Mastering the subcontractor relationship—an integral part of homebuilding
By Paul Emrath
Subcontracting has long been a fact of life in the residential construction industry. Yet sometimes the role of subcontracting, so well-known inside the industry, seems misunderstood or conveniently overlooked outside it. In its preliminary analysis of a recently proposed regulation, for example, the Department of Labor ignores all costs of subcontractors to homebuilders when calculating what increased labor costs mean to homebuilders’ bottom lines.
It has therefore proven worthwhile, periodically, for NAHB to remind the public of how much the construction of a typical home relies on subcontracting. Traditionally, NAHB has collected this type of information through surveys of its builder members. The latest survey, from April of this year, shows that use of subcontractors remains as strong as ever, with builders often employing 20 or more different subcontractors on a single family project and subcontracting out over 75 percent of their construction costs.
The NAHB survey on subcontracting took the form of special questions on the April 2015 installment of the survey for the NAHB/Wells Fargo Housing Market Index (HMI). The HMI survey is based on a national sample of NAHB members whose main activity is building single family homes. The sample is stratified by region of the country and size of builder. A total of 289 builders responded to the special questions on subcontracting.
Results show that 70 percent of builders use somewhere between 11 and 30 subcontractors to build the average single family home. The median is 20, and the average 22 different subcontractors per home. The survey also asked builders how often they subcontract 23 different jobs. In every case, the job was always subcontracted by at least two-thirds of the builders. At the low end of the scale, “only” 68 percent of builders said they always subcontract finished carpentry. At the other extreme, subcontracting is nearly ubiquitous for some jobs. Over 90 percent of builders said they always subcontracted concrete flatwork, masonry, drywall, foundations fireplaces, technology, plumbing, electrical wiring, HVAC, carpeting and security systems. Even when builders don’t always subcontract these jobs all they time, it’s common to subcontract them out at least part of the time.
Previous NAHB surveys show that subcontracting has increased over the past three to four decades, but only to a modest extent. The share of costs subcontracted in the average single family home hovered around 70 percent in the 70s and 80s, then increased to 75 percent in 1993 before drifting upward ever so slowly over the next decade to 77 percent, where it’s remained in three of the last four surveys.
The average share subcontracted spiked to 84 percent at the peak of the housing boom in 2005. A recent Department of Labor working paper gave a tendency of subcontractors working increasingly in housing during a boom as one of the reasons labor productivity in residential construction spiked during the housing boom. In smaller subcontracting firms, it’s not unusual for the owner of the business to perform actual construction work. Because business owners aren’t counted as labor in official government statistics, this is technically construction work done without labor.
And there are many small construction trade contracting firms in the U.S. Indeed, the latest statistics from the Census Bureau show that there are about 1.7 million of them without any employees at all on their payroll, and there’s obviously no one in these firms other than the owners to perform the work.
While the share of construction costs subcontracted has been stable in the average single family home, the number of different subcontractors used has edged down—from a median of 22 subcontractors per house in 2003 to 20 in 2015. Fewer builders are now reporting the use of very large numbers of subcontractors on the average single family project. The decline in the share reporting over 30 subcontractors on the average was fairly consistent, falling from 23 percent in 2003 to 15 percent in 2015.
Half of NAHB’s builder members, thought, build five or fewer homes a year. Subcontracting is perhaps easiest for the uninitiated to understand at the level of these smaller companies, as it seems intuitively obvious one to five homes a year won’t generate enough work to justify carrying a full-time electrician or carpet installer on payroll.
Working with subcontractors, maintaining relationships with them, and being able to schedule a relatively large number of them to complete projects on time while maintaining control over quality takes time to master and is an important part of being a successful homebuilder.
• Latest statistics from the Census Bureau report about 1.7 million subcontractors
• Most subcontracted work include: concrete flatwork, masonry, drywall, technology, plumbing, electrical wiring, HVAC, carpeting and security systems
Paul Emrath is the Vice President of Survey of Housing Policy Research for the NAHB. He may be reached at PEmrath@nahb.org.