Finley Perry understands both business models: For years, F.H. Perry Builder, near Boston, had 15 full-time employees. But during an early 1990s' recession Perry couldn't find work and had no choice but to lay off 75% of those people. When business picked up in 1993, Perry was reluctant to change. “I began to see myself as a management company as opposed to a trade company,” he says.
In recent years, many remodelers have taken up the subcontractor mantle — for trades in particular. But many feel just as strongly that having employees is the model to follow. There is, of course, no right or wrong way to run your business — just considerations of the strengths and challenges of each.
COST. EFFECTIVE. No one disagrees that maintaining full-time staff is expensive. For each employee an owner might spend anywhere from 30% to 130% or more in labor burden, depending on the number of benefits, such as payroll taxes, health insurance, workers' compensation, vacations, holidays, training, bonuses, and equipment and vehicle use. “I pay around $5,000 in general liability and workers' comp,” says Bob Lehner, owner of Lehner Brunton Remodeling, Warrenville, Ill., who has four employees in the office and subs out all trades. “We don't pay [subs'] federal taxes, FICA, or Social Security. Every sub is a 1099 or a corporation where they report their earnings. We save money in that regard.”
Any reputable subcontractor will pay those items for his or her workers and pass on those costs plus profit to you, but they won't be sustained by you year in and year out. “Our business is cyclical,” says Paul Floramo, general manager of Capstone Remodeling and Construction in Rochester, N.Y. “I don't want to have to worry daily about what my people will do and have the burden of overhead. Sometimes we have a dozen projects going and other times we have four.”
And, of course, employing fewer people makes payroll easier to manage. Dylan Wadlington of Wadlington Remodeling, in Pine Grove Mills, Pa., subcontracts every position, even the office manager, who sets her own schedule. “All I ask is that paychecks are ready to be signed Friday morning and that bills are paid on time,” he says. That kind of loose situation might be difficult with a large, full-time staff.
David Adams, owner of Design Builders & Remodeling, in Sandy Hook, Conn., has 25 employees, including office and showroom staff as well as an extensive group of tradespeople. Burden is high, but his upscale Connecticut market is strong enough and his $6 million volume large enough that Adams has been able to create separate divisions — a separate company in the case of plumbing — that support themselves. “I'll do roofing and drywall for other builders or just a roof [if it's not part of a larger project] for a previous client,” says Adams, in essence becoming a subcontractor himself.
By setting up divisions instead of companies, Adams doesn't pay separate insurance premiums for each trade, lowering costs. He has a standard builder's insurance liability and workers' compensation policy covering everyone at separate rates. But he does face higher risk. “If the plumber burns down the house, it's the company's problem,” he says. “It's risk versus cost, a decision each person must make.”
With subcontractors there are other insurance issues — such as whether or not they have up-to-date insurance. “We're required by the insurance company to audit subcontractors' insurance and make sure they meet minimums,” Lehner says. “We make sure they have certain limits on their liability and workers' comp. We ask to be additionally insured so we're not responsible for anything that could happen.”
Keeping up with this paperwork can be a burden (see February 2007 Ways+Means, “Keeping Subs Insured”), but the alternative could lead to legal issues or a government audit.
HIRING For many remodelers, the issue begins with finding workers. Adams, whose tony market does not encourage its youth to enter trades, finds it difficult to locate good subcontractors. “I started hiring employees out of frustration,” he says. Adams found that many subcontractors were excellent at their craft but were poor businesspeople. He has hired many of them as full-time employees. “There's one in particular who is one of my best,” Adams says. “Now he's home every night and weekend with his family and making the same amount of money [as when he was on his own]. He couldn't be happier, and I have him at my disposal.”