Subcontracting VS. Employees

[GetShitDone]

Hey guys, I'm a week away from launching a massive direct marketing campaign that has been tested and targeted. I am very sure that this will work out to get a good amount of clients for us. It is a service based business that maintains a residential home's outdoors throughout the entire year on a weekly basis. So all things lawn care, pressure washing, car washing, litter pick up, etc. All throughout the year to keep the entire home looking perfect everyday. We come once a week and do a service. The clients pay a monthly fee. One serviceman can service 10 clients a day and will be in charge of 50 clients for the entire year. (Work 5 days a week = The Same 50 Clients Each Week)

Now here's the thing. What would be a better option in terms of profit and overall? Sub contracting the work out to other reputable companies or going through the process of hiring employees? What are some pros and cons of this?

I'm starting to think that if we do the business end of things and leave the work to high quality service companies (subcontracting), it can create an automated system within the company and a burden will be lifted off for me to be focusing on quality of work.

 

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[Ikke]

I would start with subcontracting, unless you can grow fast enough to fund a team with workers and more important, someone to deal with them.

Also how do both options work out on the bottom line?

 

[cashflow3000]

Hey SuccessKing -

I like the idea, best of luck with the execution!

Now to address your questions. Based on how you are thinking of the business - specifically that you would have one person responsible for the same group of homes all year, I'm thinking EEs would be a better bet. You will have more control over them, can conduct the necessarily background checks, and properly supervise them. This is a service based business, and using employees is the best way to ensure that you are providing the service you advertise.

If you used contractors instead, I can easily foresee a situation where a job isn't done to the customer's satisfaction - and then what do you do? Do you scramble to find a new crew? Do you discontinue a certain service because your partners (subs) aren't up to par?

It seems to me your best course of action is to be selective, hire employees, train them right, and treat them well so they will stick with you.

Have fun and good luck!

 

[Red]

I think you're approaching this from the wrong (legal) viewpoint -it's not about the bottom line, it's about what keeps you legal in the eyes of the IRS & how you classify an Independent Contractor vs. an Hourly Employee.

With an hour employee, as mentioned above, you have more control: you can dictate working hours, appearance/uniforms, etc. You also have a shit-ton more paperwork, including but not limited to, taking payroll taxes out of paychecks, potentially being responsible for new health care, worker's comp claims, etc, etc.

With a contractor, you limit your liability & the payroll/taxes nightmare, but you also limit your control. There is no "be here from this time to this time & do this" -they are an independent contractor, hence, independent.

The IRS Regulations are here: Independent Contractor (Self-Employed) or Employee?

Rarely is this decision a matter of preference or of bolstering your bottom line; it's one of legality.

 

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[Kak]

I kind of like the advance on comission contract model for what I am doing. Theag brought it up as something his employer started to do. I take most of their comission until im payed back. This would help me maintain a level of control over my contract employees. Thoughts?

 

[Red]

I kind of like the advance on comission contract model for what I am doing. Theag brought it up as something his employer started to do. I take most of their comission until im payed back. This would help me maintain a level of control over my contract employees. Thoughts?

If you can expound a little more on your situation & how the pay scale works (also what your people's responsibilities are), I could give more input.

 

[Kak]

If you can expound a little more on your situation & how the pay scale works (also what your people's responsibilities are), I could give more input.

Thanks Red I am going to come up with a potential game plan and run it by you.

 

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[Red]

Thanks Red I am going to come up with a potential game plan and run it by you.

Feel free to PM me, but I'm not the absolute authority on this stuff -I've just encountered it within my brokerage on numerous occasions when having to distinguish between my agents (IC's) and office staff or assistants (HE's). It can be muddy waters & the last thing I want is a goddamned IRS agent breathing down my neck.

 

[Kak]

Feel free to PM me, but I'm not the absolute authority on this stuff -I've just encountered it within my brokerage on numerous occasions when having to distinguish between my agents (IC's) and office staff or assistants (HE's). It can be muddy waters & the last thing I want is a goddamned IRS agent breathing down my neck.

Thanks bud!

 

[cashflow3000]

With an hour employee, as mentioned above, you have more control...You also have a shit-ton more paperwork, including but not limited to, taking payroll taxes out of paychecks, potentially being responsible for new health care, worker's comp claims, etc, etc.

...Rarely is this decision a matter of preference or of bolstering your bottom line; it's one of legality.

Hey Red -

You are correct, it is a question of legality to an extent.

At this stage of the game I think the OP can structure his business either way.

My humble opinion is that his biz model will work better with EEs, but he could also structure it with SUBS instead.

I think with more clarity in the biz model the choice will become clear. Of course consulting with a small business attorney won't hurt either.

As far as the "shit-ton" more paperwork you mentioned for EEs, that's what payroll processing firms are for!

About two years ago we hired our first employees, and overall the switch wasn't nearly as difficult as I thought it would be.

There is a small pile of paperwork to complete on each new hire, and good record keeping helps, but it really isn't anything major.

Have fun and good luck!

 

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[Entourage]

From a point of view you might have not thought about..

I'd go completely with subcontracting. I have a few clients who do something similar, and they all went from employees to subcontracting. The amount of times (and headache it will create for you) that your employees will call in sick, and get behind schedule, will be unbearable. You don't have this same problem with subcontracters (no work = no pay)

 

[GetShitDone]

Hey Red -

You are correct, it is a question of legality to an extent.

At this stage of the game I think the OP can structure his business either way.

My humble opinion is that his biz model will work better with EEs, but he could also structure it with SUBS instead.

I think with more clarity in the biz model the choice will become clear. Of course consulting with a small business attorney won't hurt either.

As far as the "shit-ton" more paperwork you mentioned for EEs, that's what payroll processing firms are for!

About two years ago we hired our first employees, and overall the switch wasn't nearly as difficult as I thought it would be.

There is a small pile of paperwork to complete on each new hire, and good record keeping helps, but it really isn't anything major.

Have fun and good luck!

First of all, thanks for the advice guys its really helpful.

Hey, I did read about the mass amounts of paperwork and taxes for hiring employees: But then I realised about hiring other service companies that take care of all of it for you.

It seems as if both paths are good but as Entourage mentioned above, dealing with employees on missing days, getting behind schedule, etc. would be a problem. Especially for this industry that I'm in. I always hear about how dealing with employees is such a pain in the lawn/home care industry so that is one of the reasons why I thought of sub contracting. Convenience and more profitability.

What would the margins generally be when splitting the revenue with another company for subcontracting? Considering that this is a monthly membership fee program for customers.

 

[Entourage]

Succesking, I think that's all relative! Test it out! See what the comfort level is for your clients to pay, and then start interviewing subcontractors and ask them what their prices would be!

I would try and pay your subcontracters by the hour, instead of by the project, assuring that they don't clear other gardens whilst on your rate, maximum efficiency.

What do you plan on charging your clients if I may ask?

 

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[GetShitDone]

$380 a month as the average (Depends on size). I have tested and upper middle class/upper class home owners are willing to pay this price especially for an all year round weekly service of over 20 different services throughout the entire year. It's basically a "set & forget" service if you will. They don't have worry about their outdoors again.

Thanks a lot for the advice and I will try it out! I am willing to pay for gas and also equipment too (there is a good chance that the reputable companies I will subcontract to will already have a lot of the equipment but if not I can still pay for that.) Along with an hourly payment for paying employees and their company making a profit. I was thinking of giving the subcontractors 40%-50% of the client revenue. Still need to research and test it out.

Cheers

 

[Entourage]

With those margins, I'd really look into how much it'd cost you to pay them by the hour. A lot of young lawncare businesses need a steady flow of income to cashflow, you can use that in your negotiations!

We're doing something similar as a young company too, charging a monthly fee to maintain someone's facebook page!

If you need any help, feel free to PM me

 

[GSF]

I have run a business in a similar area of outdoor services for the last 4 years, to medium to high end residential customers (aswell as commercial clients) and have experience of using both sub contractors and employees, from my experience I have found using subbies is great for flexibility and growing your business in the early stages and then once established and are confident you have the workload and some money behind you use employees. I think when it comes to domestic customers its important to provide a quality, personable and professional service, they expect my workers in my trucks in uniform working to my companies standards, also they like to get to know the workers, its important to portray the right image, if done right this results in word of mouth recommendations and repeat work, if your not careful you can lose this with subcontractors ( i tend to use subbies for commercial work) so its important to find and vet properly with any workers. Regarding employees vs subs and which being more hassle/ costly, both cause hassle people are hard to control but overall I think employees when managed well will build a stronger biz and help portray your brand better and will be less likely to let you down, wheras subbies are lower risk and flexible whilst growing. Again in my opinion employees require investment of money to start but cheaper in the long run than using subbies all the time.

 

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[CommonCents]

worker temp services are another option, gives you an on demand flexible workforce and they do the paperwork, just send you a bill

 

[GetShitDone]

GSF - That's what I was also thinking about doing but it seems to me that having subbies will be cheaper in the long run and short term simply because of my business model and industry.

CommonCents - That sounds so damn convenient. I am starting to send a few emails out there to test it out and see what kind of generalised margins there are so I can get an idea of how this system works. I sent an email to a worker temp service today and will receive a reply back soon.

----

Here are my numbers for revenue and margins. Let me know what you think and if the margins are possible in subcontracting for this situation. (Please excuse my ignorance to this as I will do my absolute best to learn how it works.)

50 Clients = $228,000 In Annual Revenue

Subcontracting Payment = $100,000 In Payment To Them (45% of revenue) + $10,000 bonus that depends on the positive reviews/ratings by the clients that they are serving.

$100,000 = (15,000 for equipment) + (15,000 for gas) + (55,000 for labour/employee(s)) + (15,000 for profits to them).

So basically, that is a 45/55 margin in which I pay them a guaranteed 45% to take care of the labour. They also are eligible to get $10,000 bonus which will motivate them to do quality work and satisfy clients.

----

What do you think and if you think something is wrong, please let me know what it is along with letting me know how to fix the problem/paths I should take.

Thank you.

 

[liquidglass]

Why not hire people as contractors rather than sub contractors? It eliminates the need for pay roll deductions and the like and can be vital to getting your business off the ground. That way they are paid on performance rather than paid by the hour. Then have each home owner fill out a survey once a month to the quality of the service, pay accordingly, and fire accordingly.

I think you're on the right path with the bonus plan as well, give people an incentive even a small one and they'll work their asses off.

I have employees and contractors both working for me, employees are easy to control with the hours and threat of being fired but they are usually lazy and are in it for the paycheck. My contractors also have the same ability to be lazy but seem to perform better overall because I give them an element of control of their pay. Especially if you're unable to directly observe the quality and time tasks take I believe contractors or subcontractors would be the best route to go.

 

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[GetShitDone]

Why not hire people as contractors rather than sub contractors? It eliminates the need for pay roll deductions and the like and can be vital to getting your business off the ground. That way they are paid on performance rather than paid by the hour. Then have each home owner fill out a survey once a month to the quality of the service, pay accordingly, and fire accordingly.

I think you're on the right path with the bonus plan as well, give people an incentive even a small one and they'll work their asses off.

I have employees and contractors both working for me, employees are easy to control with the hours and threat of being fired but they are usually lazy and are in it for the paycheck. My contractors also have the same ability to be lazy but seem to perform better overall because I give them an element of control of their pay. Especially if you're unable to directly observe the quality and time tasks take I believe contractors or subcontractors would be the best route to go.

That sounds pretty good but what are the main differences between subcontractors and contractors?

Would people actually sign up on purely performance based? Or did you mean set pay + performance pay? If you could elaborate a bit more that would be great.

Thanks!

 

[bflbob]

A few year's ago, I would have strongly suggested that you hire as many subs as you could on a project. Our primary reason was that they took away the risk on a project. They agree to do 'job a' for $x. If it cost them more, too bad. It was their nickle.

Now, I'm not so sure. We have had several subcontractors default on jobs. Not just little ones. When they can't make ends meet, you may find yourself owing their unions, having to pay their suppliers (in construction, anyway), or having to complete their work. Sure, you can sue, but in most cases you are suing an empty wallet.

Another issue with subs is that you can't tell them what to do. You hire them to do a job. You can tell them what you want, but you can't tell them when, or how, or who does it. If you do, they can become employees.

The IRS is really starting to crack down on this. Make super sure that this is what you want to do.

Hiring subcontractors just to avoid doing payroll is sort of like shutting down a profitable business just because you hate filling out deposit slips. It is the worst reason for hiring a sub.

 

[mayana]

I had a business in the past where I used a mix of subcontractors and employees. Our services were similar (outdoors type stuff).

In my opinion, with subcontractors it will be a little more difficult to earn a healthy margin AND it's more likely that your subcontractors could steal your customers (since they are totally set up and have their own business anyway).

The reason I used subcontractors was because I was providing several different services. Some services I felt confident in providing top quality, others I felt other companies could provide. But my profit margin was much lower for those outsourced services. Especially in an industry such as this where barrier to entry is really low and as such, competition is fierce.

Just my two cents!!

 

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