Preface: Counting the costs accurately requires appropriate knowledge and expertise. The ability to ask the right questions are a quintessential value of business advisors, because with that question you often have opportunity to formulate an effective and right answer. Example: Doubling or tripling “fish on the line!” usually begins with a question too.
Help Wanted (Segment II)
Credit: Jacob Dietz, CPA
New Employee to Replace Subcontractors
Pay new employee by efficiencies Another situation may arise when a company wants to hire an employee to do work that a subcontractor was doing. In that situation, cost savings may pay for the new employee.
Imagine a remodeling company that specializes in remodeling bathrooms. In the past, they always subcontracted the electrical work. Now, they add an electrician employee team to do that. Even though there may be no increase in sales to pay for the new employee, they may save enough money on subcontracting work to pay for the new employee. An employee will likely have a lower per hour rate than a subcontractor.
There are other costs from an employee, however, in additional to the hourly rate. For example, the employer may be paying employment taxes, tools, uniforms, etc.
In the electrician example, the remodeling company could perhaps get by with less tools when they subcontracted out the work. If they bring the electrical work in-house, then they may need to make some tool purchases. The company can run some calculations on what those additional costs would be per working hour.
Consider Number of Hours to be worked
With a subcontractor, the remodeling company can structure the relationship so that the subcontractor only helps on jobs on which they are specifically contracted. If the remodeling company does not have any jobs currently running on which they need the subcontractor, then they do not pay the subcontractor a dime. Sometimes that can be done with a part-time employee as well, but the employee may want to work at least a minimum number of hours per week.
If that is the case, then the employer may pay him even if he is not doing the type of work that they would want him to do, if that work is not currently available. If that happens frequently, then the remodeling company may want to increase its calculation of what the employee is costing per hour for electrical work. To have the employee available to do wiring, they may need to pay that same employee to sweep the shop floor and sort screws occasionally.
When replacing a subcontractor with an employee, consider how many hours you have available, and how many hours the new employee will want to work.