Should You Price a Client Differently if You Hire Subs or if You Hire Employees?

Below is a supplemental blog post on pricing when hiring subs or employees. Realized I didn't explain it in the last post. Here you go.

Should you price a client differently if you hire subs or if you hire employees? If looking to save some reading time from my last post on pricing and my last post on estimating time, then read below for TLDR:

No, there shouldn't be a difference in how you price whether you hire subcontractors or employees, or at least based on how we price. 

In the prior post I gave a school pricing example. In that example, you have a 30,000 sqft school, at 30 hours per week. In that scenario, it was 10 hours per day for 5 days per week at 52 weeks per year paying $18/hour. That total gross pay was $46,800. The labor taxes were estimated at $5,616. The supplies were at $1500/year. And Gross Profit was at 1/3 for $26,958/year.

When we price, we price for employees only. If we decide to hire a subcontractor, then we take components on that original pricing for an employee, and add them together to come up with a subcontractor rate, while keeping the client's rate exactly the same. Here's how...

If we hire employees using the above scenario:

Gross Wages: $46,800/yr
Labor Taxes: $5,616/yr
Supplies: $1,500/yr

Then we have employee-related costs that we didn't break down. Below are guesstimates:

Uniforms - $100/year
Insurances, including Workmen's Comp - $1,800/yr @ 4%, estimated
Payroll processing - $180/yr for these 2 employees
Training Costs - $400/one time
Gifts/Meals - $200/yr
Background checks - $100/one time

There are others I'm leaving out like health insurance, 401(k) offers, pay between job locations if they work at more than one location, reimbursements for this or that, etc. I'm focused on the above in our goal to calculate a subcontractor rate. 

So in our school pricing example, we came up with $80,874/yr. If we hired employees, we could have costs representative in the above, right? Well, if we hired subcontractors, we won't have the above costs. Why? Because we aren't supposed to pay employee taxes on subcontractors. We're not supposed to provide supplies and equipment. We're not supposed to reimburse them. There are no training costs for subs. There are no insurance costs for subs. They are self-sustaining (or legally should be to avoid the raw end of an audit). But we'd stroke checks for the above if we had employees. 

So if we add up the above, we have $56,696 in annual costs if we hire an employee. 

Follow me here...what if we hired subs? You wouldn't have all of these costs in the books (or shouldn't). What if you took those costs if we had an employee and converted the above total to be used as a rate for subcontractors? So we pay the sub $56,696/year. Our overall profit doesn't change. We're no less or more profitable if we hire subs or employees. All we're doing is taking labor + supplies + some of our overhead and giving it to the sub in form of a payment. 

In the $56,696 total we just calculated, I would present to the sub an offer of $4,725/month to provide labor, supplies, their own insurances, and anything else needed in performance of that contract. I would approach the subcontractor and offer this monthly total. They can either accept or decline, or maybe negotiate. We pay our subs monthly and we require they invoice us and we give a time frame to do so. In turn, we'll pay monthly through ACH. We don't pay hourly, unless a temporary gig. And we don't pay them like we pay employees, which is on a biweekly schedule. We keep it clean and make it obvious to all involved that they're true subcontractors, and not employees. 

In the end, the rate we charge to the client is unaffected and we still earn a healthy profit, with less overhead. It's a win-win for everyone. The key here is truly knowing your P&L statement and know your costs (and make sure you bid with a profitable rate). If you calculate a rate first without knowing or involving your P&L, this will not work for you. Then you'll come up with a price and you'll find yourself cramming labor, if it can even fit.