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Bay of Plenty Region
Sunday, April 18, 2021
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The double-edged sword of subcontracting

With the boom in construction we as a nation have been experiencing during the last few years we have seen a proliferation of tradespeople who have taken the opportunity to jump from employment to self employment.

This, however, is often a double-edged sword. The “freedom” to choose your own hours , take advantage of tax benefits and make a name for yourself on your own rather than  as part of a team can be a powerful motivation. But like any opportunity, caution is needed.

The way that the majority of self-employed tradespeople get a foothold in an already crowded market is to subcontract to larger “same-trade” companies and hope that their work will be noticed by the end clients and be offered the work directly after time or that their marketing efforts will pay off with client enquiries.

Firstly, in my experience there are two types of employed tradespeople that go out on their own, those who understand the rigours and true cost implications of owning a business, and those that do not.

Many a time have I heard an employed tradesperson lamenting to friends over a cold beverage how their “Boss” is charging them out at $xxx per hour and they are only being paid half that and doing all the work.

In my experience to set up any business you will need at least $5,000 just to get into it, with companies office set up costs, legal fees, basic website, terms of trade, H&S system, basic invoicing and CRM software, logo design, uniforms, business cards and vehicle signwriting.

That may seem unfair to the casual observer until you understand the costs of owning a business rather than working in one. Let’s just look at the basics of setting up a best practice business in the construction trades.

Set-Up: In my experience to set up any business you will need at least $5,000 just to get into it, with companies office set up costs, legal fees, basic website, terms of trade, H&S system, basic invoicing and CRM software, logo design, uniforms, business cards and vehicle signwriting.

Running: Any small business working in the trades needs to have comprehensive insurance that will cost around $200-400 per month, mobile phone plan $50-$150 per month, accountancy and bookkeeping services $120-$400 per month, plus vehicle running costs $200-$500 per month – and that is with no active marketing.

If you spread the set up costs over the first year of business this gives an initial running cost of around $1570 per month, meaning that the new business will have to generate $7834 per month in gross profit just to break even.

In my experience, if the subcontractor does not have a considerable cash reserve all it can take is one client not to pay, a dispute that goes on for months, or some other unexpected cost for the whole situation to become untenable and the subcontractor has no choice but to once again become an employee, often times on less money than they were being paid when they left.

There are many success stories of tradespeople leaving employment to go it alone and it all working out great, but you will find that these are people that had a good understanding of all the facets of self-employment not just the allure of more money.

I have seen too many good tradespeople become bad debtors, not by intention, but lack of preparation and a clear understanding of the above.

Just a thought.

Nick Kerr
Nick Kerr is Area Manager BOP for EC Credit Control NZ Ltd. He can be reached at nick.kerr@eccreditcontrol.co.nz

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