Home building depends on subcontractors, likely more so than any other industry sector.
Subcontracting provides an efficient means for assembling the variety of services and specialties needed to construct a new home. Using a series of specialists allows the home building company to remain small and efficient while offering extensive products and services to the ultimate buyer. Choosing the right subcontractor is the single largest challenge in delivering a home for most small builders.
Subcontractors make up the largest component of NAHB members. Last year, the NAHB had 30,000 subcontractor members and 25,000 single-family builder members. In a recent survey, builder members told us they contract with 22 subs who make up about 85% of the building costs. Over one-third of the builders subcontract 100% of the costs.
The list of subcontractors runs from the expected, such as carpenters and framers, to those working in security and technology systems. The task subcontracted the least is finish carpentry, contracted out always by 68% of the builders and sometimes by 19% of the builders. Interior doors are subcontracted always or sometimes by 88%, and exterior siding and framing are subcontracted always or sometimes by 94%.
Security systems jobs are subcontracted always by 97% of the builders, and carpeting, electrical wiring and HVAC subbed always by 96% of the builders. The list of jobs subcontracted always by at least 90% of the builders also includes: plumbing, technology (structured wiring, home theatre, etc.), fireplace, foundations, drywall, masonry work, and concrete flatwork.
Subcontracting has gained in use over the past 15 years as homes have gotten larger and more embellished. Nearly three-quarters of builders subcontract for more than 75% of the cost, up from two-thirds in 1999. And in sync with the increase, 52% of the builders used over 20 subcontractors, up from 47% in 1999.
Larger home builders use a larger number of subs and subcontract a larger share of the costs. Half of NAHB's single-family members build fewer than five homes a year, and they subcontract fewer jobs as they tend to be custom, hands-on builders. For instance, firms building 25 or more homes conduct their own finished carpentry 21% of the time while firms building fewer than five units provide their own finish carpentry 42% of the time. Similarly, those building 25 or more homes provide interior door installation 11% of the time; those building fewer than five homes provide that operation internally 36% of the time.
Subcontracting also has fallen into the focus of the federal government.
Subcontractors are independent businesses run to make a profit and secure a living for the owner and employees. Income paid by the builder to the subcontractor is taxed as personal income if the company is operated as a sole proprietor. Contract payments to subs organized as corporations or pass-through entities pay business taxes (at corporate or individual rates respectively) with salaries and wages deducted as a business expense.
Some industries have used the independent contractor classification to avoid paying social security and other taxes, as well as avoiding many other personnel costs. Unfortunately, actions of a few bad apples have caused an increase in enforcement of what is and is not a subcontractor.
There is no absolute definition of an independent contractor, but the Department of Labor recently has provided updated guidelines for labor law purposes. The general focus for qualification is on operating an independent business that carries normal business risks of success or failure, is managed as a business independent of the builder, and that has control over work also independent of a single or specific builder.
Home builder subcontractors seem to be the most independent of all independent contractors because of the varied skills needed to build a home but not needed consistently within a home building company. But because the lines do get blurred, the NAHB is working to ensure the rules consider the industry's unique use of subcontractors.