RHACOVA

Labor and overhead

Employee Labor vs Subcontractors: Comparing the Real Cost

The comparison only works when both sides are loaded: burden, unproductive hours and supervision on one side, delivered scope and your management time on the other.

The short answer

You cannot compare a subcontractor's invoice rate to an employee's wage. Compare the employee's loaded cost per productive hour against the subcontractor's all-in delivered cost for the same scope — including your supervision, coordination and anything you still supply. Which one wins depends on your burden and your utilization, not on a rule.

Definitions

Loaded labor cost per productive hour
Wage plus burden, spread over the hours that can actually be billed. This is the only employee figure worth comparing anything to.
Subcontractor delivered cost
The sub's price for the scope, plus your management time, plus materials or equipment you still provide, plus any cost you absorb when their work has to be corrected.
Capacity risk
What each choice costs you when work slows down. An employee is paid whether the calendar is full or empty; a subcontractor is not.

How to make the comparison fair

Employee side = loaded cost per productive hour × hours the scope needs + supervision

Subcontractor side = quoted price + your coordination hours × your loaded rate + materials you supply

Worked example: the employee side of the comparison

A $32/hour employee, 10% payroll taxes, 9% workers' compensation, $7,200 of benefits and $2,000 of other employer costs, paid for 2,080 hours with 340 non-productive:

  • Total annual cost: $88,406.40
  • Burden as a share of wage: 32.82%
  • Productive hours: 1740
  • Loaded cost per productive hour: $50.81

That last number — not $32 — is what goes up against a sub's hourly or lump-sum price. If a subcontractor quotes a rate below it, the sub is cheaper per hour for that scope; if above, the employee is, provided you can keep them busy. The method for the first figure is in labor burden.

What each side hides

  • Employee, understated: burden, unproductive hours, tools and vehicles, training, and the weeks you pay for with no work sold.
  • Subcontractor, understated: your coordination and site time, scope gaps between trades, waiting on their schedule, rework you end up covering, and materials assumed to be yours.
  • Both: equipment. If you supply the machine, that cost belongs on the comparison — the true cost of owned equipment shows how to price it per hour.

Utilization decides more than rate

An employee's cost per productive hour depends on how many productive hours you actually sell. At high utilization the employee usually looks cheap; at low utilization the same person is expensive, because the same annual cost is spread over fewer billable hours. That is the real trade-off: employees convert a variable cost into a fixed one in exchange for control and availability. See billable hours vs productive hours.

RHACOVA does not claim one model is correct. It insists only that both sides of the comparison be loaded the same way before you decide.

Common mistakes

  • Comparing a wage to an invoice rate.
  • Ignoring your own supervision hours on subcontracted work.
  • Assuming full utilization for a new hire in the first year.
  • Pricing subcontracted scope at cost with no margin, which moves the risk to you and the profit to them — see markup vs margin.

Quick answers

Is a subcontractor cheaper than an employee?
Sometimes, and it depends entirely on your burden, your utilization and what the sub's price includes. There is no universally correct answer, which is why the comparison has to be run on your own numbers.
What gets left out of the comparison most often?
On the employee side: burden and unproductive hours. On the subcontractor side: your supervision time, coordination, rework risk and materials you still supply.

Run the numbers

Total annual employer cost, burden percentage, cost per paid hour and cost per productive hour.

Open the Labor Burden Calculator

Free, no account, and the answer stays on the page.

Estimate both the same way

RHACOVA Estimates keep loaded labor and subcontractor costs as separate classes at their real rates, so the comparison survives into the job.

Start an estimate

How RHACOVA defines these terms

Every calculator, estimate and job in RHACOVA uses one set of financial definitions, and they are written down rather than implied. Read the RHACOVA methodology for the full list of definitions this article relies on.

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