Subcontracting can change the game by enhancing the value you provide to your clients. With the right subcontractors, you can extend your construction and home renovation services into all-new, specialized areas, attracting new customers and building a diverse and dynamic portfolio.
However, subcontracting comes with risks. In this article, we’ll define subcontracting and weigh the pros and cons. Then, we’ll look at how to price subcontract work step-by-step. Finally, we’ll share our tips for presenting subcontractors to your clients.
With the right subcontracting approach, everyone wins.
What Is Subcontract Work?
Subcontract work involves an agreement between a contractor (you) and another professional (a subcontractor) to carry out construction, renovation, or remodeling work outside the scope of the contractor’s abilities or resources.
For example, if you and your team are remodeling a bathroom, you might hire a licensed electrician to carry out the electrical work and a plumber to install the fittings. The electrician and plumber are subcontractors.
Your client does not communicate directly with the subcontractors. Instead, it’s up to you and your team to schedule their work, ensure they are qualified, and perform a quality check. If the subcontractor runs into an issue or delay, they’ll bring it up with you, not the client.
Although enlisting the help of a subcontractor can transform your business, in the eyes of your client, the subcontractor’s work is a reflection of you. So, always outsource carefully.
Is Subcontracting a Smart Idea?
At its best, subcontracting can open the doors to scores of new business opportunities for you and your team. It can allow you to take on jobs you otherwise couldn’t, which means more cash in your pocket.
However, at its worst, subcontracting can be an ongoing headache. Delays and poor-quality workmanship can lead to client disputes. Even if the subcontractor is at fault, it’s you who has skin in the game, which means your business suffers.
Here’s a breakdown of the pros and cons of using subcontractors.
The Pros of Using Subcontractors
- Cost. Unlike your regular staff, you don’t have to pay subcontractors’ benefits or taxes. This can help keep costs down. In addition, you can charge your client more than you are paying your subcontractors, which means more revenue for your business.
- Skills. The number one benefit of subcontracting is securing access to skills, abilities, and tools you don’t have. Subcontracting can bring specialized expertise to your job site, allowing you to execute projects you otherwise couldn’t have.
- Team morale. A subcontractor can alleviate pressure from your other team members, who will have more time to focus on the tasks they enjoy most.
The Cons of Using Subcontractors
- Cost. Subcontractors typically demand a higher rate than your regular employees. If they charge too much, ensuring the project is profitable can be challenging.
- Skills. Your team operates like a well-oiled machine. Bringing another person into the mix can cause issues. Your subcontractor may carry out a task in a way that disrupts productivity or prevents future tasks from being completed properly.
- Team morale. In some cases, employees become disgruntled because the subcontractor is paid more. In addition, subcontractors may be less committed to your business and the client, meaning they’re more likely to show up late or not at all.
How to Price Subcontract Work Step-by-Step
Pricing subcontract work is a balancing act. On the one hand, you need to protect your own profitability—at the end of the day, you are running a business. On the other, healthy, mutually beneficial relationships with quality subcontractors can become a significant competitive advantage. Underpaying your subcontractors will not result in a sustainable partnership. The following step-by-step process will help you find a happy medium.
Step 1: Determine the Subcontractor’s Unit Prices
How does the subcontractor price their work? Depending on their skill set, it could be by the hour, fixture, or square foot.
Step 2: Present a Scope of Work
Next, show the subcontractor the scope of work required. Use their pricing unit as a guide. For example, if you are subcontracting a tiler that charges by the square foot, with varying rates depending on the complexity of the tiling pattern, provide a work order to document the details of the project. The work order can outline how large the area is that needs to be tiled and the type of tiles the client has chosen.
For more complex projects, you may need to review the plans and specifications with your subcontractor, answering their questions and eliminating ambiguities along the way.
The step is all about mitigating the risk of your subcontractor underquoting. For example, say you assumed your client needed approximately 150 square feet of tiling. That’s the figure you give the tiler, which they use to provide a quote. But when the tiler arrives on-site, they see that the actual area that needs tiling is closer to 200 square feet. You’ve already billed the client for 150 square feet, which means it’s up to your business to wear the extra cost.
Step 3: Add Extra for Your Time
Sourcing and managing a subcontractor take time, and you deserve to be reimbursed for that time. When pricing subcontract work, add a percentage on top of the quote the subcontractor provides. How high that percentage should be will depend on several factors:
- The complexity of the subcontracting work. The more complicated the agreement, the more time it will demand.
- Your relationship with the subcontractor. If you know and trust your subcontractor, you are taking on less risk. So, you may lower the client’s fee.
- Market conditions. There is only so much you can charge your client for tiling, for example. Ensure the client’s fee aligns with market conditions and is competitive enough to win business.
Generally, the profit margin in construction is between 10 and 30 percent. For example, US home builders earned a profit margin of 14.9 percent in 2021.
Step 4: Refine Your Pricing Approach
If you are new to working with subcontractors, you’ll likely make a mistake or two when deciding how to pass on the cost to your client. That’s okay, as long as you reassess and refine your approach. For example, if your margin was too low, you know you need to up the percentage next time around. (For more on this — check out our post on estimating construction jobs)
Tips for Presenting Subcontractors to Customers
Your client trusts you but may be wary of subcontractors you bring in to complete their project. Here are a couple of tips you can implement to ease your clients’ concerns:
- Demonstrate that the subcontractor you have chosen is fully qualified and licensed.
- Share a portfolio of work with the client to show the subcontractor’s skill level and experience.
- Assure the client that you have worked with the subcontractor before (if you have).
Embrace New Opportunities
Successful subcontracting empowers you to take on new and exciting opportunities. Embrace it, but be cautious. Do your research and ensure your pricing system protects your business’s profitability.