Employee vs. Contractor: The Balance Conundrum
Growth in the home services business often leaves companies struggling to decide on an employee vs. contractor model; to balance the cost of hiring and carrying employees for their home services workforce versus hiring contractors to do the same work. Often, these decisions are further complicated by geographical expansion and the lag between entering a new market and being busy in one.
Your employee vs. contractor strategy will be based on several factors and might not always be about the math. Here are some questions to ask yourself:
- Are you trying to grow your brand?
- Is the perception of professionalism important to brand growth?
- Are you trying to enhance your community presence?
For these strategies, a higher weighted distribution of employees might suit you better.
Conversely, a higher weighted distribution towards contractors might benefit you if the following strategies are important:
- Is it all about the bottom line?
- Is there seasonality in your task distribution?
- Are you an established brand?
Understanding that most home services companies will have a mix of employees and contractors, the conundrum becomes one of managing the distribution of the resources at your disposal. This is especially true where you have unionized employees. Unionization changes everything. If your employees are unionized, then you have the benefits and constraints that come with that. Right sizing cannot be an afterthought. It must be planned. Once you have a new employee, you are paying for this resource every working day, regardless of whether you have work.
Employee vs. Contractor: The Dollars and Cents
As your corporate brand grows and your work and workforce expands, you start to consider the implications and trade offs of using contractors versus employees. On one hand, employees seem like the best choice; they allow you to control your brand and your message. From utilizing advertising on trucks to the clothing your team wears and the script they have rehearsed for when they are in front of customers, the level of professionalism cannot be underestimated. But – all of this comes at a cost; salaries, benefits, medical program, training, certifications, fleet maintenance, insurance, gas, etc. All are part of the price you pay for carrying employees on your payroll. More significantly, you need to pay your employees for their full day, whether you have work for them or not.
Contractors on the other hand are attractive in many ways. They help you grow your business in areas where it does not make sense to initially hire employees; they are local and know the territory and potential customer base. If your company is selling home services, then often the contractors you employ will already know the technology and carry the requisite certifications. The costs of benefits, fleet, training and certifications are borne by the contractors themselves or the firm they are subcontracting to rather than you. This significantly reduces the cost of delivering service to your clients. Often, contractors are paid by the piece which means you do not necessarily have to fill their day. Conversely, if you need them to work extra hours they are usually more than willing since this directly affects their compensation.
The chart below demonstrates the variability of service delivery costs in the employee vs. contractor models. In this chart, we see the cost of completing service tasks with the two workforces. The assumption is that you have 1000 tasks to deliver. The cost per completion for contractors is about half that of employees and that contractors are generally about 50 per cent more productive in any given day.
Source: Dave Wilder
In my experience, the total cost per call in a contractor model can be as low at 40-60 per cent of the cost to deliver the same service in an employee-based model. In addition, contractors tend to complete more tasks per day; being paid per completion is a direct motivator. That said, you may find contractors spend less time with customers; depending on your business objectives, keep this in mind if you are trying to build a brand or if you consider customer experience and customer service as a key differentiator amongst your competitors.
Only you know your corporate data; this needs to be mined, understood and built into a model to forecast when you should grow your employee base. The key constraint becomes the number of hours you need to offer your employees under your contract and the amount of work they can be expected to complete on any given day. You do not want to grow your workforce if there is insufficient work to maximize their utilization every day, nor do you want to commit work to your contractor base that could be done by an employee.
For many companies, it is much more cost efficient to grow into a new area with a minimum of company employees and a flexible number of available contract resources that can be utilized as required.
In my next article, I will explore FSM measures, highlighting the measure that I feel help leaders manage their workforce. This will include why you need to measure your employees differently from your contractors.
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