Cost Sharing with Subcontractors

Independent contracting became a ploy for large companies to avoid the employee overburden. Often they paid the "contractor" the same gross wage rate they were paying an employee. The problem was the independent contractor now had that overburden to pay themselves plus administration and all the other back office costs. Thus they were actually earning a lower wage than as an employee. As the economy improved many of these independents started charging rates that would allow them to actually earn a competitive real wage. What is being lost here, Ward, is that when they aren't working for you they also have to seek out work, as in sales and marketing. There marketing is to tree services that hire them not to the end client, thus the sub designation. Here's a link to the Oregon government page pertaining to the issue.
Ward, take into account that you don't pay SS, UI, or any other payroll overburden for the sub. So when you compare the climber rates between employee and sub, add to the employee rate the overburden in order to compare apples to apples. Plus, you should be experiencing a productivity gain. To calculate that you'll need to actually have your existing climber take one of these jobs on and compare how long it takes them to do the job. Functionally, what you're doing is akin to comparing a jr climber to a sr. climber and assuming the jr. will perform the job in the same time the sr. does it. Is that realistic? Would you have been able to do these jobs without the sub? Why are you pursuing jobs that are outside of your company's skill set?

I'm posing these questions not to challenge you but to see if you've asked them yourself.
 
ward said:
http://en.wikipedia.org/wiki/Free_rider_problem
Click to expand...
The example of the street cleaner isn't a good one. Urban centers perform this service paid for by the collective property tax. In business districts they form associations if they feel there is a need to actually do more to improve the area and draw customers. If they do, then it's up to them to sell the value of belonging to the assoc to all the businesses that may benefit.

It's ironic that companies who initiated the surge of independent contractors now are finding fault in it. Hmmmm.... I guess it's only good when it serves the company, not so good when it actually benefits the individual. But, isn't that the whole free market thing?
 
Hump, I'm glad you joined in. You make some good points about there being some real costs for subcontractors and I fully understand that, but I want to press you a little. You write, "What is being lost here, Ward, is that when they aren't working for you they also have to seek out work, as in sales and marketing. There marketing is to tree services that hire them not to the end client, thus the sub designation."

I don't think calling around to tree services and asking if they have anything remotely compares to the advertising campaigns and extensive client interaction that is covered by the contractor to get the work. The costs are not even remotely in comparison. If the subcontractor is doing work directly with clients and has advertising expenses there, I can understand. But that is not what I think is happening in my market. Rather, because there is so much work and so few skilled people to do it, subcontractors are making a killing by outsourcing all the heavy expenses to the contractors and taking the cream rates for themselves.
 
That's the nature of the market. When times are good and demand grows then goods and services can sustain better prices. How one markets their product is entirely up to them. Remember, they are not going after residential customers but the commercial market, they still have to invest time at their hourly rate into contacting prospective clients, i.e., tree cos, to sell their services. So, multiply those hours spent researching the market, putting together their pitch and then making all those calls, by their rate. On the other hand, the tree co can distribute those costs over a larger employee base. While you may be doing all the sales & marketing you have a crew that's out there bringing in revenue at the same time. The sub, it's an either or situation.

There's is a different business model and, if there isn't a market for it they go without. Ward, you can imagine yourself as being like a homeowner in the aftermath of a storm. Contractors either boost their rates making the fixed cost a smaller percentage or they reduce their overhead by reducing marketing efforts

Now, let me press you a bit. How about the questions I posed?
 
This is the free market, to be sure. If this situation is the evolution of certain trends, then I'd say that what I am bringing up here speaks to the future of the free market in these regards. There is a lot of price searching with these rates, where will they finally resolve? Answer: only after the full costs of the scheme are being borne by the system. Presently, there is a lot of enthusiasm for the model, but I don't think the costs are being calculated by businesses who use this. A lot of companies do foolish things for many years financially until they just can't survive any longer. The use of contract climbers can never be an ordinary day to day business plan (for an ordinary tree business in this market). Everything I've been talking about explains why this is the case.

I don't quite understand your point about the street cleaner. I thought I'd link to the free rider problem entry on Wikipedia because, in many ways, the arrangement where a number of subcontractors are exporting the costs of getting work onto the contractor only to then expect a lion's share wage are free riding on certain expenditures unique to the contractor.

An idea occurs to me that it might make sense to pro-rate the contract climber's rate to the gross total of the day. This way, if the company wins the climber wins, too. Just to roughly frame how this would work: say, if the gross is less than 1,700 then the climber makes $35/hr but if the gross goes over $2,000 he would make $50/hr. This way, the contract climber is incentivized to achieve a lot. The pain is shared, the glory is shared, and there is full time employment to be had.
 
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The street cleaner is the example given in the wiki entry you gave the link to. Have you made the calculations? What is the total cost of your best climber/hr?
Your confusing your market with the climber's market. They are not the same thing. Do you sell your services to Landscapers, or construction contractors? Then you're doing the same thing. Your cost structure isn't the same as theirs but you offer a specialized service to them that would be otherwise costly for them to offer. The climbing contractor extends the reach of your business into work that it would otherwise not be able to do competitively.

Have you calculated what it would cost to do with your existing climber and how much longer it would take them to do it?
 
Hump,
I'd say that $25/hr is really pretty much top employee pay for tree climbing. Thats pretty standard in Portland, although I'm sure there are a few exceptional cases. I'd say that with taxes and the like at least $10 more, makes it about $35/hr gross cost (and that is very lean for costs). Given that most contract climbers are top climber grade I'd start contract climbers at $35/hr.

Now, this is how I think I have solved my problem. If that is the base rate so to speak, then if the company makes its daily gross total and then exceeds that gross, it becomes possible to share the largesse. That is why I'd say a graduated rate, depending upon where the daily gross ends is both a fair system for all concerned, but it incentivizes in the right way (I could see this going badly, too). I mean, if there is a special claim to the value of contract climbers vs. ordinary employee climbers, this should be seen in the daily gross total increase. A contract climber should be able to demonstrate the added productivity and, based on the achievement of a certain goal, should be rewarded with a higher share of the take.

I think this is fair. What do you think, Hump?
 
It makes sense but as you can see there may be a pitfall in it. Incentivizing must take all factors into account. While it's easy to measure the bottom line gross, it can lead to short cuts and risky work. The special claim is the contract climber's ability to perform the work your existing crew can't do within the estimated time. They have to add value to your work somehow or there's no point in hiring them. Are you saying that the subs you hire are no more productive than your own climbers?
 
Contract climbers can be more productive than employee climbers, for sure. I can think of a number of instances where this is the case. A lot of times, however, they are just like everybody else, can only do so much work in the day, etc. I won't generally use subcontractors for pruning because they don't seem to like it and it shows. If you agree that the special claim to the higher rate is pegged to productivity above and beyond what ordinary top employee tree climbers can command, then it is economically rational to pay more. I guess this is no different than it always was. A chainsaw and a pickup truck do not a tree service make!
 
Caveat Emptor applies to us as consumers too. It's all about the value proposition. If the sub is no better than your own climber they only deserve what your climber would earn plus overhead and profit. Where this can go south is in a seller's market. You'll pay more for the mere availability of the product than it may be worth.
 
Well, that's a deep subject. I am a biz owner(small), a sub-climber, and I also hire subs, so I can see this issue from many angles.

When I do my own jobs I find that the $300 pruning job has the highest profit margin, do three or four of those in a day and I'm set. I can do the work myself with a low paid helper so overhead stays low. No way I could justify hiring a sub to help with that.

On bigger jobs I may have to sub in a clam truck, maybe bucket and even other good climbers - all expensive and leave me without much in pocket at days end. I think this is the situation you're describing Ward, but whatever I'm left with all depends on the bid I put on it. If I don't make much then I learn how to bid better or not take on those jobs.

From the sub-climber perspective I'm really just there to help, whether the contractor is under-skilled or just overworked. I do charge less if the contractor doesn't really need my skills but just my labor to help complete a big project. And I charge a lot more if they have no clue what they're doing and simply couldn't get it done without me. I have no concern for their profit margin, that all comes from the bid. Everyone I sub for is happy to pay whatever the rate and they can't wait to get me back.

Ward I don't think your idea will gain any traction because if you start charging an overhead fee or pro-rating their payscale I'm afraid those top climbers will simply find work elsewhere. I'd suggest simply offer a little lower rate and explain to them why. Or acquiesce to their rate demands but don't have them on site the whole time, start at nine and leave as soon as the climbing's done. This actually happened to me as a sub for a landscaper who sells tree work but can't really do it - I charge him my most premium rate and he only has me do the really tricky stuff then bug out - I actually make less working for him than myself (per day) but then I have time off to work on my own biz overhead crap.

Yeah, never offer a cash incentive for higher production, it will lead to quarrels between the sales and production teams, and could result in higher accident and property damage rates.
 
Raven, Yeah, you got the problem exactly. :) Been on both sides of the aisle just like most other guys here. Its tough cause you can see it both ways. No easy answers here. I think the best I can do is what I already do which is to train employees well from within, and hire out rarely and when it calls for it both as a training supplement to the employees, but also to support contract climbing. I don't think there's a lucrative use of it for most daily work as I mentioned. I'd like to see the practice come into use more often because it gives a better sense of purpose to a young person entering the trade. If they can see themselves as independent contract climbers that make a good wage with dignity, thats great. If it is to be a useful supplement to a small tree service, its got to be used sparingly. But I guess I already knew this anyway.

I will discuss the rate thing with some contract climbers to see what their reactions are. I just hope I'm in the cab of the truck by the time the rocks start hitting it!
 
Make sure you're perfectly clear about safe work practices. It's easy enough to get hurt in this business without incentivizing haste.

Like renting equipment, you do it until you know you've got enough business to acquire the equipment. Subs sparingly until you can see that you need to expand your staffing.
 
You are right. That could be a recipe for disaster. That is all wrong now that you really bring that point home. Safety should never take a back seat to productivity. But I still think I can have it apply. Lets call top pay 'alpha' pay and a lower tier pay 'beta' pay. Similarly alpha pay for the tree service would be a gross total of X, less than that is beta pay. What I am suggesting then is something like 'when the work is priced above x amount per day (an alpha day for the tree service), your (contract climber) alpha rate kicks in, otherwise when our work is beta paid your rate is beta paid'. The extra rate applies only when the bid is alpha rate. Still, I don't think this is realistic as everyone is reminding me. After all, if you are a subcontractor who makes alpha wages even half of the year, you can afford not to work the other half. What need have you to care for the bottom line of the businesses you serve? It would only work if other tree companies had a similar set of policies, if there was precedent for it and if subcontractors recognized when they are asking for more than their fair share and limiting themselves. If they are even a little like their kin on Wall Street, I think they will simply not give a shit.
 
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Part of the problem is that employee climbers top out most places at $25/hr. Working full time, that's only $50,000 a year, before taxes. Not enough to raise a family on. It's an industry wide problem, but as long as that's a top wage for a climber, guys will always jump ship and go out on their own when they get good enough. Therefore, there is a glut of qualified climbers who want to make a good wage, not just a decent one.
 
Wyoclimber--this is exactly the deficiency that the contract climber provides a solution to. The contract climber model gives much more autonomy and control to the worker and requires having a lot of things together. It is also the solution to that career ceiling that you are talking about. Provides a next rung up above lead climber.
 
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I think that what it actually does is water down our industry. It's ridiculous that a highly skilled, knowledgable Arborist tops out at a wage like that. Not every climber has business sense and not every businessman is a good climber. It's a shit feeling to reach that glass ceiling and realize your options are to quit climbing and go into sales, or go out on your own, creating one more little company fighting for their piece of the pie, underbidding jobs just to get established, therefore driving everyone else's prices down and perpetuating the cycle of low wages. I think the true contract climber can be valuable, but the real "stars" are few and far between. I'll readily admit that among the industry as a whole, my skill set is probably only in the middle of the pack. I'm sure as shit not going to the ITCC anytime soon. But here in Northwest Wyoming, I'm as good as they get. Sure, I can contract climb here, but I'm not going to have people calling me from around the country to come work for them. If we ever want to be accepted as a real professional industry, we need to pull our heads out of our asses and start acting like one.
 
Since I am one of these fat cat Wall Street bankers oops I mean contract climbers I will speak for myself. I look at these complaints as jealousy. Me and my subcontractor friends who I have brought to the dark side all make our own hours, we work as much or as little as we want, we charge a premium for our services, and we all kick ass on the job. The company owners are tied to their phones, their overhead is huge, they have loans dangling over them like the sword of Damocles, and employees peeping at them like baby birds in the nest waiting to be fed. They see us show up, crush a job for them, get a check, and then head home. No bids to do, no marketing to pay for, and certainly no employees to worry about. I have made the decision to be a specialist at what I do to avoid those things. I am a horrible businessman but a hell of a climber. Ask my accountant if I'm successful. He will say "no." Ask me in 20 years if contract climbing was a good idea. I will say "no." It isn't sustainable. It is as sustainable as my body. But climbing is my drug of choice. That is my driver. The money is secondary.

I have busted my ass in this industry since the late 90's to get where I am at as a climber. I charge a premium for my services because I can. I have raised my rates annually since I stopped climbing as an employee and started my business and will continue to raise them until my phone stops ringing. I have clients who very rarely use me (Ward) and clients that would use me every day if I let them. I am fully licensed bonded and insured and always show up fully equpied with every piece of climbing gear, rigging gear, and chainsaws that I will use to complete the work I do.

Contract climbing is a step away from unionization of the tree service industry in Portland which is what I would really like to see happen. I want the wages of everyone in the industry to go up and to see our profession valued and professionalized more. Real apprenticeships, health care, retirement, and job placement for worn out climbers should be standard in the industry. Instead it is a learn as you go, slave away and get thrown aside and replaced by the next young buck who can run up the tree and rip it to shreds. You are very right Chris, I don't give a crap about the bottom line of the contractors I work for on an annual basis. That is not my problem. What I make my problem is making every job I am on profitable. What also is my problem is that I am 37, my body is slowly getting more prone to injury, and bouncing back takes longer. I am going to take my piece of the pie while I can get it. I'm going to be as nice as I can to my body, nice to my brain, and live a life worth living. I certainly am not going to be a slave worker bee ever again. Especially for a company that won't really take care of me as I age.

I don't think that the workers in the industry need to bear the brunt of the tendency for the company owners to screw each other over by driving down the value of the work by undercutting each other. I certainly will not. Especially when I am continually taking on the hardest jobs by choice and delivering a high level of production. When people stop hiring me and paying my rates and I am hungry and motivated then I will look at lowering them. That point has not come yet.
 
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Ryan, That is a great reply. (BTW, Cafferky is expensive but massively productive) And if others had ears to hear they would understand instantly how desirable contract climbing really is--even if you can't do it forever. I suppose there is a little jealousy as I (a business owner) find myself tethered to the computer and the round of daily estimates and the baby bird phenomena, rather than free to climb, but that doesn't blunt the force of what I am essentially discussing. This is an issue about fair distribution of benefits and costs. When contract climber rates are 2x the cost of ordinary labor, there has to be a point below which they cannot be used by the tree service if it wants to remain profitable. As contract climbers become more like the equals of businesses, both in terms of net profit, etc., shouldn't they share in the costs of production--especially if we are below the 'alpha' pay number? If I were a contract climber I would do just the same and I would go after the most profitable jobs. Nothing but necessity will force any downward pressure on your rates and, unlike the 470 tree services in the Portland area who must compete with each other for the pie, the contract climber doesn't have a lot of competition.
 
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