In this Article鈥�
- Learn the distinctions between a subcontractor vs. an employee, including the definition of a subcontractor and the general contractor meaning.
- Consider the benefits of both roles for your construction business.
- Decide on whether to hire subcontractors or employees based on costs and your business needs.
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Disclaimer: The information provided in this article is for educational purposes only and should not be considered legal or financial advice. For any legal/tax concerns or questions regarding construction, please consult a qualified legal or accounting professional.
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In the construction industry, building structures goes hand in hand with building a strong team. Without impactful and productive workers, your business will fail to achieve the success you are aiming for.
It is clear that building such a team not only affects your business鈥� bottom line, but also assists in navigating today鈥檚 labor market. The competition for top talent in construction is growing, and the pressure to secure and retain skilled employees has never been higher.
With indicating that, 鈥淚n 2025, the industry will need to bring in nearly 454,000 new workers on top of normal hiring to meet industry demand,鈥� it's clear that the foundation of any thriving construction business today lies in its capacity to attract, develop, and maintain a top-notch team.
This staggering statistic also underscores the crucial role that subcontractors play in filling in the gaps in your workforce. However, effective team management in construction isn鈥檛 just about hiring; it鈥檚 about striking the ideal balance between subcontractor vs. employee roles to ensure that your projects run seamlessly and efficiently.
In this blog post, we鈥檒l explore the strategies for balancing these roles, ensuring that you not only meet immediate labor demands, but build a resilient team capable of weathering industry challenges.听
We'll delve into the contractor vs subcontractor dynamic, discuss project management considerations, and touch on the risk management aspects of working with different types of workers.
Understanding a Subcontractor vs. an Employee
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Understanding the distinctions between a subcontractor vs. an employee is vital, impacting both your business operations and the financial decisions that you make.
Let鈥檚 first look at the simple definitions of a subcontractor and an employee.
Subcontractor
A subcontractor, also known as a sub subcontractor or trade contractor, is an independent contractor who you hire to perform specific tasks or services on a project.听
For instance, you hire a landscaping contractor to install a sprinkler system, shrubs, and stonework at a home that your business is building. This subcontractor runs their own, independent landscaping business and is not your employee.
Subcontractors often work for multiple clients and on multiple projects.
Employee
A worker that your company directly employs, usually under a contract, is an employee. Their contract often outlines their responsibilities, compensation, and benefits.听
Ideally, employees contribute to your organization鈥檚 success through an ongoing relationship of dedication and loyalty. As a general contractor, you have more control over your employees' work compared to subcontractors.
Control, Commitment, and Company Benefits
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Do you want employees who are committed to your company鈥檚 vision? Try these best practices:
- Offer opportunities for career advancement and skills growth.
- Listen to their feedback and use it to improve your company.
- Value them鈥揵oth as employees helping your business succeed and as people with hopes and aspirations outside of work.
Essentially, be a to retain great employees.
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Beyond the basic definitions, considering what control you have over an employee vs. a subcontractor, as well as the commitment you can expect from them, provides a clearer understanding of the meaning of each worker.
Here are some differences between the two:
Control
As a business owner, obviously, you exert substantial control over an employee鈥檚 work schedule, method, and performance.
However, with a subcontractor, you have less control over them. Subcontractors, while hired by you and required to meet your expectations, will maintain control over how they complete their tasks, such as with their own preferred tools and methods.
A subcontractor will also have to take their own schedule into consideration when joining your project, whereas an employee has to adhere to your schedule. This difference in control is a key aspect of project management when working with different types of workers.
Commitment
While turnover is all-too common in the construction industry, ideally an employee is in it for the long-haul. They play an integral part in your company鈥檚 future success and are committed to your mission.
A subcontractor, on the other hand, is engaged for specific projects and timeframes. They may want to help you succeed with a specific project and work with you in the future, but they鈥檙e less vital and interested in your business鈥� long-term journey.
Consider employees to be like family, while subcontractors are like friends鈥攈aving friends is important, but family endures.
Benefits
There鈥檚 a simple distinction between a subcontractor vs. an employee when it comes to benefits:听
- Employees receive benefits from your company.听
- Subcontractors do not receive benefits from your company.
The benefits your company may have to provide employees include:
- Health insurance
- Retirement plans
- Paid leave
Subcontractors, on the other hand, are responsible for their own insurance and retirement savings.听
The Flexibility of a Subcontractor vs. the Stability of an Employee
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Hiring subcontractors and employees doesn鈥檛 have to be an either-or decision; your business can choose both.
Create a hybrid workforce for your company, using a combination of subcontractors for flexible roles and employees for core functions.
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When assembling your workforce, understanding the flexibility of a subcontractor vs. the stability of an employee is vital to building a dynamic and resilient team. This balance is crucial for effective project management and risk management in construction.
Let鈥檚 take a closer look at these two contrasting attributes鈥�
The Flexibility of Subcontractors
- Adaptability: Subcontractors allow your business to scale labor based on your project needs.
- Specialized Skills: One of the greatest reasons general contractors employ subcontractors is that they bring niche expertise with them. Roofing, drywall, landscaping, bricklaying鈥搒ubcontractors can perform all of these tasks to enhance your project outcome, without requiring long-term commitment from either parties.鈥�
- Cost Efficiency: Hiring subcontractors does not entail the expenses associated with employees like we鈥檝e discussed (health insurance, retirement plans, etc.).
Also consider the negatives of subcontractor flexibility, such as:
- Quality concerns 鈥� While you鈥檒l be choosing a subcontractor you know performs quality work, without rigorous oversight in the materials, tools, and techniques they use, it can be a risk to the consistency and quality of your project.
- Reliability and scheduling issues 鈥� As mentioned in the previous section, you have minimal control over a subcontractor鈥檚 schedule. This can affect your project鈥檚 timeline, as well as present reliability issues.
The Stability of Employees
- Consistency: Having a full-time staff ensures that your company has a stable workforce. This not only keeps your projects moving forward, it can foster team cohesion and loyalty.
- Long-Term Knowledge: Your employees can accumulate valuable knowledge about your company processes, culture, and client relationships. Investing in employees is investing in your business.
- Reliability: Again, committed employees can be more dependable than outsourced help for ongoing projects and keeping your business on schedule.
Hiring an employee for the stability can also lead to negative consequences:
- Complacency 鈥� It happens; employees can become too comfortable with the way things are, affecting innovation and initiative.
- However, it is possible to reduce the risk of complacency by introducing new challenges and perspectives into your workforce.
- Bureaucracy and Inflexibility 鈥� The bureaucracy associated with formal HR processes and other protocols can slow your business鈥� decision-making and adaptability.
Now that we have a greater understanding of what a subcontractor vs. an employee is and the advantages of each, let鈥檚 explore how to weigh these options against your company鈥檚 needs and budget.
Making Hiring Decisions Based on Your Project Needs and Business Goals
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Building a strong team isn鈥檛 going to happen overnight. It鈥檒l take conscious effort and .
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When deciding to hire a subcontractor vs. an employee, take a strategic approach using these factors:
Project Scope and Complexity
A large, complex project鈥搇ike an office building with retail space鈥揷an often achieve greater success with full-time employees. On a project like this, employees will:
- Ensure consistent quality in your company鈥檚 work.
- Be there every step of the way until project completion.
- Streamline your workflow.
- Help your team remain on schedule to reach deadlines.
However, say your company needs assistance with a smaller, specialized task, such as installing an elevator in your large office building. A subcontractor is the better choice for this project because:
- They provide the necessary expertise your team needs鈥搇ike adhering to regulations for elevator construction.
- They fill the skills and expertise gap in your team without your business needing to hire an employee.
Duration of Projects
Consider a quick project like installing shingles on the house you鈥檙e building. When choosing between hiring another employee or a subcontractor, ask yourself:
- Is the overhead of an employee warranted?
- Is the time it takes to hire an employee worth it?
- Is a subcontractor more-ideal for this type of project?
Skill Requirements
In the case of an elevator installation, specialized skills are required on a temporary basis and subcontractors can fill those gaps at your company. However, consider this:
- Your construction company鈥檚 niche is building large residential buildings.
- And those buildings require multiple elevators.
- Would a subcontractor work in this situation?
- Would it be more beneficial for your company to invest in employees with the knowledge and skill sets of elevator engineering and construction?
Cost Considerations in Your Hiring Decisions
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Employee retention isn鈥檛 just about building a strong team, it鈥檚 above saving money.
Did you know that, , the average cost per hire is almost $4,700?
Imagine losing 5 employees in a year and having to hire 5 new workers to replace them. That鈥檚 $23,500.
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When deciding whether to hire a subcontractor vs. an employee, it鈥檚 important to evaluate the costs of both. There鈥檚 taxes, benefits, and even potential pitfalls that can lead to substantial financial repercussions for your business. Let鈥檚 break down these costs to help your decisions.
Payroll Taxes
- When you pay a subcontractor, you鈥檙e not responsible for any state or federal payroll tax for their labor.听
- Instead, subcontractors will handle their own self-employment taxes, but at the end of the year you must provide a 1099-MISC form if you pay them $600 or more for the year. This frees you from these obligations and the administrative tasks they entail.
- Hiring employees requires your business to stay on top of Social 魅影社区, Medicare, unemployment, family leave, and other payroll taxes.
Employee Benefits
- Most employees expect benefits like health insurance, while some requiring companies to provide health insurance to their employees.
- You need to follow any applicable health insurance laws and you may need to provide employees with retirement plans and generous paid time-off to compete for the top talent in construction.
- In contrast, subcontractors typically do not require these benefits, as they are not your employees.
Hidden Costs
- Subcontractors may offer lower upfront expenses, but outsourcing isn鈥檛 always cheap.
- For instance, subcontractors often include markups to their services and supplies that add up over time.
- However, there are hidden costs with hiring employees as well.听
- How much more liability insurance will your company need for a larger team?
- Will these new employees be driving company vehicles and will that lead to increased auto insurance costs for your business?听
- Will more employees mean more costs for safety and skills training?
Hourly Rates vs. Salary
- Subcontractors often charge higher hourly rates than what you would pay an employee. However, they can complete work efficiently and don鈥檛 require the added cost of health insurance coverage.
- For employees, consider whether there will be projects requiring you to pay overtime, and how paid or unpaid time-off will affect your timelines.
Costly Mistakes
- A final cost to consider when hiring a subcontractor or an employee relates to the misclassification of the two roles.
- For example, say your business classifies a worker as a subcontractor because you don鈥檛 have a formal contract with them.
- However, based on other factors, such as the hours they work and the length of their engagement, they should be considered an employee and your business has underestimated its tax liabilities.
- To make matters worse, your business failed to provide necessary benefits to that worker.
- This could lead to significant fines and costs down the road for your business.
The IRS provides guidance on this matter, including the use of Form SS-8 to determine worker status. Understanding the IRS guidelines on independent contractor vs subcontractor classification is crucial for avoiding costly mistakes.
Key Takeaways鈥�
Building a strong team in construction is crucial for achieving success and maintaining a competitive edge. The balance between subcontractors and employees can significantly impact your operations.
When balancing subcontractor vs. employee roles in your construction business, keep this in mind:
- Define the roles of subcontractors and employees within your company, understanding the difference between contractor and subcontractor responsibilities.
- Align your hiring decisions with your project needs and business goals.
- Assess the tax obligations and potential costs associated with each hiring decision.
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