What Should You Charge as a Subcontractor?
Rates, whether hourly or by the project, are a source of great curiosity for most subcontractors. Are you charging too much? Are you not charging enough? What does your competition charge? What's a good rate for paying subcontractors in your area? Making sure you're getting a fair rate for your work is vital to your business' success, but determining that number can be a serious challenge for many contractors. Here's the basics of figuring out how much to charge for your business' services as a subcontractor.
What Should Subcontractors Charge for Their Services?
Though it would be nice if someone could just give you a dollar figure, that figure may not work for your business. You could go with a general average of other area contractors, but again, it may not work for your particular situation. In general, a rate should be based on a few specific details. It should include you or your crew's hourly rate, the cost of materials, any overhead expenses and some amount of profit.
But when many subcontractors start out, they only cover the hourly rates and the cost of materials. That's why so many subcontractors come and go. To ensure your business can continue as a going concern, you need to cover all your expenses, not just the ones directly related to the job, and make some profit to pay for expansion of the business, dry spells down the road or to provide a buffer when larger jobs are slower to pay or require replacement material for damaged supplies.
Calculating a good rate for a subcontractor should start with the basics: labor plus materials. Profit is typically between three and five percent of the project total. But overhead is a topic that many contractors find confusing. Here's how to calculate it:
- Start out with your basic employee costs. These are costs beyond the withholding and payroll taxes that the employee sees on their paycheck. It can include the other half of the Social Security tax you need to pay, benefits such as health or a matching 401K, worker's compensation, vacation or sick days, safety equipment you provide on the job and similar expenses that go above and beyond the basic labor and material costs.
- Your back office expenses are next in line. How much does your bookkeeper cost? Do you have to pay subscription fees for software that is used on a regular basis? One area where contractors often lose money is failing to pay for the time they spend in the office working on bids and paperwork. Your time is valuable, so if you can't automate the process or use tools to limit the amount of non-billable time spent in these pursuits, you're leaving money on the table.
- What about the cost of keeping your office and equipment working? Whether you rent or own your location, you'll usually still need to pay rent or a mortgage. Subcontractor tax on property is are another area that can be ignored, because whether or not you make any money during the year, the tax agency is still going to expect to be paid for your property values. Utilities can also cut into your profits if not accounted for in your office overhead. Are you making truck payments or buying new equipment to replace aging tools that are losing their effectiveness? Any of the expenses you undertake to keep your business operating needs to be taken into account when determining a fair rate for your business as a subcontractor.
- And of course, there's always fees and regulations that need to be addressed. Fees for testing and certification can quickly eat into your profits, as can training and updating skills for new technologies that are quickly becoming available. Most states and municipalities will require you to maintain a license for a variety of contracting jobs, including electrical work. Are you accounting for these fees and costs in your overhead? If your license or certification requires continuing education hours to remain current, have you included the cost of business that will be passed up to attend those trainings?
As you can see, all these fees and costs can quickly add up to take a huge chunk out of your profits as you work as a subcontractor. Though it's far easier to ignore all the various costs that go into your total overhead, knowing how much they are as a percentage of your annual income and expenses can make all the difference between making a great rate and barely scraping by. Add up all the costs, then divide by how long the job will take to determine your rate.
One other area where you'll see different rates is if you specialize in any particular area of contracting. Do you have experience putting in photovoltaic panels and systems or are you credentialed as a LEED AP contractor? Do you have a reputation for excellence in your area? These specializations open the door to charging a higher rate, because you have skills, knowledge and experience that other contractors can't meet. These type of contractors also spend more time keeping up with the newest developments in the industry, so the higher rate they charge helps pay for the time spent pursuing this information and industry innovation.
Deciding how much to charge seems like a simple enough question, but the answer can be far more complicated than you might expect. By calculating this amount, you can get a better idea of what it takes for your business to be profitable when working as a subcontractor. At Esticom, we understand that you make money doing what you do best, working in the field. Our construction estimation software helps you determine your rates based on everything that impacts your bottom line, then passes that information along to automate your back office and accounting process. Learn more about how Esticom can give you more time in the field and less time spent chasing paperwork and figures.