Subcontracting Strategically Through Strong Leadership

As a leader in many companies during my career, I have engaged in countless hours of discussion regarding leadership strategies. The conversations usually focus on how to improve a product, how to make deliverables for a service more useable or how to develop more productive employees. In today’s economic environment, where companies use subcontractors for a large portion of projects, I am amazed that leaders rarely discuss what could amount to 50 percent or more of their company’s workforce.

As leaders, we have to set the course for our business. When you look at your subcontractor strategy as a mere business need, you are missing an opportunity to promote, unify and improve your business. If you are using subcontractors, you owe it to your company to set forth a strategic initiative that treats subcontractors not only as a need, but also as an advantage. Use the following five steps to optimize your subcontractor strategy.

Step 1 – Define Your Goal If your company has fallen into the trap of simply hiring subcontractors, then you need to re-evaluate your strategy. Why are you letting a significant portion of your workforce just happen? The first step toward turning your subcontractor strategy into an advantage is to define when your company will use subcontractors and why.

Start by determining what your company does well. Perhaps your company has skilled cabinet workers, painters or maybe landscape architects. Then, think about where you want to focus your growth. What skills have fluctuations in needs? What are the long-term or short-term skills required? For example, you may want all of your jobs to have site managers, project managers and quality assurance specialists that are your employees. You need a plan for what will be your core skill sets and how you want to develop them. Doing so will help you and your team understand when to hire new employees and when to use subcontractors.

Now that you have defined your goals, understand that these aspects of your business are constantly changing. The market may change. Your growth projections may change. As changes happen, make adjustments and let your leadership team know why you made these decisions.

Step 2 – Find the Right Partners Now that you know what work you want to subcontract, you need to move beyond “this person for this job” to long-term relationships with your subs. Based on growth plans, you should know that you will need, for example, two companies with these skills, four companies with those skills and three with another set of skills. Now create a process for finding these partners.

Develop a Request for Proposal (RFP) process to send to potential partners to complete and return. The RFP needs to include all the items that you would expect from a partner, including the following:

• Do they maintain training?
• How do they maintain their tools and equipment?
• How do they assure quality?
• What do their business financials look like?
• What are their reporting requirements?
• Are their employees legal?
• Do they pay taxes?
• Do they employee 1099s?
• What are their rates per skills required?

Notice that these items are not job-specific. The RFP is a generic agreement for a one-year period. This allows you to develop strategic relationships with your subcontractors versus simply hiring a person for each job.

Step 3 – On-Board your Partners When you hire a new employee, do you just send them out to a job, or do you take time to conduct some type of orientation? Hopefully your answer is that you conduct orientation. So, if you take the time to initiate employees, why are you not doing the same for your subcontractors?

Your subcontractors are representatives of your company, so develop an on-boarding program for them. This program may be a two-hour class with a presentation and a test, or it may be a 15-minute checklist that you review at the worksite. Regardless of the format, develop a program to ensure everyone understands the expectations of working for your company. At a minimum, your on-boarding program needs to cover safety, emergency procedures, escalation paths and expected reporting. I also recommend that you include items such as your company’s core values, how you expect subs to interact with the customer and what it means to be a company partner.

Step 4 – Know the Value of Your Services Another trap I see is an owner allowing their employees to play the mark-up game, taking the price given by the subcontractor and marking it up a standard rate such as 5 or 10 percent for the customer. As a leader, you are doing your company a disservice. You must educate your managers on the true definition of gross margin percentage (GMP) and the need to understand the true value of a service. If a subcontractor charges you $100, and you mark it up 10 percent and charge the customer $110, what was your GMP? If your answer is 10 percent, you are giving the answer I hear 75 percent of the time, and you are wrong. Your GMP is actually 9 percent or $10/$110.

Make sure your team understands this fundamental difference. You need to also understand the true value of the service you are providing. What if the subcontractor charged you $50/hour for a service that you know the market will pay $70? Would you price the service to a customer for $55/hour based on your mark-up strategy? If your answer is “probably,” then you, as the leader, have to make the necessary changes within your team. Subcontracting is not a strategy for you to set your pricing. It is a strategy for delivering services to your customers while making a reasonable profit. If you are truly going to have long-term relationships with your subcontractors, then you have to make sure they are receiving a fair price. You want them to make a reasonable profit, because you want them to stay in business.

Step 5 – Brand Your Subcontractors The last step in moving your subcontractors from a simple need to a strategic advantage is to make sure they carry your company’s message. If your employees wear shirts with your company’s logo, then shouldn’t your subcontractors wear the same shirts? You have taken the time to build a long-term relationship. Why not take the next step? Your subcontractors should look like your employees. If your employees have hard hats and safety vests with logos, then so should your subcontractors. If you require your employees to have magnetic car decals, then expect the same from your subcontractors. I am not suggesting you lie to your customer about your use of subcontractors. I am suggesting that you make sure your subcontractors act and look just like your employees.