This question comes up all the time, the ensuing conversation has become second nature to me it happens so often. What’s the answer to that question?
The answer is simple: price differences come from 2 sources: the company structure, and the quality assumed in the proposal. Since the quality assumed within the proposal is unknown (at least until the work is done), I’ll focus on the differences in how companies are structured.
Companies that do residential painting projects are structured in 3 ways:
1) Traditional Employee Company
2) Subcontractor Brokerage
3) Moonlighters, neighborhood guys, or guys from Craigslist.
A brief description of each:
1) A traditional employee-based company hires employees, pays hourly wages, deducts state and federal payroll taxes, deducts and matches social security and Medicare taxes, pays unemployment insurance premiums on wages, and sends the employee a W2 at the end of the year.
2) A subcontractor brokerage is a more recent business model, one that has an owner who handles sales and management, but the production labor is performed by subcontractors, and so the balance of the labor cost is not subject to wage burdens such as those of a traditional employee-model. At the end of the year the worker receives a 1099 from the company showing how much income he/she made, which was not taxed and for which the worker will have to pay tax. A larger subcontractor brokerage may have employees in administration, paid sales staff, maybe field management too.
3) Moonlighters, guys from the neighborhood or from Craigslist. Largely self explanatory, these operators are completely under the table.
There’s nothing wrong with any of them, they’re just different. Like buying a car, there are many ways to do it, none right or wrong, per se, just different options for different consumers.
Pros and cons; from the price/cost vs. risk/liability standpoint:
1. The employee company’s bid is typically the more expensive because the bid is a multiple of estimated man hours X hourly billing rate: (100 hours X $50/hr) in this example the labor estimate would be $5000, add approximately 20% for materials = $6000 bid price.
This is a traditional structure, above board, playing by the rules- so to speak. Companies structured in this way pay taxes, unemployment insurance, workman’s comp & liability insurance on all the wages of all the employees, including the painters. These costs are called labor burden, because they’re an additional burden on top of labor costs.
This is the safest way to go from a risk/liability standpoint. Companies obeying labor laws are also more inclined to perform background screening on staff, and are more likely to have a training program. In this arrangement, if there is damage to property or injury to workers, the liability is born by the company and it’s insurance carriers.
Moreover, companies like this tend to be more stable, long-term companies so the likelihood of them being around to correct a problem, stand behind the work, or just be there to do the project next time around are significantly better.
2. The subcontractor brokerage’s bid is factored differently; using a % for labor which equates to roughly 30%, and a % for materials, the remainder is overhead and profit. The main difference is the labor % is fixed – and without labor burden. In this company structure it is the subcontractor’s responsibility to pay labor burden costs on the painters’ wages, or not.
This type of company is relatively new, and has arisen in response to the rising costs of employment, employment law, litigation and insurance. This type of company assumes no responsibility or risk for labor burden (aside from office and admin), and if the subcontractor doesn’t pay for work comp, liability, unemployment, or matching contributions to social security or Medicare, it’s not the company’s problem.
If there’s damage or injury, it is the responsibility of the sub-contractor to take care of. If he’s current on his insurance premiums no problem, if not big problem. The wage burdens as they relate to playing by the rules really only play to your sense of fair-play. Unemployment insurance, social security and Medicare are programs designed to protect and provide, not paying into them avoids cost, but also responsibility.
Additionally, there’s a real issue with regard to the question of whether a worker in one of these arrangements is truly a subcontractor, or is really an employee. There is a test, a series of questions really, that determines the answer – only if the test is used, of course.
3. The moonlighter, Craigslist guys or guys from the neighborhood. This is what is known as fly-by-night, station-wagon bandits, or student painters. They have no insurance, pay no taxes or other wage burdens. This is under the table work, traditionally the type of labor one would engage to rake the yard, shovel snow or haul junk out. This should be avoided for any kind of trade or craftsmanship work.
That’s it in a nutshell. I’m fond of drawing analogies to other industries, purchases or common experiences to illustrate, and in this case it does lend itself well to the purchase of a car. You feel most protected buying from a dealership, you’re comfortable that purchasing from the dealer brings comfort and confidence that they will stand behind the car, service it now and 5 years from now.
You’re less confident buying the car from a 2nd hand dealer or a relative, even less confident buying from a classified ad, or off Craigslist. And you may be ok with any of the latter, but you would also have to recognize the risk and be comfortable with accepting it – as a trade-off, in exchange for the $$ you save.
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