types analyzed, general contractors not only generated the most revenue but they also were in the top three businesses based on the number of projects completed in a year. Interestingly, residential remodelers were at the top of the list, producing a full 30% more projects than general contractors.
Having a rigid approach to available labor can result in paying over market price, fewer options, and missed opportunities. The research indicates that each of the seven businesses employ some mixture of employees and subcontractors.
Residential remodelers tend to have about twice the number of subcontractors as they do employees, while general contractors tend to employ about 50% more subcontractors than employees.
To gain a better insight, it is necessary to break the categories down a bit further to examine the style of work they perform. For example, fairly repetitive work like masonry, roofing, painting, and siding installation lend themselves well to subcontractors. This is because those tasks require great precision, yet are generally done in a very similar way from job to job.
Other services residential remodelers and general contractors require, like back office operations, payroll, and accounts receivable, are often better suited for full-time employees. This allows upper management access to the information as needed without coordination with a subcontractor.
The data collected by Buildbook supports the idea that a combination of subcontractors and employees usually works best for residential remodelers and general contractors. Residential remodelers tend to use a few more subcontractors, while general contractors tend to have a fairly equal number of both.
The data also suggests that remodelers create more revenue and complete more projects with a subcontractor to employee ratio of about 2:1. General contractors have a slightly smaller ratio of 1.5:1 (subcontractors to employees). Often this indicates a larger back office function since general contractors tend to handle large amounts of paperwork.
Home Builders, residential remodelers, and general contractors can use this data to help make sure their business is aligned with current market conditions. The data is informal, but helps us as builders to identify areas of our businesses that may be struggling.
Based on the data, the construction companies with a focus on the profitability of labor will have the best chances of success. Tweaking the ratio as needed during busier or slower times is often the best strategy.