Subcontractors are essential to all contracting businesses, but some companies are going a step further and opting to subbie out the lion share of their work. This article looks at what a business that subcontracts out most of their work looks like, and the pros and cons for doing so.
What Is A Subcontractor-Led Business?
A subcontractor-led business is one where most of the work is outsourced to subcontractors. The contractor employs senior and middle management to manage subcontractors to do 90 per cent of the physical work on site. The contractor is responsible for delivering the project on time and budget and they do this by managing the work of several subcontractors. In many instances the client does not know that staff working on site are subcontractors, assuming they are direct employees of the contractor. This business model was once reserved for large building contractors, however many smaller operators and specialty trades such as landscapers have started to adopt the model.
How Is The Business Structured?
Typically, the business will consist of a Director, General Manager, Estimators, Construction Manager, Project Managers, 2ICs and administration staff.
Rolls And Responsibilities
- Directors – Owner of the company, tasked with setting the culture and vision
- General Manager – Tasked with
- overseeing the running of the whole business, from big picture to day-to-day
- Estimator – Responsible for winning profitable tenders. The estimator will analyse the subcontractor’s submissions, seeking complete and competitive quotes. It is the estimator’s responsibility to ensure the subcontractor’s quote includes all vital elements of the subcontract
- Construction Manager – Oversees all construction projects
- Project Manager – Responsible for delivering specific projects on time and on budget. The Project Manager and 2IC manage the subcontractors on site
- 2IC – Assistant to the Project Manager
As you can see, this type of business model is office-heavy. Wages are high but so is turnover. It is easier to fluctuate the business size and turnover to meet demand. In fact, many directors sight this as the main reason for opting for this model because there is no need to lay off a dozen tradesmen when the work slows down.
What Are The Advantages Of Subcontracting Work Out?
Pass on the risk
The largest and most obvious advantage is that you pass on much of the risk to the subcontractors, however in doing so you also pass on some of the profit! Forming a tender using fixed subcontractor prices mitigates your risk, the subcontractor shoulders it in your place. In return, the subcontractor will earn much more per hour than they would as an employee, which comes from your bottom line.
Subcontracting out the work allows you to increase your turnover without increasing your overheads. A small, yet highly skilled project management team can run very large projects using well-coordinated subcontractors.
Flexible Business Size
When work slows down contractors try to hold onto their staff for two reasons: they’re hoping work will pick up and they don’t want to let good staff go knowing how hard it is to get them back. Paying out wages without the work can get the contractor in hot water very quickly.
When you subcontract out most of the work the staff are only employed for the work at hand, removing the guilt and the burden of keeping the staff employed from the contractor. This model allows the contractor to expand and contract his business quickly without the weight of carrying those staff through lean times and profit margins increase as a result.
What are the disadvantages of a subcontracting work out?
It all comes down to having a reliable pool of subcontractors you can employ; if you don’t have that you will run into a wealth of problems.
For this business model to work it must have access to a good team of subcontractors to do the work. In leaner times subcontractors are easy to find, when it gets busy it’s trickier. You need to build a solid, reliable base of subcontractors who are loyal to you. To do this you will need to treat them with respect and show them loyalty yourself. It may seem OK to screw the subbie down on price during lean times but remember the shoe will be on the other foot eventually.
Quality control comes down to the quality of your subcontractors and your ability to manage them. Workmanship is the main reason contractors keep their skills inhouse, it is much easier to educate and train your own staff than subcontractors whom you have little control over. However, if you invest in finding and building a strong relationship with good subcontractors, who you are loyal to, you can overcome this issue.
The other major reason contractors like to keep their skills inhouse is they have complete control over their schedule.
Managing subcontractors takes planning and skill. A good Project Manager, with access to a reliable, loyal pool of subcontractors can plan a project to run smoothly, with little downtime. This relies on access to that database of subcontractors, but it is also about open and clear communication between the Project Manager and the subbies. That is key!
The tendering process is both easier and harder. It is easier in that the subcontractors deliver the estimator fixed prices for the project; however, subbies are notorious for misreading plans, making assumptions or simply leaving elements out. It is up to the estimator to ensure their final tender submission covers all aspects of the project, so the estimator must scrutinise each subcontractor quote.
However, the major problem is getting quotes from the subcontractors in a timely manner. Again, it comes down to having access to that pool of reliable subbies who prioritise your quotes, treating them well helps immensely too: give them ample time to price, send them personalised tender packages, and make sure they win some of the work!
There are many advantages and disadvantages to relying heavily on subcontractors in your business. The risks can be mitigated by actively building a team of subcontractors that are reliable and loyal to you, however you will never have as much control over your subcontractors as you will with your direct employees. You will make a lower percentage of the profit, but your profit margin should increase due to the higher turnover and reduced risk. In my opinion a subcontractor-led business model is the way of the future!
Anna is a professional landscape estimator and cofounder of Gauge PM. With 22+ years’ experience she’s built up a wealth of business, estimating and project management knowledge. For loads more tips and tricks follow Anna the Estimator on Facebook and Instagram.