Wondering what a subcontractor is or about their role in the home building or renovation process? Look no further, because our complete guide covers everything you need to know.
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- What Is a Subcontractor?
- Benefits of Using a Subcontractor
- Things to Consider
- Subcontractors vs Employees
What Is a Subcontractor?
A subcontractor is someone who does all or part of the work on a contract that someone else has signed. Real estate businesses use lots of people and other businesses as subcontractors, especially in construction and renovation.
General contractors in the construction industry hire parts of construction contracts out to specialist subcontractors. The subs do the electrical, plumbing, concrete, HVAC, and other work. The general or prime contractor oversees and coordinates them.
A person who is doing work for a small business without being an actual employee may also be called a subcontractor. Freelancers, independent contractors, and temporary employees from a temp agency are examples.
These are people who may do jobs for you without being your employees. Here are some examples of subcontractors being used in real estate:
- A property manager contracted to manage a street of duplexes subcontracts landscape maintenance to a landscaping company
- A construction company building a new apartment complex hires an electrical company to install the wiring
- A real estate agent hires a one-person painting business to paint the interior of a new single-family residential listing
- A broker hires a janitorial service to clean the real estate company’s offices
Benefits of Using a Subcontractor
There are some good reasons for using subcontractors in a real estate business, or any business. Subcontractors let a business owner do jobs he or she couldn’t otherwise handle, and to do them cost-effectively. Major benefits include:
Even expert brokers may have little knowledge of carpentry, installing carpet or other parts of the construction business. By using specialist subcontractors a business person can make sure necessary work gets done by professionals.
Subcontractors provide their own equipment and tools. Using subs lets you avoid buying expensive gear like riding mowers and paint sprayers.
Extend Your Hours
Tenants always seem to call at 5 o’clock Friday afternoon to report clogged toilets. Having a subcontractor plumber to handle these calls makes a real estate agent’s life much easier.
Subcontractors may charge more than an employee would earn in salary for the same work. But hiring employees involves withholding taxes, unemployment insurance, workmen’s compensation and possibly paying for health insurance and retirement plans. Over time, subs can boost your cash flow.
When a sub’s job is done, the small business owner has no more responsibility. Compare that to employees, who expect to get paid whether or not there is work to be done.
Some Caveats with Subcontractors
Despite the advantages of using subs, businesses still have full-time employees. That’s because employees have some advantages over subs. Here are a few:
- You have less control over subcontractors than employees. Subcontractors are by definition independent and only subject to a limited amount of control.
- Using subcontractors may involve laying out more cash in the short-term. This can actually be a savings in the end, due to freedom from tax and benefits. But a sub is likely to charge more than you’d pay an employee.
- Using subcontractors can bring additional scrutiny from the authorities. The Internal Revenue Service is always on the lookout for employers attempting to evade withholding taxes on employees by claiming they are subs. You have to be careful about using subs in some circumstances.
- If a general contractor doesn’t pay subcontractors, a subcontractor may be able to attach a mechanic’s lien to the property. This can complicate selling the property down the road.
Subcontractors vs Employees
The IRS has a list of rules for determining whether a worker is a subcontractor or an employee. Generally speaking, someone who punches a time clock is probably an employee and not a subcontractor.
However, it can get complicated. And it’s important to get this right. An independent contractor is responsible for his or her own self-employment taxes and benefits.
Also, usually, expenses, equipment, and other responsibilities are borne by the sub, not you. To make sure a worker is a sub and not an employee, consider these three tests:
1. How Is the Worker Directed?
This is the key one. Do you tell the worker exactly what to do and how and when to do it? If so, this worker could be an employee. Does the worker decide the details of how to do the work, what tool to use and so forth? If the answer is “yes,” this worker is probably independent.
2. Who Controls the Money?
Does the worker expect to be reimbursed for, say, using his own car to get to the job? If so, then he is probably an employee. Is paying for the worker’s transportation and other expenses up to him? If so, this is likely a subcontractor, not an employee.
3. What Kind of Arrangement Do You Have?
Does the worker expect to get a specified number of paid hours of work from you each week? That’s probably an employee. Does the relationship end when this particular task is done? That’s likely a subcontractor.
Whether a worker is an employee or independent subcontractor can be tricky to decide. If you have any doubts, consult with an attorney or tax professional.
Working with Subcontractors
Eventually you may connect with one or more reliable general contractors who can screen, hire and oversee subcontractors for you. If you’re the project manager, check them out beforehand.
Hire them from a reputable referral source such as a personal recommendation. See that tradespeople are licensed, bonded and insured. Meet them in person to see they project the image you want.
Identify more than one candidate or each subcontractor need. Give each one a test job to see how they perform. Put details of the subcontract work order in writing.
Should You Use a Subcontractor?
Subcontractors can give a real estate business the ability to do all kinds of specialized jobs. They can save money and provide unmatched flexibility when it comes to project management.
But just like the work the subcontractors will be doing, hiring them has to be done right. Take care to understand what subcontractors are and are not, and how to deal with them.