[pghsteve]

This may be a little long.... but I'm considering making a major change to one of our paint markets.

We have two offices, the first in an area where most competitors function at least somewhat as we do.... work is done by employees. We are more expensive normally than our competitors, as we run a better (by our standards) business. We give our employees healthcare, company matching 401k, WC, unemployment insurance.... we pay overtime, give vacation. We have a robust management and office staff to give our customers the best service possible. These things come at a higher cost than the mom&pop shops we compete against, and certainly cause us to be higher than the bigger (than mom&pop) shops that 1099 their "employees" and don't do things the way we do. That's okay....not knocking anyone else for how they run their business -- it's a different strokes thing. We get undercut on bids all the time, but we still have more work than we can handle....so nothing lost. In the first area, many customers will pay extra money for top quality and great service. Those on a tighter budget have other options.
We also have a second office 1000 miles away from the first. Totally different. Almost all of our competitors subcontract their labor. We get crushed on price, even though we price jobs 30-50% lower than the same job in the north. At the price we do get jobs for, we can't make a profit. We lose money every year, with no end in sight (and no, we don't want to close the office). I'm reaching the point where I'm accepting that we have to change things. If we're going to survive, we're going to have to do things the way the market demands. In office 2 city (sorry, I'm trying to not name cities), people won't pay an extra dollar for any reason. In a $3MM dollar house, a customer will take a crap fly-by-night company for a $3500 paint job before paying $3600 to a great company with well treated employees.
My question is... how does this work? If I find a couple companies to subcontract to.... how are they able to do the jobs so much cheaper, and what liability do I have (legally, regarding employment laws) for what the subs do with their employees?
- we currently have to make sure all our employees are legally allowed to work in the U.S. I know these subs everyone else uses are not all legal. If the company I sub to is legal, am I covered? I assume I can't be expected to check up on every employee they have?
- I know how CP, SI, CW, 5S and the other regional/national chains / franchises do their pay setup....so I know we can just copy that methodology...but I worry about the lack of quality control, worry about the contracting with the sub aspect, worry about any unforseen legality issues I could have.

I hate to go this route....but I can't keep losing 50-100k a year trying to compete in a market that just doesn't support they kind of business we are built to do.

Any insight is appreciated.

 

[MikeCalifornia]

I highly doubt that your competitors in city #2 are doing any type of quality work?? I may be wrong, but if they are so underpriced, something is amiss here. The competition can't be paying any reasonable amount of labor to someone they give a 1099 to and make a decent profit to continue business. If they are giving a 1099 to someone, I highly doubt that is being put on a tax return. But, hey you never know. I have heard of cases where the contractor sponsors 5-10 guys from some Asian country to come and work as indentured servants. That is cheap labor?? I'm in CA, and with the new change in our 1099 laws, I believe its SB5, I can't sub out work that I already do as a company. Meaning I can't sub out painting work to another painter. It sounds weird, but I'm not about to get in trouble over it.

 

[kentdalimp]

Wow, the second market sounds like UT!

Jokes aside, I guess my first thought is why are you trying to compete in the same market in location #2? It's kind of the idea of: If I were a real-estate agent, and all I wanted to sell was High End Beach properties, I wouldn't setup shop in Nebraska. A more fitting example is the same thing with a Lexus Dealership, I wouldn't necessarily start it in the ghetto, that's more of a "cheap" used car market.

So my first questions are:

• Why are you still in Location#2? Is there a valid reason for it? or is it a personal reason that you can't realistically justify? (Not saying it's wrong, but hopefully you can answer that question honestly.) My example comes from the company I work for. One of the owner's kids work for us. He is a terrible employee. He costs us a lot of money. He constantly makes mistakes and brings very little to the table. Doesn't work a full 8 hours, and gets paid more than some of the other Key employees. If he were any other employee he would have been gone a long time ago. But his dad is one of the owners, and he can't bear the thought of his kid failing so he is trying to drag him along. He can't justify it, but he won't consider anything else. So it's an anchor we carry to our detriment. Is it something like that?
• I agree that if the market won't bear it, you need to find what it will. If you want to compete with the guys that operate "under the table," it will be a race to the bottom. Is there another market in the same location you could go after? Commercial painting? Industrial Painting? Hospitals? Schools? Car Dealerships? Is there some niche you can enter and be the clear leader where they will value paying more money for getting it done right? There is no value in being the second lowest price, but there can be value in being the most expensive
• Could you pair down to a small crew and be more competitive? Or add services like Pressure washing that you could bundle? Trying to find ways to reduce costs or add more value for the same price is likely the only way to compete if you insist on competing.

That being said, and unsolicited advice aside, yes you can Sub-Subcontract. Biggest thing is going to be the contract you have with them. Require them to have proof of insurance (Business, Workers Comp, Liability, Vehicle, etc.) Having very clear indemnity clauses and expectations for safety and quality are going to be extremely important. Also if they will sign a contract agreeing that they will only use Legal Labor and will indemnify and defend you if they don't you are covered. But if it goes wrong on a job and you are fined for their misconduct, then you may be a while before you do ever get paid back (If ever.) Granted some government work, and other types of contracts can specify that they won't let you Sub-subcontract without permission from the owner.

If you can find someone who can do all that and you can still markup their prices and make money then you are set. But I would be surprised you'll find all of those things if the market is already as depressed as you are claiming.

There are marketing guys who do this all the time though. They go out and sell jobs, then subcontract them out to a local painter, and keep the margin. In that case they have a subcontract agreement for each job. You basically become a middle man, that convinces the local company to wear your uniform and act like they are your employees, when in reality they just won the contact. Its the same thing Home Depot does with their carpet/painting/tile services. It works, but it is a whole different business than you are running now.

Interested to know your reasoning for holding on the Location #2 and some more particulars. Someone here may be able to give you better insight with more information!

 

[pghsteve]

Wow, the second market sounds like UT!

Jokes aside, I guess my first thought is why are you trying to compete in the same market in location #2? It's kind of the idea of: If I were a real-estate agent, and all I wanted to sell was High End Beach properties, I wouldn't setup shop in Nebraska. A more fitting example is the same thing with a Lexus Dealership, I wouldn't necessarily start it in the ghetto, that's more of a "cheap" used car market.

So my first questions are:

• Why are you still in Location#2? Is there a valid reason for it? or is it a personal reason that you can't realistically justify? (Not saying it's wrong, but hopefully you can answer that question honestly.) My example comes from the company I work for. One of the owner's kids work for us. He is a terrible employee. He costs us a lot of money. He constantly makes mistakes and brings very little to the table. Doesn't work a full 8 hours, and gets paid more than some of the other Key employees. If he were any other employee he would have been gone a long time ago. But his dad is one of the owners, and he can't bear the thought of his kid failing so he is trying to drag him along. He can't justify it, but he won't consider anything else. So it's an anchor we carry to our detriment. Is it something like that?
• I agree that if the market won't bear it, you need to find what it will. If you want to compete with the guys that operate "under the table," it will be a race to the bottom. Is there another market in the same location you could go after? Commercial painting? Industrial Painting? Hospitals? Schools? Car Dealerships? Is there some niche you can enter and be the clear leader where they will value paying more money for getting it done right? There is no value in being the second lowest price, but there can be value in being the most expensive
• Could you pair down to a small crew and be more competitive? Or add services like Pressure washing that you could bundle? Trying to find ways to reduce costs or add more value for the same price is likely the only way to compete if you insist on competing.

That being said, and unsolicited advice aside, yes you can Sub-Subcontract. Biggest thing is going to be the contract you have with them. Require them to have proof of insurance (Business, Workers Comp, Liability, Vehicle, etc.) Having very clear indemnity clauses and expectations for safety and quality are going to be extremely important. Also if they will sign a contract agreeing that they will only use Legal Labor and will indemnify and defend you if they don't you are covered. But if it goes wrong on a job and you are fined for their misconduct, then you may be a while before you do ever get paid back (If ever.) Granted some government work, and other types of contracts can specify that they won't let you Sub-subcontract without permission from the owner.

If you can find someone who can do all that and you can still markup their prices and make money then you are set. But I would be surprised you'll find all of those things if the market is already as depressed as you are claiming.

There are marketing guys who do this all the time though. They go out and sell jobs, then subcontract them out to a local painter, and keep the margin. In that case they have a subcontract agreement for each job. You basically become a middle man, that convinces the local company to wear your uniform and act like they are your employees, when in reality they just won the contact. Its the same thing Home Depot does with their carpet/painting/tile services. It works, but it is a whole different business than you are running now.

Interested to know your reasoning for holding on the Location #2 and some more particulars. Someone here may be able to give you better insight with more information!

Multiple reasons for location #2....

• we originally opened it b/c we thought it was a good expansion opportunity and we had someone we thought would be outstanding to run it... same background (multiple years in paint sales to contractors) as we had in location 1, and with excellent connections and knowledge of the market. He turned out to be an alcoholic who took a year and a half of high wages and never left his couch. We fiiiiiiinally fired him and hired a really good second market manager who does a lot of things really well, but he hasn't grown the market.
• we keep it going out of loyalty to our key employees...and because we haven't closed the door to the idea of opening locations 3,4,5, 12....etc. We run a pretty great business in location 1. We lose 100k or so a year in location 2. If location 2 dies, we'll probably close the door on future markets. If location 2 wakes up and thrives, we will have shown we can thrive in any kind of market. We have multiple other paths to growth aside from opening other markets, we're looking at travel work, other specialties we don't currently do, etc.... we just like options. We currently do about 4-5MM, and we think depeinding on what paths we choose we could do 10-20 million, so these decisions are important to us.

We're not looking for a race to the bottom -- but we realize we can't be 25-40% higher than the market and still get substantial work in market 2. We have to price where the market is, and that means changing how we operate. We're very aware of the 'paper contractor' concept, and are okay doing that to be competitive....we just need to figure out all the contracting details to make it work and protect us. We sell against that and trash the concept in market 1, we beat those guys in this market every day. In market 2 (and possibly other markets) it's a proven concept that works. People knock it as if it's literally just selling work and dumping it to someone cheap. If done correctly, there is certainly more to it than that. It's a management game to give customers a good product and good experience, and it's driven by being a sales company...which is what we're generally good at. I don't want to reinvent the wheel though...I need guidance on the contracts and what all bases to cover in doing this.

As far as other submarkets to go after... we already paint 10MM dollar homes in that market. New res jobs that commonly top 100K. We also do (which is our main target) res repaint, which can be anywhere from 1500 to 10k+.... but a 10k job in market 2 would be a 20k job in market 1. We do some commercial repaint and some commercial New const, but not on the volume we need. We don't do industrial in that market yet, but we do in market 1. We're pretty diversified... but in market 2, all different submarkets are pretty equally whored out. There's a ton of money in the city...people just don't spend it on contracting. It's because the labor market allows fly by night work, so the customers take it. We thought we could change a market if we showed quality for a little more money. We were wrong.

 

[kentdalimp]

Multiple reasons for location #2....

• we originally opened it b/c we thought it was a good expansion opportunity and we had someone we thought would be outstanding to run it... same background (multiple years in paint sales to contractors) as we had in location 1, and with excellent connections and knowledge of the market. He turned out to be an alcoholic who took a year and a half of high wages and never left his couch. We fiiiiiiinally fired him and hired a really good second market manager who does a lot of things really well, but he hasn't grown the market.
• we keep it going out of loyalty to our key employees...and because we haven't closed the door to the idea of opening locations 3,4,5, 12....etc. We run a pretty great business in location 1. We lose 100k or so a year in location 2. If location 2 dies, we'll probably close the door on future markets. If location 2 wakes up and thrives, we will have shown we can thrive in any kind of market. We have multiple other paths to growth aside from opening other markets, we're looking at travel work, other specialties we don't currently do, etc.... we just like options. We currently do about 4-5MM, and we think depeinding on what paths we choose we could do 10-20 million, so these decisions are important to us.

We're not looking for a race to the bottom -- but we realize we can't be 25-40% higher than the market and still get substantial work in market 2. We have to price where the market is, and that means changing how we operate. We're very aware of the 'paper contractor' concept, and are okay doing that to be competitive....we just need to figure out all the contracting details to make it work and protect us. We sell against that and trash the concept in market 1, we beat those guys in this market every day. In market 2 (and possibly other markets) it's a proven concept that works. People knock it as if it's literally just selling work and dumping it to someone cheap. If done correctly, there is certainly more to it than that. It's a management game to give customers a good product and good experience, and it's driven by being a sales company...which is what we're generally good at. I don't want to reinvent the wheel though...I need guidance on the contracts and what all bases to cover in doing this.

As far as other submarkets to go after... we already paint 10MM dollar homes in that market. New res jobs that commonly top 100K. We also do (which is our main target) res repaint, which can be anywhere from 1500 to 10k+.... but a 10k job in market 2 would be a 20k job in market 1. We do some commercial repaint and some commercial New const, but not on the volume we need. We don't do industrial in that market yet, but we do in market 1. We're pretty diversified... but in market 2, all different submarkets are pretty equally whored out. There's a ton of money in the city...people just don't spend it on contracting. It's because the labor market allows fly by night work, so the customers take it. We thought we could change a market if we showed quality for a little more money. We were wrong.

Appreciate the added information, it definitely helps with being able to offer advice. Just remember that free advice is worth every penny!

Con's first:

• My biggest concern is that you are completely changing your business in Market #2. Not that you can't, its just that, now you are making your business More complex instead of more streamlined. It is essentially 2 different business now: Market #1 is a Painting Contractor & Market #2 is a Sales company.
• If you look at most contractors that exist in multiple locations, they operate the same in all locations. They use the same processes and systems across the company. Yes they have specific things required for each location but the business is essentially the same.
• What is the reasoning that you can't pursue a 3rd location if you close Location #2 down? Just personal hang ups? No reason you couldn't identify a similar market to location #1 elsewhere and relocate the key employees that are willing to move. You may become more profitable faster doing the things you already do well in a new market than changing the entire business model for Location #2.
• " If location 2 wakes up and thrives, we will have shown we can thrive in any kind of market." Maybe your current business model can't though. (My previous example of selling Luxury cars in a Ghetto) Maybe quality isn't enough of a concern in Market #2. So you can either educate the entire population to make your offer more desirable, and even then, most customers may understand the benefits of a luxury car, but still be unable or unwilling to pay for it. Or you can sell something different. Or find a better market. While I'm not a big fan of Internet Marketers, Russell Brunson gives a good example [I'm Going to paraphrase]: "The Market is a location, not a person - If you are a fisherman who needs to sell his fish to feed his family, where are you going to setup shop? Outside of town? No, you go where the most people are. You go to a marketplace where people are already in the habit of buying and selling...So the question is not 'Who is your market?' Rather the question is Where is your market, and who is your dream customer already going there?"

Anyway Con's aside, Yes it can be done. I am not a big fan of making things complex and adding a whole new business to an already established business seems like it will detract rather than compliment. -BUT- others do it successfully and you can too.

I'm going to throw you some links to read up on that I have read over the years. It may be worth reaching out to some of these people and ask for advice. They may be willing to coach you on the subject.

[Link] Reddit Thread from a couple years back where the guy started brokering jobs. eventually changed back to the Owner/Operator model.

[Link] According to these guys: "You’d be amazed how many sub-contractors have their own equipment, AND are willing to paint your house for 50-60% of what you’re charging the customer. "

I know a lot of the forums I have been on over the years have had posts about guys doing this. I will try and find some and post them here, but Google is definitely your friend.

While I am not saying don't do it, what I am saying is that, from an outsider's perspective who is not so personally attached, it seems like it would be a better bet to find the right market instead of trying to start your own market or create a whole new business. People do it and have success, but lots don't as well.

EDIT

Contractually, I would purchase the Consensus Docs 725 [Link] or maybe the 703 (Same Link as before) Read them and understand them, then hand them over to your legal council and ask if you should modify them at all.

There are limits on what you can ask a "Contractor" to do that vary by state. (Working hours is a big one.) But it's nothing you can't overcome if you have the right people on board. Doing Residential it shouldn't be a huge deal. Anything more complex and it carries a lot bigger risk.

 

[pghsteve]

Appreciate the added information, it definitely helps with being able to offer advice. Just remember that free advice is worth every penny!

Con's first:

• My biggest concern is that you are completely changing your business in Market #2. Not that you can't, its just that, now you are making your business More complex instead of more streamlined. It is essentially 2 different business now: Market #1 is a Painting Contractor & Market #2 is a Sales company.
• If you look at most contractors that exist in multiple locations, they operate the same in all locations. They use the same processes and systems across the company. Yes they have specific things required for each location but the business is essentially the same.
• What is the reasoning that you can't pursue a 3rd location if you close Location #2 down? Just personal hang ups? No reason you couldn't identify a similar market to location #1 elsewhere and relocate the key employees that are willing to move. You may become more profitable faster doing the things you already do well in a new market than changing the entire business model for Location #2.
• " If location 2 wakes up and thrives, we will have shown we can thrive in any kind of market." Maybe your current business model can't though. (My previous example of selling Luxury cars in a Ghetto) Maybe quality isn't enough of a concern in Market #2. So you can either educate the entire population to make your offer more desirable, and even then, most customers may understand the benefits of a luxury car, but still be unable or unwilling to pay for it. Or you can sell something different. Or find a better market. While I'm not a big fan of Internet Marketers, Russell Brunson gives a good example [I'm Going to paraphrase]: "The Market is a location, not a person - If you are a fisherman who needs to sell his fish to feed his family, where are you going to setup shop? Outside of town? No, you go where the most people are. You go to a marketplace where people are already in the habit of buying and selling...So the question is not 'Who is your market?' Rather the question is Where is your market, and who is your dream customer already going there?"

Anyway Con's aside, Yes it can be done. I am not a big fan of making things complex and adding a whole new business to an already established business seems like it will detract rather than compliment. -BUT- others do it successfully and you can too.

I'm going to throw you some links to read up on that I have read over the years. It may be worth reaching out to some of these people and ask for advice. They may be willing to coach you on the subject.

[Link] Reddit Thread from a couple years back where the guy started brokering jobs. eventually changed back to the Owner/Operator model.

[Link] According to these guys: "You’d be amazed how many sub-contractors have their own equipment, AND are willing to paint your house for 50-60% of what you’re charging the customer. "

I know a lot of the forums I have been on over the years have had posts about guys doing this. I will try and find some and post them here, but Google is definitely your friend.

While I am not saying don't do it, what I am saying is that, from an outsider's perspective who is not so personally attached, it seems like it would be a better bet to find the right market instead of trying to start your own market or create a whole new business. People do it and have success, but lots don't as well.

EDIT

Contractually, I would purchase the Consensus Docs 725 [Link] or maybe the 703 (Same Link as before) Read them and understand them, then hand them over to your legal council and ask if you should modify them at all.

There are limits on what you can ask a "Contractor" to do that vary by state. (Working hours is a big one.) But it's nothing you can't overcome if you have the right people on board. Doing Residential it shouldn't be a huge deal. Anything more complex and it carries a lot bigger risk.

Thanks Kentdalimp,
I appreciate the referral to the Consensus Docs. I've been tied up the last few days, so I haven't gotten far...but i did bring up the website. I'll probably use a copy of those, and I think I have documents from two of the bigger franchise companies on the way. I'll combo all the docs I get and build contracts and docs that fit us. I'll also check out those couple reddit threads later tonight if I can keep my eyes open.

I'm honestly not worried about running different business models in different cities. The sale is the same, the job mgt is the same... it's just managing subs instead of in-house employees. Once the documentation is cleared up, the business should go pretty easily. We've been around a good bit of this, we're not naive to how the process works -- we just have to straighten out the details.

Though it's been a money loser most of it's time in existence so far, it is that way only because we've hung onto the idea of doing things the same way as we do in market 1. That lack of versatility has been a detriment, not a strength. To give up the market at this point would be a waste of resources. We have a shop, we have a residential customer/referral base, we have a couple strong repeat customers (one that can do 4-500k on a good year if we manage it right, another for about 100k), we have a pretty good salesman and a manager and a decent production manager and a couple good foremen. Though they lack profit, the people/shop/equipment is the foundation of a business. Folding it just to keep from being flexible....though it could still end up in the same result if our change doesn't work out....seems like a waste. Actually, when we've talked about opening other markets in other cities, we've talked about buying small companies like we are in market 2 (decent setups with people in place that lack sales (preferably) and profit. If we were to buy companies we think we could greatly cut our time to profitability...we could just go into markets and focus on sales (which again, we're pretty well built for). In this case...we're doing what we've talked about doing in other cities and just "re-opening" our existing business. It's shameful on our part, but these changes should have happened a long time ago. The fact that we let a business doing 400-800k a year flounder for this long reflects terribly on us. I'm fairly committed to fixing it.