LBJ News
The Great Sub Debate

Gain control with employees; lose labor costs with subcontractors
Originally published in Professional Remodeler Magazine, Oct. 2002

Professional Remodeler magazineBreck Powers, CGR, GMB, CAPS, of LBJ Construction in Houston and Stuart Petke of Petke Construction in Richmond, Va., run somewhat similar companies. A 7-year-old firm, LBJ specializes in high-end additions and interior remodels, plus the occasional custom house. Sales this year will total $1 million to $1.2 million. Petke Construction, which is 6 years old, also specializes in high-end work, with a focus on renovation and restoration. Sales volume this year will fall between $1.5 million and $2 million.

But there's one big difference between the companies. While Powers subs out virtually all his field work, including much of the carpentry, Petke employs seven people in the field.

The two of them, with Tom Swartz to moderate, hash out the pros and cons...

breck powers, professional remodeler 2002Tom: Breck, do you use mostly subs or employees in your field crew?
Breck: The only field crew I have employed is one jack-of-all-trades type who does limited carpentry work and miscellaneous things. And then we have a laborer. He does cleanup for us and whatever needs to be done.

Tom: Stuart, what about you?
Stuart: We try to have a two-person crew on the job. We have a lead and a helper, and I try to hire leads who are trim carpenters. I'm not sure that's the best way to go. If you look at your numbers at the end of the year, we'll typically make more money on the vendors and the materials than we make on the actual labor. But the way we're set up, those guys are the glue that holds the project together. They are responsible for coordinating the subs, for making the kinds of decisions in the field that you need somebody with experience to do. Certainly if we get into heavier framing, then we'll sub out framing. Quite often we'll sub out drywall, insulation, always electrical, plumbing, heating and air, and roofing.

Tom: Breck, Stuart has a person on site who coordinates the other trade contractors, as well as materials, deliveries and things of that nature. With you using subcontractors, who handles that function, and how does that work?
Breck: I have a project manager who oversees all my jobs. Sometimes there is a control issue because he is not on one given job the entire day. So there will be times when we do not have supervision on that job. Sometimes if we get strapped, myself or my partner needs to come out of the office to assist with the production.

Tom: Stuart, what are the advantages of using your own employees?
Stuart: Most of the guys we have in the field are every bit as competent as I am, if not more so, and able to judge what to do when the trades run into problems. I'm in touch with our people in the field to a far greater degree than I would be if I had to call another office. You often are working off a rudimentary set of plans at best, and it sure helps to have somebody who's been there from the footing on through to the end. And if something is done that I don't think is right, then we just go ahead and redo it. We don't fight or worry about guys in a hurry to get a draw or worry about guys not showing up because another job has been demanding their time.

Tom: Breck, what are the advantages of using subs?
Breck: You don't have to deal with the overhead issues, some of the employee issues, the cost of the benefits, which has risen dramatically. The biggest thing that I like is that when we slow down, which we have the last half of the year, I don't feel the pressure to have a skilled guy do something he shouldn't be doing. That's when you start eating profitability on your jobs. And you don't have to worry about laying guys off.

Tom: What's the disadvantage?
Breck: Lack of control. For example, if I'm trying to get a trim carpenter out to a job, sometimes I'm battling the fact that he has other projects he's trying to finish, and I don't have the ability to tell him, “You're going to be here,” like you would with an employee. Sometimes it interferes with scheduling.

Tom: Stuart, what would be disadvantages of having your own labor force?
Stuart: Breck just hit on some of them. The benefits are outrageous. We do have times when we get real slow. I've had lead carpenters on backhoes pushing snow when they couldn't work on their jobs. You feel a strong responsibility and genuine affection for the people you work with every day. We try to keep them busy. We manage to get them a paycheck every week, and they understand that, and they appreciate being carried when we don't have a ton of stuff.

Tom: Stuart, how do you see quality control with employees?
Stuart: If you're dealing with subcontractors, unless you've got people you deal with all the time, what you expect and what winds up on the ground may be pretty divergent. The people we've got, we've had for a while, and they know how we like to do things.

Tom: Breck, is your one project manager the main quality control point?
Breck: It is, but I also want to emphasize building relationships with the subcontractors. The goal is to build a relationship with these guys to the point where you're giving them enough work that they depend on you. Treat them well so they count on our work as much as we count on theirs.

Tom: Is it a good idea to be a particular sub's largest customer?
Breck: We benefit quite a bit from subs when we are their largest customer because, in a sense, they are like employees to us. They're dependent on our work for their survival. However, we've been in situations where we've relied on a subcontractor for a couple of years and have built a really strong relationship with them, and then maybe something changed in their business, and we weren't agreeing to things, and we had a couple of issues. That causes us to scramble because we've relied on them so much.

Tom: Stuart, when you're using employees, how are you able to bid their labor, as opposed to a subcontractor who might give you a bid?
Stuart: We recognize that the cost of equipment of that employee on the job is far more than the nominal wage pay, and as such, it's actually cheaper for us in a lot of instances to go outside for labor than it is for the in-house stuff. For better or worse, I look at a job and say, “This is going to take three guys three weeks.“ If there's something unforeseen in there that's not in the contract, then that's an extra. But there are times when you just plain take a hit, and you take a hit whether you're the employer or the subcontractor.

Tom: Breck, how do you do the bidding when it comes to the main subcontractors? Does he give you a bid on each project?
Breck: If the plans are such that it makes sense for him to look at the plans and give us a quotation from that, we do that. But most situations, we just take lineal footage, and we have agreements with the subcontractors. With the trim carpenter, we have the cost per lineal foot to run our base and our jambs, whatever we need to do along those lines. That usually gets us real close to where we need to be. If the time comes when we are awarded the job, we will just contact him and say, “Here's the scope of work, and here's the money we have estimated into it.” Occasionally there are discrepancies, but typically we can work that out.

Tom: The U.S. Labor Department puts out very strict guidelines on whether a person working on your job is classified as a subcontractor or an employee. To have a true sub, there are a lot of things you cannot do. Can you address that?
Breck: My plumber, I'm the only general contractor he works for, but another big portion of his business is service work for past clients. So there's a nice mix there. On the other hand, I have a painter who probably could be classified as a captive sub. He does a small percentage of work outside our company a year, maybe 5-10%. So if it comes down to it, the IRS would probably have a pretty good argument with that one. Hopefully the IRS isn't going to read this article.

Tom: Stuart, do you deal with “captive subs,” and what do you do to distinguish between employees and subs?
Stuart: There's a fellow who, much to my delight, told me this week that he's coming to work for us. He's been a subcontractor averaging 30 hours a week or so for us since the start of this year, maybe a little before that. We've got certificates on him, the contractor's license and all that. Frankly, I like hiring guys like that because they've been there and gone through the headaches that go along with running a business. And he wants to get out and run the jobs instead of dealing with the IRS, dealing with the insurance companies, ad nauseam. I've got a friend who can't so much as own a pack of cigarettes for the rest of his life because he ran his business with everybody being a subcontractor, and he didn't meet the tests for the IRS.

Tom: Is it hard to find good employees?
Stuart: Absolutely. It's loosening up now because we're seeing something of a tightening up in the commercial side. With residential remodeling, it's kind of our time to shine when the economy notches its belt a little bit. I'm seeing better responses to ads now than I have since I've been in business. I think the second or third year we were in business, we sent out 54 W-2s to have an average of 12 people on the payroll. And of those 12 people, four of us were constant from January 1 to December 31. We've used these skilled-labor temporary agencies, and sometimes you'll get reasonably competent people, and then other times they'll send you guys who are carpenters and don't know how to plug in a circular saw.

Tom: Is it just as hard to find good subcontractors?
Breck: Yes, it is. And it takes time to learn how to work with them. It takes time to learn how to properly estimate the work that he's going to be doing. Some of these guys are volatile, and they tend to be there one day and not the next.
Stuart: That's part of what drives a lot of these guys to be self-employed. You know, “I'm a good tradesman, and I'm not going to have somebody telling me what to do. If I wanted to do that, I'd get a job.”

Tom: What words of wisdom would you give to a remodeling contractor today saying, “Hey, the subcontract route is probably the best route to go”?
Breck: It gives you the ability to be a little bit more diversified in your business so you're not always relying on trying to keep your guys busy. It gives you the ability to have a little bit more of a resource pool to draw from; you have different skill levels of certain trades that you could use. It allows you to do a little more work because you may have relationships with several different people in each trade. And I think it's a little bit easier to sleep at night sometimes when you know you don't have a huge overhead. Utopia would be to have three or four relationships with tradesmen in each trade whom I could count on. That, unfortunately, is hard to achieve, and a good portion of my job is constantly trying to cultivate relationships with these people. It's a constant battle to keep that pot full of reliable people.

Tom: Stuart, what would you tell him? S
tuart: Why I use the people I use is that I've got a pretty good long-standing relationship with most of them, and I genuinely like them and know what they're capable of and know that if we need to divert resources from one project to another, we can do it to get the cart out of the ditch, if you will. Certainly there are advantages to going with the subcontractor labor force. It's just that for us, I'm very proud of the group of people we have. We work well together, and I think they all know what we're trying to accomplish together. There's a synergy there that you don't necessarily get when you bring together a group of people who don't have a common thread that's going to last longer than the project they're on.