Hiring subcontractors is a great way to expand your service menu without spreading yourself too thin. But experienced contractors note that there are pitfalls
to watch out for.
When business is growing, it’s hard to pass up the opportunity for an upsell. But plenty of green industry businesses have found that expanding a service menu can be a slippery slope. “A lot of folks, including myself when I was younger, tried to be good at everything and it’s not easy,” says John Gachina, president of Gachina Landscape Management, Menlo Park, Calif. “You really want to pick your niche and focus on it. When you come up against things that are out of that scope, it’s time to tell your customers you don’t do that kind of work or hire someone else to take care of it for you.”
Derek Blumberg agrees. “More revenue isn’t always better,” says the owner of Quality Seasons, Savage, Minn. “There was a point where we were doing a lot of work in a lot of areas, but our bottom line wasn’t looking so hot, and we had to fix it. The book Good to Great inspired me to find out what our company was really good at and focus on that.”
While Blumberg’s niche is high-end residential work and Gachina’s is commercial contract maintenance and enhancements, both industry veterans found subcontracting to be the best way to address business growth and service management issues, though their approaches are very different.
A TALE OF TWO BUSINESSES.
Quality Seasons. In 2001, Blumberg was getting Quality Seasons back on track after episodes of overspending and a lack of systems put the company in a tough position in the late 1990s. Part of the solution, he found, was to streamline services with the help of subcontractors. That year, the company subcontracted all of its snow removal services. By the spring of 2004, independent contractors handled the business’s entire service menu.
“Subcontracting was the best decision I could have made,” Blumberg says. “My natural skill is in business organization, setting up and developing sales – managing employees isn’t my sweet spot. By taking all of our services out-of-house, now the responsibility of dealing with employees falls to the subcontractor and I can focus on what I’m good at, which is making more sales.”
With three subcontractors (13 employees total) working for Quality Seasons, Blumberg notes the importance of hiring trustworthy individuals that meet company standards. “Any time I meet with a potential subcontractor, I ask them what they were really after. What interests them about subcontracting? I make them define what kind of work they want – if they’re just looking for a few extra jobs or if they want to be dedicated to their work – and I make sure they know that to work for Quality Seasons, they’re going to have to put our accounts first.”
|SUBCONTRACTOR AUDITIONS |
At Watters & Associates Landscape, Rome, Ga., President Ed Watters says he’s hired a number of subcontractors over the years to handle everything from swimming pool installation and fencing work to stone masonry and major grading. While the company is trying to keep more work in house these days, subcontractors’ contact information is never far away.
“We keep a list of subcontracting sources on our wall and in our weekly meetings with designers, if someone says they need to get in touch with a stone mason, we know who to call,” Watters says.
Staying on the subcontractor list depends on the work quality and professional relationship between Watters & Associates and the independent contractor. Adding your company’s name to the list requires a short audition of sorts. “If someone has expressed interest in working with us, we’ll invite that person to our office to give a presentation to our designers,” Watters says. “We’ll have them bring samples to our Monday afternoon meetings and let them take 30 minutes or so to show us what they can do, tell us about their company and experience, give us a look at the products they use, and go from there.”
Watters says his designers meet with about one new vendor every month to build relationships. “We’re far enough outside the Metro Atlanta market that it’s too expensive to bring in a subcontractor from the city every time we need one, unless it’s a $20,000 or $30,000 job,” Watters says. “Keeping in touch with professionals in our local market gives us access to their expertise when we need it.”
Quality Seasons uses only dedicated subcontractors; that is, they work for Blumberg and no one else. The workers wear the Quality Seasons logo and display it on their trailers. This unique relationship allows Blumberg to have a staff of full-time, brand-building employees without the hassle of personnel management, employment taxes and other administrative costs. Additionally, he doesn’t have to worry that the subcontractor will shirk its duties on Quality Seasons accounts in favor of another competitor.
Blumberg notes, however, the importance of keeping subcontractors independent in their work, lest certain employment regulations be breached. “It’s essential to make sure that the subcontractor is independent from you and not defined as an employee of your company,” he explains. “The way we do that is by having two inputs on every item. For instance, the subcontractor purchases shirts and hats, while we pay for the embroidery. We require that they have enclosed trailers, but we pay for the logoing. This reinforces our brand while the subcontractors are on the job, but legally keeps us separate professionally.” (Read more in Define Your Relationship on page 70). Also in that regard, Blumberg says his subcontractors can sell and perform their own work on their own time, as long as those jobs are outside Quality Seasons’ service area.
Gachina Landscape Management. While Quality Seasons operates almost solely on the power of subcontractors, Gachina Landscape Management takes a more traditional approach, keeping most of its work in-house and hiring independent contractors for specific tasks in which the company doesn’t specialize.
“On the contract maintenance side of the business, we’ll work with subcontractors on things like tree work, pest control and paver installation,” Gachina says. “These are things we don’t do routinely, so we bring in professionals we know and trust will do a good job for our clients. A lot of customers don’t want to hire the landscaper, the tree care company, the pest control operator and then manage all three contractors. They want to receive one bill and that’s what makes subcontracting a good option.”
Like Blumberg, Gachina ensures that subcontractors meet certain requirements of professionalism that match those of his own company. “Just like hiring someone as an employee of the company, you want to know who they are and hear about their background,” he says. “We always check references of other contractors they’ve worked for and may even visit jobsites they’ve worked on to get a feel for the quality of their work and if it’s in line with our expectations.”
From there, Gachina says he’ll hire a new subcontractor for a small project to give them experience with the company. If the work is good and the company cultures match, more and larger projects follow. More importantly, because Gachina’s subcontractors work for themselves and for other area landscape companies, trust and respect are essential. “If I’m giving you work, you have to take care of me, too,” Gachina says. “There are factors of ethics, integrity and business etiquette, so in doing my job to give you a good experience and pay you on time, I also expect you to respect my business. I would never expect a subcontractor to jeopardize their relationships with other companies they work for, nor would I expect them to discuss our relationship with my competitors.”
Arborwell is one company that has a longstanding relationship with Gachina. “Our relationship has been close for many years and is one that we really call a ‘strategic alliance,’” says Peter Sortwell, owner of the Castro Valley, Calif.-based tree care company. “It might sound trite, but in a subcontracting relationship, the two companies have to match. John and I do well together because we both have the same vision of what we want our companies to be and we have similar management styles.”
Gachina adds that Arborwell’s professionalism – and that of the other subcontractors he hires – makes him proud to present independent contractors and their expertise to his clients. “Arborwell has some really professional representatives and we know they’re experts in fields that we’re not,” Gachina says. “Whenever we bring a subcontractor in, we’re able to tell our customers with confidence that we trust these workers to be on their properties. We don’t worry about outfitting the workers or vehicles with Gachina gear. For me, the team is my employees, myself, my managers and my subcontractor – we’ve worked together for years. We trust them and we guarantee the work will be done right.
|DEFINE YOUR RELATIONSHIP |
When the Joneses asked if you could add irrigation to their lawn renovation project, your first thought was of your industry colleague a few miles away. Your company doesn’t handle irrigation work, but his does, so you hired him as a subcontractor. He agreed to the job, the system went in easily, the clients are happy and everyone got paid. Success! But now with Uncle Sam knocking, it’s time to get your story straight for the IRS.
“Before we hired our subcontractors, we hired an attorney,” says Derek Blumberg, owner of Quality Seasons, Savage, Minn. “There are a number of questions you need to answer, according to the IRS (Internal Revenue Service), to determine if the person you hire is a subcontractor or an employee.” Blumberg says he spent about $3,000 for the attorney’s fees, but it was worth it.
The IRS says, “anyone who performs services for you is your employee if you can control what will be done and how it will be done,” while “you, the payer, have the right to control or direct only the result of the work done by an independent contractor, and not the means and methods of accomplishing the result.” For employers, an official distinction helps identify how the individual must be compensated and what taxes need to be paid. The determination also is important for the subcontractor (or employee), because it affects how that individual pays income tax, Social Security and Medicare taxes, and how they’ll file a tax return.
Employers concerned that one of their subcontractors may be considered an employee (or vice-versa) can request a determination from the IRS using form SS-8 “Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.” The form asks several questions, including:
- What training or instruction is the worker given by the firm?
- ow does the worker receive assignments?
- Who determines the method by which work is performed?
- If substitutes or helpers are needed, who hires them?
- Can the relationship be terminated by either party without incurring liability or penalty?
- Who determines the worker’s territory?
There’s no magic question on Form SS-8 that will determine a workers’ status. Questions cover three categories including behavioral control, financial control and the relationship of the parties. Upon determination, individuals classified as “independent contractors” must pay their own income tax and self-employment tax and the employer firm may be required to give you Form 1099-MISC to report “miscellaneous income” that it has paid to you.
PROPER PAPERS. For business owners hiring subcontractors, getting the work done right means more than just on time and on budget. Up-to-date documentation of insurance coverage, workers’ compensation and necessary licenses should all be on contractors’ checklists before approving a subcontractor’s work. “Our insurance company does an audit every year and wants to check on every subcontractor we’ve used on every job,” says Ed Watters, president, Watters & Associates, Rome, Ga. “We have to make sure we have certificates from their insurance companies to show they’re covered.”
Blumberg notes that a subcontractor’s insurance coverages for general liability and workers’ compensation should match those of your own company. “If you have $2 million in coverage and you don’t think the crew you’re hiring can do $2 million in damage, coverage up to $1 million might be OK,” he says. “But more often than not, the coverage should mirror your own. Don’t give the insurance companies or the IRS (Internal Revenue Service) an unnecessary gray area.”
Watters says the insurance issue is one reason his company is scaling back the frequency with which they hire subcontractors. “We’ve had some trouble finding subcontractors with the proper insurance,” he says. “If a subcontractor hires a laborer who ends up hurting his back, we don’t want to find out later that we’re liable for the injury because of our subcontractor’s lack of coverage.” As such, Watters & Associates may withhold a subcontractor’s final check – as much as 50 percent of a job – until insurance papers and a Social Security number (to get a 1099 Form from the IRS) are produced.
Sortwell says landscape contractors faced with technical and somewhat dangerous work, such as tree care, should seriously consider subcontracting because of the insurance risk. “When I started Arborwell, one of my strategic marketing focuses was to be a supplier to companies that don’t want to deal with the high risk and insurance costs associated with tree care,” he says. “Any landscape contractor looking to outsource some work needs to be sure to work with someone who’s legitimate and being insured is a big part of that.”
Blumberg reminds that “contract” is the operative phrase in “subcontracting.” “Handshakes are no good for this type of work, even if you have a longstanding relationship,” he says. “I recommend having a contract that says you’re obligated to provide work for your subcontractors and if you fail to do so, they should be released of the obligation to do the work.” Blumberg adds that contracts should include a 30-day cancellation clause allowing the hiring company to end the relationship if need be. “The good news is that if everyone’s doing their part, the contract can sit in a drawer and get dusty.”
Editor’s Note: Lawn & Landscape advises its readers to consult their own legal counsel when drafting contracts of any kind.
MONEY FOR MANAGEMENT. Among the details outlined in any business contract are the financial terms of the agreement. In this respect, subcontracting can sometimes seem like free money – another business is doing the work and while they’re getting paid, so are you. But Watters notes that some subcontracted work requires a good deal of management and it’s that time for which an overseeing contractor must be paid.
Watters & Associates works with three pricing models depending on the level of management required. “If we oversee a subcontractor, we’ll normally charge a 25-percent markup on that work,” he explains. “But if we find that the work is going to take a lot of extra supervision or would require our designer to be on-site during much of the work, we charge an hourly rate, just like we would if we were charging for a design. If the landscape architect has to be out there laying out a driveway or sidewalk and making sure the grades are right, we need to make sure our company is compensated for their time.”
In a third approach, Watters says that some customers prefer to supervise subcontractors themselves, rather than pay a marked-up fee. That’s fine, though Watters still makes sure to charge the other contractor a referral fee. “If the client wants to oversee the subcontractor, we’ll tell that subcontractor that we’ve recommended them for work on this property,” he explains. “In their bid, we request that they build in a 10-percent referral fee for our legwork in making sure they’re the preferred company for this work.” Referring work to subcontractors helps build relationships, Watters adds, so his company’s subcontractors also are likely to refer landscape work to them later on.
Gachina says his company and Arborwell have several mutual clients who have chosen to work with Arborwell directly, rather than pay a higher fee for subcontracted services. When Gachina Landscape Management does serve as the general contractor, Gachina says his markup varies. “We’ll usually mark up a subcontractor’s work between 5 and 15 percent depending on the size and scope of the job, our relationship with the property owner, and how bad we want the account,” he says. “There have been a number of deals where we needed a competitive edge and tightened up our bid by not marking up the subcontractors at all. In commercial landscaping, you really have to look at the bigger picture. If it’s a customer you want to do a lot of work for, not making a few dollars on subcontracted work may make your bid a little more together.”
At Quality Seasons, Blumberg approaches pricing to ensure that both he and his subcontractors make a good living. “A contractor has to figure out what his or her costs are to sell the work and make a profit, then add onto that what they’ll pay their subcontractor – that’s simple,” he explains. “From there, I broke down my subcontractor’s model and determined how much they would need to pay their bills.”
Some of Blumberg’s subcontractors are year-round, while others handle snow removal only, which requires a different payment structure. In the winter, Blumberg draws up guaranteed-minimum contracts for 12 plows, which he passes onto his subcontractors. Even if there are only 9 snow events, as their were in the winter of 2004/2005, Blumberg and his subcontractors still get paid the minimum. For more than 12 events, and Quality Seasons bills per-time. “In the winter, it works out that our subcontractors are earning about $100 per hour, per truck, which is unheard of, especially for residential plowing,” Blumberg says. “Our drivers are also required to have a shoveler in their trucks with them and they usually earn $15 to $20, which still leaves a great amount of profit coming in.”
For mowing contracts, Blumberg takes a pay-for-production approach, “We don’t pay by the hour – we pay a percentage of what the job makes,” he explains. “The more lawns the subcontractor mows, the more he makes. We also charge more for things like shrub care, so if the subcontractor offers that service they’re able to bring in more money on that job.” Moreover, Blumberg says that his mowing subcontractors are given a list of 80 hours of mowing for two people for the week. If they’re able to complete more than 80 hours of work during the week, they can increase their own income. “I didn’t create a cap for my subcontractors, so if they want more work, they can get more, as long as they’re completing the required work with the right levels of quality.”
Blumberg says his subcontractors bring home most of the gross revenue on a job – about $30 to $40 per hour, on average to pay their bills and themselves – and he still meets the minimums he needs while making a nice profit. “When I got started, I knew the minimum I needed to make to get out the door in the morning and I started thinking about how much someone could make mowing lawns if they had no administrative costs to pay and only a small amount of rent that we charge them,” he says. “When these subcontractors are working most of the time – billing 10 hours a day – they’ll make more money partnering with me than if they were working on their own and had all the expenses of a small business.”
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