Should You Hire More Full Time Staff or Use a Subcontractor

"What's the correct number of team members I should have based on our yearly volume?"

It's an age-old question asked by residential contractors owner/operators at multiple points throughout their business life.

Aligning the work in your pipeline with the internal team you have on hand is a balancing act that's tricky to manage because the answer depends on so many factors. Clients often ask me how to know if they have enough team members for the volume of work they have, or how quickly they should be considering hiring additional people.

There is no set formula

The truth is, there's no set formula for determining when (and how much) to add to your team because every company's size and business model are different. Some builders have internal teams and self-perform most of their work, while others rely more on trade partners to do the heavy lifting.

If your business typically handles many smaller jobs, like bathrooms and kitchens, you need more people to cycle through those jobs because they take less time. And in those cases, you're likely self-performing most of the work. 

But if you run larger jobs, like custom-built homes or large-scale remodels, you probably rely more on trade partners instead of doing all the work internally, reserving your team members for specialized work that can't be farmed out. In which case, you need less staff to handle the jobs you have booked (depending, of course, on the number of jobs you operate simultaneously).

Determining whether to hire additional team members or outsource work to trade partners means balancing a very thin line between "do I have enough work for the people or people for the work?"

And every residential construction business has to manage this, regardless of its size or yearly output. To put it another way, they're looking for the "Goldilocks Effect."

The Goldilocks Effect 

The Goldilocks effect (also known as The Goldilocks Principle) is the premise that people are inclined to seek "just the right amount" of something, stemming from a psychological desire to avoid extremes.

In the case of residential construction, it's the sweet spot where work and staff are just about balanced.

To illustrate the Goldilocks Effect, let's look at these three scenarios: 

• If you have too much work for the size of your team, they become stretched too thin, increasing the likelihood of making mistakes that will cost you more time and money and jeopardize your ability to profit on each job.

• If you don't have enough work to keep all your team members busy, you have to "create work" for your team that isn't billable to a client or find yourself in a situation where you have to lay off team members.

• If you have just a bit more work than you have team members for, and you're finding yourself just a little bit pressured - but not panicked or frenzied, you've hit your Goldilocks Effect.

Using Billable Ratio

One Key Performance Indicator (KPI) we can use to track our production effectiveness is your 'billable ratio.' 

A billable ratio measures the percentage of billable hours against available hours for each of your team members.

This helps ensure we are striking the right balance between the volume of work and the team members on staff to perform that work (aka the Goldilocks Effect).

If you don't have enough work and you have to find "make-work projects" for your team, then your billable ratio lowers because they are not working on revenue-generating tasks.

If you have too much work on your team's plate, your billable ratio can also lower because your team is overstretched. An overworked team without enough support can lead to communication gaps and errors that result in re-work and additional costs you feel the need to absorb.

The Master Projects Calendar

Determining the team size you need comes down to how many jobs you have booked, how many are in paid pre-construction, and how many leads you have on the table. If you aren't looking at this big-picture calendar weekly to monitor your overall capacity, you will likely struggle to either keep everyone busy or meet project deadlines.

This is where the Master Projects Calendar comes in and is one of the five key success tools we teach in the BUILD AND PROFIT SYSTEM, a program created specifically for custom home builders and renovators.

Without this system, it's very difficult to forecast how many team members you need and how many site superintendents and project managers you'll require. If you need help gaining clarity in your business so you can start looking ahead instead of right in front of you,  then click here to learn more about setting up this system.

The Horseshoe Psychology

A great way to think about your team's capacity is to use the horseshoe analogy, which describes the psychology of sport and its top athletes. An athlete operates best at the top of the horseshoe - in the middle, where they are neither over nor under-engaged. That's when they are maximizing their potential. 

Your remodeling business should be the same. You're busy but not over the top, and you've got just a tiny bit more work than people, which is enough to keep everyone busy but not so 'over-pressurized' that you're at risk of bleeding profit.

Because if you fall at either extreme, you'll likely see your billable ratio (and net profit) suffer as a result. This is a critical and careful balancing act to ensure you don't dilute your profits.

The Benefits of Hiring Subcontractors

Determining where your residential construction business falls on the horseshoe is a process that takes time. If your pipeline is growing, but you’re not quite sure you've reached the tipping point yet, it probably makes more sense to outsource to trade partners rather than add more team members.

Trade Partners lend short-term help for larger projects

Trade partners are a valuable resource that can add short-term expertise and help on a project, allowing you to free up your internal team for other tasks. This will increase your ability to take on more projects each year and increase your throughput.

Trade Partners are cost-efficient and risk-adverse

Full-time employees come with a full-time payroll commitment and added overhead costs. Trade Partners own their own businesses, so you are not responsible for managing any of the “burden” costs of having employees. Plus, they are responsible for warrantying and guaranteeing their work.

Trade Partners have specialized knowledge

There are always tasks that require specialized knowledge that your team, while highly skilled at what they do, may not possess or are not legally allowed to perform (like electrical and plumbing work). And because Trade Partners complete this type of work daily, they will be more efficient and quicker at performing their work, allowing us to move projects along quicker than self-performing the work internally.

Three Rules for Determining Headcount

Here are three key ways to plan for the team size in your remodeling business:

Ensure we have enough booked hours for everyone to be as billable as possible.

This means populating your team calendar when you sign projects up into your project pipeline - making sure to identify the "bald spots" you have in the year, specifically targeting jobs to help fill in those gaps.

Ensure that we clearly understand the dollar volume each site superintendent/project manager will manage in a year.

Without leadership on your sites, you will likely have trouble keeping projects productive and profitable. Setting and tracking the gross dollar volume that each Superintendent and/or Project Manager can manage in a year is critical in order to strike the right balance.

Prioritize our internal team when scheduling for the specialized tasks we can't hire out. 

This comes back to knowing our team members' and trade partners' strengths and planning for them. Our flooring contractors aren't likely to install floor protection how we want it done to ensure they remain scratch-free. And our exterior cladding contractors probably won’t take the time to install high-performance air-barrier sealing details to meet our building performance goals. So increase your throughput by reserving your team members for tasks like these and hire out whatever else you can.

I created the BUILD AND PROFIT SYSTEM to help residential contractors and remodelers understand their numbers and use battle-tested metrics to measure their performance so they can run profitable businesses.

Click the button below to learn how the BUILD AND PROFIT SYSTEM can help you maximize your team's hours to ensure and protect your overall profitability.