A lot of business establishments favor hiring independent contractors over engaging employees because of many advantages. Hiring an independent contractor comes with many benefits such as:
- Increased flexibility: you will not need to bother yourself with the complexity of hiring several different employees since hiring a subcontractor is not a long-term arrangement. You can easily make the necessary changes along the line.
- Cost-effectiveness: going for subcontractors instead of regular employees helps cut costs. Engaging employees comes with certain legal liabilities and expenses such as vacations, taxes, and sick days. All of which will potentially increase your overhead cost.
- Lawsuit vulnerability: every employee has the protection of several state and federal laws. These laws create an opportunity for employees to bring quite some legal claims against their employers. Since subcontractors are independent, a lot of these laws don’t cover them.
What Is A Subcontractor
A subcontractor is a person or, in some cases, a business enterprise that signs a contract under a primary or general contractor to execute a specified task. Usually, it’s common to use the terms “contractor” and “subcontractor” correspondingly, but there are specific fundamental differences between the two, and it is necessary to know these differences.
The critical difference between the two terms is that a subcontractor has agreements with the contractor and not the clients. A contractor looks out for large jobs or contracts that include various specialty areas and takes care of different arrangements. At the same time, a subcontractor specializes in a particular area of construction. Consider making room for options that will prove helpful all-round.
Classes Of Subcontractors
There are three kinds of subcontractors: domestic, nominated, and named subcontractors.
- The primary contractor hires a domestic subcontractor to supply or attend to projects in a larger, main contract.
- The main contractor selects a nominated subcontractor out of already available workers. However, the primary contractor must provide certain services like water and electricity to enable the subcontractor to do his job.
- A named contractor is similar to a domestic subcontractor.
Why Subcontracting?
Many organizations, especially small businesses, prefer to subcontract. There are many reasons why establishments engage in subcontracting; if the complexity and diversity demand different technical know-how scopes, the general contractor will need to employ subcontractors’ services. Also, a subcontractor can help cater to certain unforeseen circumstances, like in a case of force majeure.
Some community development projects, especially contracts awarded by the government, demand that the general contractor hire a definite number of locally sourced subcontractors as part of the arrangement. Contractors also opt for the independent contracting option because it eliminates the need for certain expenses such as benefits, salaries, taxes, and insurance.
Furthermore, a business is required to register with the Internal Revenue Service (IRS) to qualify for an Employer Identification Number (EIN) if it is to win a subcontract. The general contractor will need the EIN to report any ordinary income paid to the subcontracting company. Also, the subcontracting company needs to have an updated tax return file.
The Subcontractors Pay
Many factors influence how much an independent contractor earns annually. Different countries record different amounts a subcontractor makes on average every year. For instance, in the United States, a subcontractor earns around $82,851 on average per annum and about $6,250 for working overtime.
Subcontractors are also usually granted certain benefits, some of which include:
- Employee assistance program
- A flexible itinerary
- Mileage reimbursement
- Health insurance
- Referral program
More than 50% of subcontractors in the United States are comfortable with the amount of money they make yearly and think it is enough with the cost of living in their region.
For subcontractors, you must discover your pay range. Understanding the market will help you compare your pay with others in your field and location. It will also help you arrange a raise and work out a fair job offer.
Determinants For Profit
Certain factors affect the returns a subcontractor gets from each project. Here are some of these factors.
Proper Estimation:
Concluding a reasonable gross profit to add to a project’s estimate can be rather complicated and time-consuming. It is not easy to determine the many factors related to the project’s nature and the economic situation. However, a proper evaluation of the profit margin will help increase profitability and competitiveness. It is essential as a subcontractor that you avoid the late submission of citations and estimates.
Pay Record:
Subcontractors consider it essential to make enough profit, but they must consider the client’s past payment record. As much as possible, the contractor’s demand needs to meet the client’s requests and prospects. This attempt will help avoid late or incomplete payment and limited cash flow, thereby increasing profit. Various areas and different projects have different pays on average. The subcontractor should consider this also.
Risk Management:
Construction risks and other work hazards are almost entirely unavoidable. There’s also the issue of natural disasters that may slow down or completely interrupt construction projects. Taking this issue into consideration when recognizing the ideal markup for a project will consequently determine the overall bid and influence the contractor’s chances of winning the contract.
Average Bidding Rate:
Before submitting your bid, it is essential to study and consider the average bidding rate of other contractors in the same region. A reasonable rate increases the subcontractor’s chances of being awarded the contract.
Timely Completion:
Completing a project according to schedule is very important. It directly affects cash flow because, in several cases, the payday is usually determined and calculated in line with each stage of the project.
Other essential factors to consider are:
- Inflation.
- The cost of raw materials.
- Interest rates.
- Fluctuating tax policies, amongst others.
Conclusion
The amount of profit a subcontractor expects hinges on the returns a contractor gets from a project. Winning the contract is vital to every contractor, and as such, professionals decide to reduce profit levels to increase their chances of winning.
