Management Talk: Health Care for Contractors

We all need health care at some point in our lives, especially as we get older. Insurance is one of those things that our family isn’t comfortable living without, and our family has been covered by an individual health insurance policy for the past 15 years. It isn’t cheap, but having health insurance has saved our financial butt more than a few times.

Under the specifics of the new health care law, whether your business will be required to provide insurance, what level of coverage you will have to provide and for whom isn’t clearly known right now. And since I’m not an insurance expert, I won’t address that.

What I will address are things you need to consider on how this new law might impact your Profit and Loss statement.

Providing health insurance for your employees, if you don’t already, is going to cost you money. If you already provide health insurance, many believe the cost of that insurance will increase because of changes in the level of coverage.

If your overhead expenses increase (and health insurance is an overhead expense), you need to charge more for your work. If we start with the premise that you need a minimum of 8 percent net profit to maintain financial balance in your company, that means you are going to have to figure out first what your health insurance costs will be, then do the math to incorporate it in your markup. If you don’t, the cost of your health insurance will come out of your profit – and when you run out of profit, you will be operating at a loss.

But there are alternatives. One is using subcontractors instead of employees. In my experience, companies that do all or almost all of their work through subcontractors seem to have the highest percent of net profit at the end of the day. Those companies also have fewer customer complaints and callbacks or service work, get their jobs done in a timely manner and require less supervisory time to get the jobs done than if they were using in-house employees.

Let’s deal with the argument that some people have already thought about as they read this: “I want employees because I can control them better and get a better quality job.” Maybe. But let me ask this question: Who defines the quality needed for a given job? And, at what cost? If you have two crews to choose from and both are capable of getting the job done and it looks the same, why do you need to put your time and effort into managing that crew? Is there an ego problem here or maybe a misguided standard set by someone too fussy and nit-picky? Hiring a subcontractor puts him in charge of the crew and saves you the time and trouble.

Here is a good way to tell if your standards are costing you money. When you reach the point in the job where, for all practical purposes it is “done”, and before you start spending more money fixing and fussing with the little stuff, ask your customer to look at it and ask them, “How do you like it?” If they like it, you are done. If you go beyond that, you are taking money right out of your profit to fix things that probably don’t need fixing. Your customer will tell you when they are happy.

And remember, when you schedule your post-job callback to tidy up the little stuff that needs fixing, you will have the opportunity to make adjustments to the things your customer would like to have fixed.

Another comment I hear about hiring subs is, “Well, you can’t control them and get them to do the job the way I want it done.” Let me ask you: if they aren’t doing the job the way you want it done, why are you paying them? If you have a good subcontractor agreement program in place, as you should, then you will not have those problems.

The old saw, “He who has the gold makes the rules” should be actively enforced. You tell the sub what you want done, and the two of you reach an agreement. When they do the job the way you agreed, they get paid. If they don’t do the job right, they don’t get paid until it’s done the way you agreed. How much simpler can it be?
Skilled subcontractors will almost always do a given job faster than general purpose employees, and they will do it better because that is what they do and have been trained for. They will also have far fewer code violations from what I have seen, and keep the jobs every bit as clean.

Remember that your subcontractors need to be performing work for others as well – if you are their only source of work, the government will probably declare they are employees. There are guidelines established that you need to follow when working with subcontractors.

And your subcontractors are business owners, and they will probably also have to purchase health insurance. That means their prices to you are going to be higher as well. You will have to pass that higher price on to your client. But that does lead us to the next concern, and that is being prepared for these possible cost increases.

Before this health insurance requirement kicks in, about 3-6 months before, you need to adjust your prices on all your quotes to cover the added expense. Don’t wait until the big day comes and then announce to the world that you have to raise your prices. By then, it will be too late and you are going to eat some of the costs. Be proactive. Stay tuned to the requirements and start dates. Calculate your additional costs and find out how your subs will increase their prices, and update your quotes.

Learn what the new laws require. There will be all kinds of seminars, lectures, classes, and on-line classes explaining the new laws. As a business owner it is up to you to get on top of those laws and get your company tuned into what the government says you must have in place. This also means you are going to have more reports to fill out, although if you work primarily with subcontractors, a majority of the paperwork requirements will probably roll down to them.

Don’t wait until the last minute to try and put all this together. Start now and when the big day comes, you will be prepared. RB

Michael Stone is a business coach, speaker, consultant and management trainer with more than 50 years in the building industry. He wrote “Markup and Profit: A Contractor’s Guide” and “Profitable Sales: A Contractor’s Guide.” He offers business management assistance to construction-related companies with audio and CD programs on his Web site, as well as coaching and consulting services. Find him at, by e-mail at or at 888-944-0044.

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