Subcontracting isn’t always the best solution when you’re feeling overwhelmed with projects and need help. The solution may be that you need to pass on the projects and allow your client to find another business to handle their needs.
How to Determine
If you are charging your client $30-$35 an hour (or less) to work on their projects, you probably aren’t set up to bring on a subcontractor.
The fair market base rate for subcontractors begins at $25 an hour. Making a $5-10 profit per hour hardly covers your operational expenses. In situations like this it’s better to refer the client to someone and take a step out of being the middle man.
A better way: Get a quote from the subcontractor, add in your profit mark-up, and charge that rate to the end client.
If you expect your subcontractor to lower their rate so you can make a profit, you probably aren’t set up to bring on a subcontractor.
Asking a subcontractor to lower their rates because you aren’t willing to earn less isn’t fair to the subcontractor. Why should the sub take the loss? The subcontractor is in business to be profitable as much as you are plus the sub is the one doing the actual work. The subcontractor is helping you meet project needs that otherwise can’t be handled by you. You need the subcontractor’s assistance if you want to keep your client happy and if you want to keep the project in-house.
A better question to ask is “What’s stopping you from raising your rates with your client?” A second question to ask yourself is “How do you feel when a client asks you to lower your own rates?” And, do you lower them? Yeah, feels icky when you think about it now, doesn’t it?
A better way: If you want a greater profit margin after hiring on a subcontractor raise your rates to your client to allow for occasions, or on-going, subcontractor rates to be built in. Many lead companies will charge a higher hourly rate so they can adequately compensate their own subcontractors. There are values and benefits to having subcontractors and most clients will understand this. Most businesses recognize that by hiring higher quality subcontractors their own business success level rises. It’s always wise to invest in your assets – those areas that make you money.
If you aren’t actively and consistently marketing your business to gain leads plus continual work, you probably aren’t set up to bring on a subcontractor.
If you state that you market your business and therefore the subcontractor should earn piddly rates to balance out this effort by you (because you’re marketing not them) then be prepared to elaborate on how you market. If the cold hard truth is that you’re not active on social media, you’re getting the majority of new clients via referrals, you don’t regularly distribute a newsletter (in digital or print format), you don’t attend local networking events, you don’t have time to participate in forums or LinkedIn group, you don’t write articles or distribute them with any regularity, then don’t fool others by saying that you’re marketing and wanting their reduced hourly rate to reflect this. You’re not marketing continually which is what you’re truly asking them to continue to pay towards so why should your subcontractor earn less for a limp bogus excuse. Additionally, when you bring on a subcontractor for the long-term you owe it to that person to trust that you are actively marketing and will do your best to have on-going work for them. I know most lead business won’t promise to have a certain number of hours yet the lead business wants the sub to be available. The give-and-take is unbalanced. Remember the sub is earning a lower wage via subcontract work so ensure they are happy in joining you in supporting your business efforts. This is the time to strengthen your relationship with your subcontractor.
Just as a subcontractor takes on two clients [the end client’s projects and the lead business] when the sub accepts subcontract work, you the lead business need to keep both your client happy with finished projects and you need to keep your subcontractor happy so they enjoy and want to continue working with you. Subcontracting works because it’s equally and mutually satisfying for all parties participating.
If you’re not willing to project manage your clients or bring on a project manager at higher rate than your other subcontractors, you probably aren’t set up to bring on a subcontractor.
Too many times lead businesses are placing their own clients directly in the hands of a subcontractor which takes the lead business out of the full project manager role. As the client and subcontractor friendship and trust levels form and strengthen the handling of everyday blips and issues shifts to the subcontractor. When this shift happens the lead business should increase the subcontractor’s earnings to reflect this higher level of service being given to their client by the subcontractor.
A better way is to have tiered subcontractor rates based on the levels of service being given. Those having no client contact get Rate A. Those working directly with clients receive an increased rate to reflect the higher level of service being provided.
Calculating your Rates
Know what it takes to operate your business. Every business has a base rate they must earn to pay for their operating expenses. Taking work under that rate is ridiculous. Not knowing what that rate is, well, that’s plain scary.
If you’re the lead business know what your base rate must be and that figure will answer if you can afford to be the middle man and bring on a subcontractor. If you’re the subcontractor know what your base rate is so that should a rate be pitched for consideration you know if that will work to support your operational expenses.
Subcontracting can be a wonderful experience. I’ve provided services as a subcontractor, team associate, and project manager for various multi-VA teams. Additionally, I have hired subcontractors for support with my clients’ projects. The success in these relationships is outlining the roles and responsibilities for each side PLUS fair compensation.