How Much Should a Contractor Pay a Subcontractor?

Scoping your next project and trying to decide how much to pay your subcontractors? As always with major construction projects, heeding the bottom line is crucial for the project's success.

There is no one answer to how much you should pay a subcontractor. At the same time, it is crucial to have a number in mind when negotiating a contract. You've won the bid and chosen your subcontractor to join your team for a reason. You want to come up with a figure that both of you feel is fair.

Every project requires very different materials, labor, and overhead fees to get going. Knowing this, you must consider many various aspects of the project. This simple guide can help lead you to an understanding of a total sum that suits you and your subcontractors alike.

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Cost of Materials

Factoring into your total sum is all the certified materials needed for the job. Before contracting your subcontractor, develop a well-documented list and total price for materials based on market rates. It will help guide you to a fair price for your job.

Your subcontractor will provide their budget based on their calculations. Once you compare it with yours, you can decide together on a reasonable amount to make your job a success.

Recent data points to construction costs rising partly based on material costs, so it's always essential to keep up to date with market rates. You want to ensure you aren't lagging when it comes to your calculations.

Plant & Equipment

If your job calls for it, you may need to factor in specialized machinery, equipment, and other extra costs into your total price. Job-specific equipment can be a worthwhile investment to ensure your subcontractors can do the job well, fast, and on time.

When knowing what P&E you should pay for, something worth considering is what the subcontractor has on hand and what they have hired or bought, especially for your project. You can ask for an estimate or itemized receipt of the price they paid.

Overhead

There is one more important factor that all too often gets overlooked.

Overhead includes fixed, variable, and semi-fixed costs associated with but not directly linked to your project. Sound confusing? It can often lead to trouble, and many contractors find this the most challenging part of the process to understand.

Calculating overhead is never easy, and many contractors run into trouble projecting this cost and calculating a fair price from it. Some factors worth including in your calculations include:

• Liability insurance
• Social Security withholdings
• Other benefits
• Backoffice expenses
• Office equipment
• Fees & regulations

What Should Subcontractors Charge for Their Services?

While you may think you are ready to go, it's important to remember what your subcontractor needs.

A successful project is an arrangement that suits both the contractor’s and subcontractor’s needs. Knowing what they will need from you is the first step to understanding the breakdown of what they plan to charge and why. Some factors could include:

Labor

Your subcontractor will need to ensure that their workers are paid fairly and on time. They should have factored in labor costs into the total sum of the bid based on roughly how long the job will take and which workers will be necessary for what tasks.

Determining what this price should look like on your end will involve being up to date on fair work rates and comparing the total job time to theirs. With the average hourly earning coming out to about $30 for construction workers in the U.S Construction Sector, you can see how costs can add up quickly.

It can be tricky to know what extra labor costs will look like at the beginning of a job and whether something like overtime should come out of your price or factor into a set contingency price. Never forget the “human factor” of your project and the extra costs your subcontractors may encounter.

Profit

Don't forget—the subcontracting company wants to take home some profit too!

For most jobs, money that goes back into the subcontracting company is part of the greater deal. The bid reward could cover various things, including the subcontractor's company expansion, slow jobs, or for moments when there is little work to be found.

As a very rough rule of thumb, the profit for the subcontractor should lie somewhere between 3-5% of the total job, but there is no fixed rule. Where there is some room in your agreement for negotiation is what you consider the margin for profit and what you might classify as ‘contingency.’

Contingency

It is not always the case, but many larger-scale deals put money aside for contingencies. This money is set aside for possible issues and unexpected delays and could include extra materials, overspill, and other unforeseen problems with the project.

Some subcontractors will ask for more than others, and this is something prime contractors may find allows for some haggling. Before doing this, though, keep in mind the particulars of the contract you are navigating and consider things that could affect the project.

Factors include:

• Special building materials
• Overtime
• State zoning laws
• Weather-related issues

Contingency funds are something that should also factor into your total project calculations. Because of the material and labor costs, many subcontractors will require a new contract for every minor addition that you request. They reason that they shouldn’t have to foot the expenses of adding a new wall or expanding the base beyond the original contract details.

Always Be Prepared!

No matter where you are in the U.S, there is much information you need to know to ensure you are on top of running your contracting business. Luckily, experienced experts are here to help!

Contractor Training Center draws from many years of experience and expertise to help you succeed. Kickstart your journey to becoming a fully licensed contractor, with useful recourses and advice to passing your test and more!

Get in touch for a consultation today!