The Design Builder's Blog

Guest Blogger: Peter Schneider, Peter Schneider Builder Contracor, Inc. has 20+ years experience and knowledge of residential custom building managing each project hands-on. He's been featured in national trade magazines and local publications and he's served on the Board of Directors of the Fairfield County Home Builders Association.  Peter offered this guest blog topic after reading my blog article titled: "Are You Less Of A Contractor If You Sub Everything Out?" I think Peter's message is a valuable one for contractors to consider.

Contractors; Know Who You Are, Then Build a Contracting Business That Works For You

Upon a little reflection I’ve realized there are a lot of ways to organize a contracting business, none of which are the “gold standard” and all of which either purposely or inadvertently express the personality of the owner.  At your inner core are you a manager or a craftsman? Are you a little of both? Are you neither?  Generally, I’ve noticed successful people have figured out who they are and how they add value to the equation.  Then they’ve set up a business system to capitalize on their strengths.  

If you are good with your hands, and want to be left alone to do your work, you probably will be a good one-man show type of contractor who can keep busy working for a few General Contractors. I work with carpenters, tile guys and drywall tapers that operate like this – most of whom survived the 7 year long down-turn OK.

If you can teach others a trade like framing, painting, drywall, etc, you can assemble a crew that will make you a nice profit, but you will need someone to run the “business” end of things, at your direction, leaving you free to estimate and sell and manage production. Profitably managing direct employees is a job unto itself and in my opinion is only appropriate when you have a crew that specializes in one type of work.

If you are excited about putting a team of specialized professional craftsmen together to construct a series of varied job types where organization & management are key elements of production & profitability, you’re a good fit for a general contractor operation. A GC set up is generally best for larger jobs like a custom home, a larger addition, or a whole house remodel job. Sometimes smaller jobs that require a higher level of craftsmanship like a special faux finish on walls, or custom built in cabinetry, or precision stone work are best left to the specialist sub contractor.  Higher end bath remodels are also a good fit for a GC with a loyal team of trade contractors. You absolutely must develop a team that you work with regularly so you can be assured of consistent quality and integration between trades.

For me, I’ve noticed the comparatively greater value of leveraging my time providing work opportunities for, and coordinating the activity of other professionals. 

There are inescapable sales, marketing and overhead costs of running a business not directly associated with performing your revenue producing activity. A good GC-Sub relationship takes this into account, or at least I like to think it does in my case.

OSHA Visits Contractor 3 Times in 33 Days, Subs Don’t Want To Come Back

A remodeling contractor in Cabin John, MD was visited three different times by the same OSHA inspector within a 33 day period on a Washington DC project.  The fines come to a total of $8000.  However he was told if he is willing to pay up within 15 days, not put up a fight about the charges, and make the required corrective actions, our government will give him a 25% discount.  The citation letter he received from the OSHA inspector also let him know that information about the citation would be published on the internet at www.osha.gov after 30 days.

Mark Scott, president of Mark IV Builders, told me he chalks it up to just another cost of doing business.   Fortunately for him his business is large enough to absorb such costs.  However it has put some fear into his employees as well as his sub contractors.  Both were found in violation of OSHA requirements when the inspector stopped by.  One sub, who was also cited for the same violations and fines, doesn’t want to come back to the job site, fearing additional visits and fines. 

All considered “serious violations” by OSHA, here are the violations as well as the fines for each:

• One employee was found using a table saw without using safety glasses.  This offense came with a $1200 fine.  The inspector noted the violation was corrected during inspection.
• Another employee was working without a hard hat in an area where possible head injury could occur due to falling or flying objects.   This violation triggered a $1200 fine.  The inspector noted the violation was corrected during inspection.
• Three sub contractor employees were each found to be using separate damaged extension cords.  Again, another $1200 fine.
• A sub contractor was observed working more than 6' off the ground without proper fall protection in place, in two different areas at the job site.   This triggered a $2800 fine.
• A sub contractor was standing on the top step of a 4’ step ladder.  This offence came with a $1600 fine.
• Both employees and subs, while doing drywall installation, were found to be using a GFI wall outlet without a cover plate on it.   For some reason no fine was assessed for this violation.

What will the company do differently?

Unlike many remodeling businesses Mark IV has already embraced worker safety and OSHA requirements.   All company employees have the safety equipment needed to do their work as well as the required training to use it.  In fact Mark told me he worked with his insurance company to make sure he was in compliance and has several letters from them stating what an excellent job his company has done in regards to worker safety.     

I asked Mark what he plans to do differently now after having been written up and fined.  His answer was; “Not much.  My employees have the equipment and know what they should and should not be doing.  It’s part of playing the game of being in business”.   

One thing Mark says he will do is look into how his company and his employees should handle and manage future OSHA visits. 

What does Mark suggest to other contractors?

Mark shared that his first experience with OSHA was back in 1979 when working as a project supervisor. An OSHA inspector showed up at the job site with three books under his arm.   Mark said the inspector greeted him with; “You’re going to get a fine today.  I’ve got three books here and I’m sure I can find something in one of them”.  

In Mark’s opinion OSHA has no intention of proactively helping businesses comply.  He suggests taking advantage of what your insurance provider has to offer to help with worker safety and OSHA compliance.  In his experience most of the help offered has been free and can even help manage a contractor’s insurance costs. 

Check out this OSHA compliance checklist for contractors.

We Can't Do That -3 Objections Your Boss May Have About Hiring a Construction or Remodeling Industry Expert

As an employee often times I bet you see challenges and opportunities at the business where you work that you believe your boss doesn't.    It’s not necessarily that you might be smarter than your boss, although that sometimes is the case.  It’s typically because you are involved in the business in a different way than your boss. If you are a Lead Carpenter perhaps that involvement exposes you to the day to day realities in the field while your boss is working on other things.  Or maybe as the production manager you're the one who has to manage the projects and build from the information provided by your boss; but you can't.  You have to constantly call him to get answers and or details. 

Often times I find that employees can be the eyes and ears their bosses are missing in certain areas.  If you are a dedicated and conscientious employee you may want to share what you see and offer solutions to help your boss.   One solution can be to hire a construction industry expert to come in and help right the ship.  This suggestion might probably be a good one.  However, if your boss objects to it, what can you do or say?  

Here are a few suggestions you can consider depending on the objection.

Objection #1: It cost too much.  

Hiring a construction or remodeling industry expert certainly can be expensive.  Depending on the nature of the problems to be addressed the fees can add up quickly.   However, compared to the money lost over time by not correcting or improving things that slow you down or increase project costs, years perhaps, the lost revenue and compromised profitability can far exceed the initial cost to fix the problem.  Perhaps you could help your boss see the cost as an investment.  To do this consider using a simple analogy from your world as an example to help get your intended point across.  Maybe consider using the example of having a table saw.  Sure you could do your job without one, but it sure would go a lot faster and come out a lot better, and at a much lower labor cost, if he made the investment in a good one sooner than later.   And by doing so the labor savings alone would quickly cover the cost of buying the table saw.  

Objection #2: Don't have the money right now, so we would have to wait for a profitable job to pay for it.  

If you hear that objection it may be the truth.  But you know what they say about the definition of insanity.  Depending on your relationship with your boss perhaps you could ask what he has already done or will do different to get that profitable job.  The positive news is that often times the business is actually already in pretty good condition.  I find many construction businesses might only need a few tweaks and or new processes to make significant improvements.  If the expert helps start with low hanging fruit the initial changes can often generate the additional money needed to finance additional changes.

Objection #3: This isn't a good time, we are straight out right now.

Again, this may be completely true.  And again I'm not sure how you would do or say this depending on your boss, so be careful and be respectful.   Come up with a safe way to remind him that it's been pretty much like that every day and all the time for quite a while now since the company started running more than one or two jobs at the same time.  If true, also remind your boss that things were going really well on the jobs when the company only did one or two jobs at a time. Point out that maybe some additional preconstruction activities and or introducing a Lead Carpenter system might be the answer.  To help really make your suggestion practical you could also share your willingness and desire to take on additional responsibility provided you get the right training and tools to do so.

Last thoughts

Most construction business owners are thoughtful and kind people.  They are also typically very busy and put in a lot of hours to help keep the business going and keep the employees working.  If you see things that your boss doesn't, keep these considerations in mind.   Choose a good time to share your opinions and offer your suggestions.  Most importantly, do it with good intention and respect.  I hope you have a boss who is willing to listen and will hear your suggestions.  

If you give any of these suggestions a try let me know how you made out by posting a comment.  If you’re afraid to say anything I hope you'll share that here as well.  If you're afraid your boss will react negatively to a posted comment, email me your comment and I will post it anonymously for you.

Will Drones Be Watching and Servicing Contractors In The Near Future?

Drones may soon become part of everyday life for contractors.  Depending on their purpose, drones could be a contractor’s helpful friend or his worst nightmare.   If your business has something to hide there could be danger from up above.  If you need a quick delivery a drone may soon be the method of choice.  Either way, you might want to make sure you have your hardhat on, both to protect yourself from falling items and to avoid an OSHA violation.

If you think my imagination has run wild check out the video below.   For about $1200 bucks you can get a pretty easy to use drone that will communicate with your IPhone.   I watched it and it got me to thinking about how contractors and others may use drones in the near future.   I encourage you to watch it and imagine ways you could use one for your business.  After you watch it check out my short list of likely uses for contractors, the government and even the vendors you do business with.  

Here are a few ideas that came to me after watching the video

Ways contractors might use drones

• Measuring the roof without pulling out a ladder.
• Check the condition of the chimney flashing.
• Jobsite fly around replaces the walk around to see how things are going.
• Create bird’s eye view before, during and after videos or photos of your projects to use for marketing on your website.

Ways vendors might use drones

• Fast delivery of that one joist hanger you’re missing so you can put the floor sheathing down and get the wall framing going
• The local print shop delivers the three copies of the plan set you need to apply for that building permit this afternoon.
• Your exterior products supplier sends a drone over your job site to measure the roof and then gets the materials ready for first delivery in the morning.

Here are a few ways the government might use drones to keep an eye on contractors.

• OSHA inspector uses it at a large development project to scan the entire site for violations.  Site conditions are all recorded on video and individual clips of each offense in action are included as part of the violation notice the GC receives.
• EPA can do RRP inspections at will.  The camera software in the drone has the ability to recognize ladders and the drone is programmed to only fly by homes built prior to 1978.
• Your State DEP sets up their drones to fly by all DEP sites to make sure all water management requirements are in place and any land clearing work completed doesn’t exceed what was approved.

Predicting the future or pure fantasy?

I first came across this topic in a discussion posted to LinkedIn by Alec Caldwell.  One commenter said Caldwell was "fear mongering" and suggested he get a grip on his imagination.  I disagree and think the uses for drones will only be limited by our imagination or government regulation.   We’ll have to see which one wins out. 

Here is one example where the government used drones to help convict a North Dakota farmer, claimed to be the first case of its kind.  

How about you?  Is this science fiction or can you imagine other uses for drones that would help and or hinder contractors?

3 Simple Steps To Covering A Carpenter's Non Productive Time

If your business pays a carpenter or other hourly employee for non productive time you better know how to build it into your labor charges so your customers are paying for it, not your profits.   The theory for how to do it is actually very simple.

What is nonproductive time?

Nonproductive time is the hours you must pay an employee for, when he or she is not producing income for the business.   Basically it’s what is typically referred to as non-billable time.   Non productive time can fall into a variety of categories for a construction company.  Here is a brief list of common examples:

Examples of nonproductive time for carpenters

• Attending weekly meetings
• Shop, tool  and vehicle maintenance
• Commuting to/from projects
• Attending educational events and training
• Vacations, Holidays, Sick Days
• Attending company social functions

How to include nonproductive time in your labor rates in 3 steps

In order to pay an employee for his or her nonproductive time a contractor must charge enough for that employee’s annual billable hours to also cover the non-billable hours.  To figure out how much to charge follow these simple steps.

1. Add up the total annual cost to the business to compensate and support the employee.   In addition to hourly wages, here is a partial list to help you out.   Add any others specific to your business.

• Employer paid taxes and Social Security
• Vehicle expenses
• Vehicle replacement
• Workmen’s Comp
• Liability Insurance
• Medical benefits
• Education and Training
• Employee raises during the year
• 401K or similar

2. Add up the total annual non-billable hours for that employee and subtract them from total paid hours to determine that employee’s total available billable hours.
3. Divide the total annual cost to compensate and support the employee by the total annual billable hours for that employee.

The resulting number is what you need to charge for each billable hour so it will, over the course of a year, bring in the money needed to pay that employee for all billable and non-billable hours.

Below is an example to help show how the math works

The example assumes an annual cost of $60,000 to compensate and support the employee.  It also assumes the employee will be paid for 2080 hours but can only be billed out for 1900 hours.

$60,000.00 ÷ 1900 billable hours = $31.58/Hr billable hourly rate

To prove the example above works simply multiply the billable rate by the number of billable hours to prove it will produce the total amount of money you will need to cover the cost of the employee for the entire year. 

1900 Billable hours X $31.58/Hr = $60,002.00

It’s that simple! Kinda...

Figuring out what to charge to cover your carpenter’s nonproductive time is simple to do, but here are a few caveats to keep in mind so you don’t come up short on the money you need.

• If the employee doesn’t work all of the assumed billable hours you will not collect enough money.   So, if you have an employee who is constantly sick or is unreliable, realize that even though you may not be paying the employee for the missed time, that missed time is not contributing to the dollars you need to cover the total annual cost of the assumed non-productive time.
• And, if in your billable hourly rate you included the costs of items required to support the employee, you will also come up short on the money you need to pay for those items as well.
  

Need help figuring out your Labor Costs?

Attend this workshop to find out how to calucalate and include burdened labor costs into your estimates

Get 6 credits towards your MA CSL renewal too!

"Estimating, Pricing and Producing Successful Projects"

February 7th, 2014 at Brockway Smith Company in Andover MA

February 11th, 2014 at Brockway Smith Company in Hatfield MA

February 12th, 2014 at Sterritt Lumber in Watertown MA

Rather work one-on-one?

Call or  Email Shawn today. 

Do it now so you can be confident you are pricing your spring and summer projects correctly!

Guest Blogger: Melanie Hodgdon is a Certified QuickBooks ProAdvisor who has been providing financial analysis and QuickBooks training for contractors since 1994. She’s the co-author of A Simple Guide to Turning a Profit as a Contractor.  Melanie and Shawn often coordinate their efforts when helping remodelers develop financial systems for their businesses so they serve the contractor, not just their accountant.

Understanding and Including General Production Costs in Your Estimates

Estimators are pretty good about including costs for permits, materials, subs, and equipment rental in their estimates. And the really topnotch ones are also adept at estimating the amount of labor time based on knowledge of what their crew(s) can produce. But there is another element that often eludes even the most careful of estimators: the cost of those “necessaries” that will be used on a job but not easily assigned to specific jobs.

These include things like:

• Bits
• Blades
• Rags and other cleaning supplies
• Sanding disks and sand paper
• Trash bags
• Small tools
• Dust masks
• Assorted fasteners
• Caulking and adhesives
• Pencils, markers and chalk

Here are some more candidates:

• Cost to repair and maintain tools and equipment
• Cost to maintain a jobsite trailer
• Propane for the space heater
• HEPA filters
• Bungies, ropes and tie downs
• Trash barrels or bins

These can be considered General Production Costs and you should have a method to allow for them in the job price.

Two ways to price your work

Basically, pricing consists of identifying the actual cost of X and then adding a markup. The purpose of the markup is to allow the selling price to cover not just what X costs, but also it’s fair share of the company overhead, with enough left over to contribute to company profit.

Option A: Include in the estimate

When you include an allowance for General Production Costs in your estimate, you increase the predicted cost of the job. When you apply a markup to the cost, you will also be marking up the predicted General Production Costs. Because you are charging your customer for the cost (income account), the matching cost should be considered Cost of Goods Sold.

For many contractors, including an allowance for these costs in the estimate will increase the likelihood that the costs will be covered.

Option B: Include in the markup

If you consider General Production Costs as being part of the cost of doing business (overhead), then you will account for them by increasing your markup on the job.

Ideally, both methods will result in the same selling price. However, in my experience, far too many contractors decide on a markup based not on the financial requirements of their company, but rather on a figure they found in an article, or what scuttlebutt tells them their competition is using. This WAG (wild ass guess) approach decreases the likelihood of capturing these costs in the markup.

Why I typically recommend Option A

Also, as companies have diversified with changes in the economy, the type of work they do has also changed in many cases. Burying these costs in overhead can make the changes less obvious than placing them in Cost of Goods Sold where significant changes are more likely to be spotted. For example, companies performing lots of RRP work might see a significant increase in these costs due to the requirement for filters, respirators, contractor bags, signage, duct tape, Tyvek suits, etc. The effect on the gross margin (when these costs reside in Cost of Goods Sold) might be noticed more quickly and reliably than remembering to deliberately dig into the overhead accounts to find and monitor them.

Estimating vs. job costing considerations

Once your General Production Costs are part of Cost of Goods Sold, an allowance for the inevitable cost can be included in the estimate. This means that you will charge for them as part of your pricing strategy. However, because of their very nature, you won’t be able to attribute them to individual jobs, so when you look at job cost reports, you will not see an “actual cost” for these items, making the jobs appear slightly more profitable than they probably are. The achieved margins of all the jobs will look higher than the overall achieved margin from the Profit and Loss Statement since the Profit and Loss Statement will contain the dollars spent on General Production Costs and the individual job reports won’t.

How to calculate General Production Costs for estimating purposes

The simplest way is by comparing General Production Costs with Materials costs. Express the relationship as a ratio or percentage. For example, if in the last twelve months you spent $500,000 on materials and $8,000 on General Production Costs, you will need to add 1.6% ($8,000 ÷ $500,000) to your estimate to cover them. When estimating, this figure can be added as a line item as shown in the sample estimate template below.

 Screen shot from Shawn's new estimating Template

Final thoughts

Each job has enough surprises in it. Why not at least plan your sell price to include an allowance for the costs you know you can count on?

Need help with General Production Costs?

Call or  Email Shawn today. 

Do it now so you can be confident you are pricing your spring and summer projects correctly!

Are You Less Of A Contractor If You Sub Everything Out?

One contractor seems to think so...

A trend I have definitely seen in the past several years is that many more contractors have moved away from using employees for their production work and are using sub contractors to get the work done.  These contractors are often referred to as “paper contractors”.  Some say using subs is the way to go, others disagree completely.  Contractors as well as home owners both have varying opinions on the use of subs, that’s for sure.  But, they do get to make their own decisions on which way they want to go.

Regardless of personal preference, does choosing one way over the other make you more or less of a professional contractor?  Assuming you run a legal and legitimate business I don’t thinks so.  I have personally worked with and or have interacted with contractors using both methods.  With the right business systems in place a contractor can do a great job for his/her customers using either method and can make a good profit for the business as well.

Then, in a LinkedIn discussion about markup posted by Gerry Gerber, I found a comment that really stopped me in my tracks.  The discussion was posted to the Contractor Talk Group.  The commenter seems to indicate that contractors without employees, those subbing out all of their work, are not good business owners.  From his comment I also assume he thinks of such a business model a “ponzi scheme”.  In fairness to the commenter I suggest you check it out to get a full context of the discussion and his comment before you make your own conclusions. 

As an FYI, I tried to leave a comment myself but the discussion group leader must be moderating the comments before they get posted.  As of the publishing of this blog my comment hadn’t yet been posted, although many others had been.   I offered my opinion about this practice in a previous blog post.   

Here is the portion of the comment that jumped out at me:

So, what about your opinion?

Do you agree with commenter?  Do you see it differently? 

Everyone’s entitled to their opinion and business owners can decide for themselves how they want to run their businesses.  I hope you will offer your opinion.  I also hope you will do so professionally.

MA Workers Comp Rates For Contractors May Go Up, Retroactively!

The Workers Compensation Rates and Inspection Bureau of Massachusetts (WCRIBMA) submitted a rate filing on December 27, 2013 to the Division of Insurance on behalf of its members recommending a 7.7% increase in average rates for industrial classes. Workers compensation rates for construction workers fall under the industrial classes. 

So if the rate hike is approved contractors can expect their workers compensation premiums to increase. Using some quick math that means for classification code #5403, Carpentry- not otherwise classified, the rate for a carpenter being paid $25.00/hr will increase by about $.74/hr, or a total increase of about $1539.00 for the full year (2080 hours). 

That should help motivate contractors to add employees and help stimulate the economy...  Ready for more good news?

Paying more is one thing, how about having to pay retroactively!

The proposed effective date of the rate filing is January 1, 2014. That means if the rate hike is approved as submitted insurance companies will be able to retroactively charge contractors the new rate all the way back to the first of the year.  Again, using some quick math, if for example the rate hike is approved as of March 1st, 2014, that means for a $25/hr carpenter under classification code #5403 the retroactive premium for January and February would be just under $255.00

WC Code #5403 current rate: 9.61/$100 of payroll

WC Code #5403 proposed new rate: 10.35/$100 of payroll

Here’s the message the WCRIB is suggesting insurance carriers send out with all new and renewal policies:

“A filing is being considered by the Massachusetts Division of Insurance which may result in premiums different from those shown on the policy.   If it does, we will issue an endorsement to show the new premiums and their effective date.”

If you don’t like it you can speak your mind

A Hearing on the Rate Filing will be held at 10:00AM on Thursday, January 30, 2014 at the Division of Insurance, 1000 Washington Street, Boston, MA.  For more information you can refer to Circular Letter #2230 and Circular Letter #2231 for details.

If you go, can you please ask if they will also write into the changes that contractors can retroactively bill their customers for the increase as well, and that all customers must pay the increase within 30 days of receiving the invoice from their contractor….?

If you plan to attend the hearing

Any person who wishes to participate as an interested party in this hearing must comply with the procedures set forth in 211 CMR 110.05 (3).  Persons who wish to present unsworn oral or written statements at the January 30, 2014 hearing are asked to submit a notice of intent to comment no later than January 28, 2014. All other persons who wish to speak will be heard after those who notify the Division in advance.

It pays to be a NARI Member

I want to thank fellow EMNARI Member Tom Messier of Mason and Mason Insurance for making me aware of this so I could share it with you.  I have known Tom for over 15 years. One reason I continue to do business with him is because he proactively shares this kind of important information with me and the other contractors he works with.  Tom also shared with me that the state has not seen rate increases since 2001.  Maybe that makes us lucky.  They did try to increase the rates by 14% two years ago, but the increase was denied.  He also shared that in the past the rate increases typically have taken place on September 1^st of the year they were approved. 

3D is the Way to Be: The Future Of Construction Projects

Guest Blogger: Steven Clark is a graphic designer who transitioned to being a work-from-home dad last year, after his triplet boys were born.

Although we can use computer modeling, high-tension bindings, and cranes hundreds of stories high to build super-skyscrapers, construction technology has advanced less far than some might think. After all, the concrete we use today is a result of an invention dating back to the Roman Empire, one that the University of California claims lacked the strength of today's concrete only because our ancestors did not have reinforced steel. As we look forward to the future of construction, much will remain the same -- plans will have to be drawn, foundations laid, and so on -- but many new inventions will change how much time, effort, and resources go into a project.

Beyond 3D

As the movie industry races to develop three-dimensional blockbusters, the construction world has left the third dimension in the dust. The newest trend is one step further: four-dimensional planning, which allows a person to not only see the entire view of a building, but see it from every possible angle. This gives contractors the opportunity to see possibilities they didn't before, plan better for construction, rent any kind of special equipment they might need and plan for supplies and safety. The American Society of Mechanical Engineers reports a new type of paradigm known as BIM, or building information modeling. This paradigm is being used in computer development of construction, and engineer Richard Beattie claims it can boost the approval rate of designs up to 90% percent BIM allows the architect, engineers, and clients to view a building's depth in addition to its height and length.

Building A Better Brick

Bricks as we know them represent one of the oldest human inventions in history, with civilizations dating back over five thousand years having used dried mud and mortar to create buildings. Yet the basic stature of a brick has changed little since then -- until now. Architizer reports that ceramic bricks made by 3D printers may soon replace their traditional red counterparts, since these bricks can be created quickly on the spot with fewer materials, weighing less, and having greater strength. A honeycomb design makes these bricks better able to withstand everything from the weight of its neighbors to a gale-force hurricane. Bricks still need to be attached to everything from window sills to floors, however, and the rubber sealing mechanisms offer a new hope as well. Thermal-bonding rubber seals minimize heat loss when utilized as a bonding agent between composite or traditional bricks. This rubber bonds to ceramic as well as plastic, glass, and wood.

5 Examples of How the IRS Determines If a Construction Worker Is an Employee

A good number of contractors are deciding not to hire employees as the economy and their workloads improve.  Instead, they plan to hire sub contractors to get the work done. I have talked with many of these contractors and the majority of the ones I spoke with are putting themselves at significant risks.  If you don’t know how to properly differentiate between an employee and an independent contractor you better find out.  If the IRS or another government agency decides a worker is an employee, not a sub contractor, it could cost you and your business big time.

Below are some examples of how the IRS would determine whether a worker is an employee or an independent worker. This information comes from a 2014 IRS Publication titled “Employer’s Supplemental Tax Guide”.

I hope these examples will help you properly classify your workers and help you avoid unneeded fines and sleepless nights.

Example 1:

Jerry Jones has an agreement with Wilma White to supervise the remodeling of her house.

The details: She did not advance funds to help him carry on the work. She makes direct payments to the suppliers for all necessary materials. She carries liability and workers' compensation insurance covering Jerry and others that he engaged to assist him. She pays them an hourly rate and exercises almost constant supervision over the work. Jerry is not free to transfer his assistants to other jobs. He may not work on other jobs while working for Wilma. He assumes no responsibility to complete the work and will incur no contractual liability if he fails to do so. He and his assistants perform personal services for hourly wages.

IRS Says… 

Jerry Jones and his assistants are employees of Wilma White.

Example 2:

Milton Manning, an experienced tile setter, orally agreed with a corporation to perform full-time services at construction sites.

The details: He uses his own tools and performs services in the order designated by the corporation and according to its specifications. The corporation supplies all materials, makes frequent inspections of his work, pays him on a piecework basis, and carries workers' compensation insurance on him. He does not have a place of business or hold himself out to perform similar services for others. Either party can end the services at any time.

IRS Says… 

Milton Manning is an employee of the corporation.

Example 3.

Wallace Black agreed with the Sawdust Co. to supply the construction labor for a group of houses.

The details: The Company agreed to pay all construction costs. However, he supplies all the tools and equipment. He performs personal services as a carpenter and mechanic for an hourly wage. He also acts as superintendent and foreman and engages other individuals to assist him. The company has the right to select, approve, or discharge any helper. A company representative makes frequent inspections of the construction site. When a house is finished, Wallace is paid a certain percentage of its costs. He is not responsible for faults, defects of construction, or wasteful operation. At the end of each week, he presents the company with a statement of the amount that he has spent, including the payroll. The company gives him a check for that amount from which he pays the assistants, although he is not personally liable for their wages.

IRS Says… 

Wallace Black and his assistants are employees of the Sawdust Co.

Example 4.

Bill Plum contracted with Elm Corporation to complete the roofing on a housing complex. 

The details: A signed contract established a flat amount for the services rendered by Bill Plum. Bill is a licensed roofer and carries workers' compensation and liability insurance under the business name, Plum Roofing. He hires his own roofers who are treated as employees for federal employment tax purposes. If there is a problem with the roofing work, Plum Roofing is responsible for paying for any repairs.

IRS Says… 

Bill Plum, doing business as Plum Roofing, is an independent contractor.

Example 5.

Vera Elm, an electrician, submitted a job estimate to a housing complex for electrical work at $16 per hour for 400 hours.

The details: She is to receive $1,280 every 2 weeks for the next 10 weeks. This is not considered payment by the hour. Even if she works more or less than 400 hours to complete the work, Vera Elm will receive $6,400. She also performs additional electrical installations under contracts with other companies, that she obtained through advertisements.

IRS Says… 

Vera is an independent contractor.

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