Productivity Insights | April 24, 2021

In-house Crew or Subcontractors: What should you choose?

In-house crew or subcontractors? Before we get down to which contract you should opt for, let’s first make sure we understand the difference between the two.

The IRS defines an employee as someone who performs services for you while you maintain control over the tasks that are contractually defined. A subcontractor, by contrast, can assign their own tasks as long as the work is completed within a time set by the employer (or contractor). 

Now that we got formalities out of the way, what is your experience? Do you have a clear preference? Do you think it has to be either-or? 

The decision of bringing a person on board vs subcontracting depends on the business needs, project structure, and timing. There is clearly no superior hiring strategy. However, one might be more beneficial than the other in specific scenarios.

To help you understand when an in-house crew is better than subcontractors and vice versa, we’ve decided to break down the key advantages and disadvantages of each method. Let’s begin with in-house crews.

In-House Crew

✅ Goal Sharing

In a workforce of millennials, long-term career planning is the new way to go. With competing firms and new jobs brought by technology, employees suddenly have more work options. As a result, they don’t settle, at least not permanently, for a job that doesn’t fulfill their needs. 

An in-house crew grows with the company. Professional growth is rated as a key factor of applying for a job to 87% of millennials. They are more loyal to companies that promote professional growth. Employee loyalty is always good for business as it lowers turnover costs and improves customer service. 

Whereas a subcontractor will primarily care about finishing the task at hand, an in-house crew will also care about how to foster deep relationships, increase retention, reduce churn, and more. Having a crew that is aware of the company’s short and long-term goals will always be an asset to the company.

✅ Skill Development

 “Tell me and I forget, teach me and I may remember, involve me and I learn.” 

This quote by Benjamin Franklin beautifully illustrates the learning curve that applies to most jobs. Through doing, one learns. The in-house crew that has worked for you for years doesn’t have the same level of skill they had at the beginning. To your advantage, the employees gain skills that are specific to your business needs. 

The attrition rate refers to the amount of money that companies lose when employees leave. According to research, we estimate that replacing a skilled employee can be as costly as their annual salary. Around 71% of millennials are planning to leave their current employer in the following two years due to dissatisfaction with skill development.

An in-house, steady crew helps your business grow by mitigating attrition-related costs. In addition to that, your team’s skillset evolves to meet your unique business needs over time. Subcontractors, on the other hand, have gained experience elsewhere, which may not be specifically suitable for your business’s needs. 

Some management experts suggest that investing in your in-house crew’s skills is better than outsourcing, even if it seems easier to subcontract. This way, talent stays within the company, and employees are happy to recognize that they are on a development track. 

✅ Steady Costs

Cost estimation is one bumpy topic. We’ve all been there. Conventional wisdom says that a good project manager should be on time, budget, and scope. The more complex your company’s processes and services are, the more difficult it becomes to estimate costs. 

This is where an in-house crew really pays off. There is an obvious advantage to having predictable costs. While a subcontractor may always go over budget at a short notice, you have a clear idea of your in-house crew’s salaries.

There are two sides to every coin, so we should really consider the areas where an in-house crew cannot keep up with subcontractors.

Subcontractors

✅ Lower Costs

Although there is an advantage to having predictable costs, there is clearly an advantage to having low costs as well. An in-house crew may be a more expensive hiring option. Besides the wage, an in-house crew will cost you:

  • Payroll taxes 

  • Health insurance

  • 401(k)

  • PTO

  • Disability and unemployment insurance

  • Overtime pay

  • Fringe benefits 

When you add this all up, it becomes quite costly to the employer to have an in-house crew. Sometimes, you don’t have luck in getting a lot of new clients or expensive contracts, but you still have to pay your in-house crew. It is important to consider whether your company can afford to have a consistent in-house crew given all the listed expenses above, or whether a subcontractor situation is closer to your needs. 

When hiring a subcontractor, you don’t have to worry about any of the aforementioned costs. The only costs you should be considering are hourly rates or project-based fees. It is no surprise that companies are cutting down costs by 20-30% by hiring externally. 

✅ Flexibly by Default

An in-house crew usually pertains to standard, full-time employment models. Although such a model may have many benefits, it is definitely not known as the most flexible mode of work. Employees have a regular work schedule and may hesitate to divert from it.

An in-house crew doesn’t usually have the flexible mindset you need in accomplishing project-based goals. Studies actually show that in-house employees are more likely to experience fatigue and burnout when they are asked to be more flexible.

Subcontractors are flexible by default. Like you, and unlike your employees, they are also running a business. It is in their best interest to be flexible, in order to get a job efficiently done and foster long-term partnerships. This flexibility has lured in more than one-third of small business owners who are already outsourcing at least one of their business processes. 

✅ Less Recruiting, More Working

Remember how much it costs to replace a good employee? Almost their annual salary. Finding productive employees is definitely a challenge. LinkedIn has pointed out that 50% of job candidates don’t even show up to the interview. Additionally, prolonged recruitment processes really pile up those costs. In fact, some companies are even offering bonuses to employees who refer to successful candidates.

Why is recruitment more intensive with an in-house crew in comparison to subcontractors? Well, an in-house employee is here to stay. You want to make sure that you’re not paying all those expenses we discussed earlier to recruit an unproductive employee. To do so, you have to keep looking until you find the ideal match. 

While some giants have mastered the art of recruitment and dedicate extensive HR teams to the task, small businesses are often drained by this process. As a result, they opt out for a subcontracted team, offering the results without the commitment. 

✅ Why Carry all the Burden?

If you’re managing a company with an in-house crew, it may often feel like you are the only one who carries the burden of the risks you take. Employees often don’t understand the entrepreneurial risk you undertake to keep the company, and their jobs, afloat. While you invest in your team, there isn’t always a return on this investment. Sometimes you simply lack the expertise you need to complete a project.

When this is the case, why carry all the burden? Subcontractors help take some weight off of your shoulders by risk-sharing. They too undertake entrepreneurial risks to deliver those final results to you. Often, they gain insights through experience and create a niche of their own. This sort of expertise distinguishes them in the market.

When looking for the perfect subcontractors, you may use these signals to find the team that has the expertise in exactly what you need. This way, you save on training costs and avoid unnecessary risks. After all, subcontractors are 30% more cost-effective for a reason. 

💡 Quick Tip

If you haven’t worked with subcontractors before, remember to use the tax forms Form W-9 and Form 1099-MISC, instead of the standard W-4 and W-2 you use for your regular employees.

If you are unsure of the regulations of such employment, check out this useful guidebook published by the IRS.


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