Is Subcontracting Right for Your Commercial Painting Company?

Are subcontractors right for your commercial painting business? Or if you own a residential painting company and you do some commercial work, are subcontractors right for that type of work in your business? For commercial painting companies who want to extend their capabilities and handle large commercial projects, working with subcontractors can potentially be a smart strategic move. However, there are several things you should know before you decide to hire subcontractors for your painting business.

There’s No Such Thing as a Perfect Labor Model

Let’s talk about labor models. First off I think it’s important that you understand that there isn’t such thing as a perfect labor model. There’s this constant argument between W-2 and subcontractor employees. And I have watched people succeed with W-2s and fail with W-2s. I’ve seen people succeed with subcontractors and fail with subcontractors. I’ve watched people succeed and fail with hybrid models. The truth is both forms of labor offer pros and cons, and your job is to build business systems that enhance the strengths of those models, and make them as efficient and effective as possible while downplaying and reducing the problems associated with that type of labor model.

So let’s get right into it. First off W-2s. What are the advantages? What are the disadvantages? So the advantage to W-2 employees is that it’s a lot easier to know what your cash flow is going to be, based on projections, because you can see labor hours, right? Very easy to track. You know exactly what the output is, what was charged, what was charged to the client, what was actually accrued, what did you pay for. And it’s easier to control the quality of the job and to put systems in place for how those jobs are conducted. There can be a lot more oversight. In that manner, they’re very positive. W-2 employees are great with all of those things that we have just mentioned. There’s a lot more loyalty. You have complete control over the process and they’re not going to be looking for other opportunities, in most cases. They’re not going to come to you and say, “Hey I have a side project going on.”

So what are the cons to W-2s? The big con with W-2 employees is that you really have to be a good manager of people in order to get them to come in on budget, and at the quality and the customer satisfaction levels that you want. That means that you’ve got to consistently hold staff meetings. It means that you’ve got to constantly reward them with things like saved labor bonus programs that give them a financial incentive to come in on budget, and reward them when they come in under budget. And that means recognition, both public and private. We recommend contests. All kinds of things that build a self-policing culture. It requires consistent effort, leadership, management, job costing on a daily basis, a good understanding of production rate estimating, the whole nine yards. Okay?

Those are the pros and cons. On the one side safer control, easier to manage the labor hours. On the other side to get them to come in on budget you have to create a culture, and you have to create management systems, that make that happen. Okay?

Subcontractors: Pros & Cons

Now let’s talk about subcontractors, the pros, and the cons. The big pro with subcontractors is that you don’t have to buy the equipment, you don’t have to manage the painters that they manage. And they have a built-in incentive to come in on budget, if you’re using a flat-rate profit-sharing plan, where the project’s $10,000 in labor, it’s $2,500 in material, “I’ll take care of the material up until a certain point and the labor’s going to be split 50/50, so I’m giving you $5,000 bucks of the 10 and the 2,500 you go purchase on our store account.” Okay? And there are a number of other ways to do this. But the thing about it is it comes with a locked-in self-policing mechanism, meaning they’re only going to get paid X. They can drag their feet, they can go fast, doesn’t matter. And so that’s probably the biggest thing. And you avoid W-2 taxes, a lot of other things, okay? A lot of things that come with managing employees.

What are the negatives? The big negative is you can’t control the quality, you can’t tell them what to wear, you can’t tell them how to do things. Sometimes they’ll have other forms of work that they’ll want to go chase. Sometimes they say they’ve got three to five painters working on your projects, but when you start looking at the billable revenue versus your W-2 labor force you’re not really getting three to five painters, you’re getting like two and a half. And unless you run the revenue numbers weekly you may not know that your cash flow is going to be really anemic because you think there are more painters out there working or that they’re working more productive labor hours than what they actually are, so that’s a big problem.

Now the bigger problem, to me with subcontractors, is the legal risk most painting contractors expose themselves to because they run subcontractors in such a slipshod fashion. You need to have subcontractor agreements that are reviewed by a local state attorney, non-competes, non-disclosure agreements, and you need a checklist from an attorney that tells you exactly how to manage those subcontractors in a way that does not create any exposure for you under the federal dual employment laws. Because if the IRS or the Labor Board ever comes and says, “Hey, I think that you’ve had” … Or rather, “1099 employees that are actually being treated like W-2s. We’re going to do some calculations and for the last seven years you’re going to owe all the payroll taxes for everyone that we estimate that you employed.” It happens. I talk to three or four contractors a year that volunteer this information. And it’s a debt you can’t bankrupt out of. It follows you around forever, until you die or until it gets paid off. So it’s a huge financial risk with subcontractors if you don’t keep your nose clean. But there are benefits.

The Risks of Subcontracting for Commercial Painting Jobs

So those are the big, huge things. And this really applies to residential and commercial. Specific to commercial, in addition to the legal risks that we’ve just talked about, one of the big things with commercial is often you will have corporations that you work for. We worked for a lot of large ones when I owned my painting business, like Volkswagen, Tennessee Aquarium, Kenco Logistics, private schools, Chattanooga State. And the thing about those large organizations is many of them are going to check, and recheck, and double-check how your employees are … Or your workforce, I should say, what their relationship is with your company. And if they smell that things are subcontracted, and these folks haven’t had safety training, and they’ve not been background checked, and they’re not under your direct control, they’re going to be very hesitant to want to hire those individuals from you. And it may knock you out of the running for some jobs.

In some commercial situations it doesn’t make any difference whatsoever, they just want the job finished and they want the quality controlled, and however, you do that through your management processes they’re okay with it unless something goes sideways. If something goes sideways, and there’s some kind of legal dispute, and they determine that you’ve got subcontractors or there’s some kind of insurance dispute and you’re not covered specifically, and perfectly, it can create problems.

So whether you’re doing W-2, subcontractor, or a hybrid, the main thing is just to make doubly sure that you’ve got your ducks in a row legally, and then from a procedures and a management standpoint.

Brandon Lewis here with Painter’s Weekly and Painters Academy. Do click the subscribe button below, forward this to people that you think it could help, post it in chat rooms. We love getting this information out to painting contractors so that they can grow better painting businesses. Talk to you next time.