Self-Performed vs. Subcontracted: Where Margin Comes From

Two Different Businesses Under One Roof

When you self-perform, you are selling your crew's labor and taking the risk that it takes longer than estimated. When you subcontract, you are selling coordination and taking the risk that the sub fails.

They earn money differently, they fail differently, and comparing them with a single gross margin percentage tells you almost nothing useful.

Why Percentage Comparisons Mislead

Take two jobs, each $500,000 of contract value.

Job A, self-performed. $350,000 of your own labor and material. Gross margin 30%, so $150,000.

Job B, subcontracted. $425,000 passed through to subs. Gross margin 15%, so $75,000.

Job A looks twice as good. But Job A consumed your crews for four months and Job B consumed a project manager's part-time attention. If your crews were the constraint, Job A cost you the ability to take other work. If PM capacity was the constraint, Job B was cheap to deliver.

Percentage margin ignores what the work consumed. That is the whole problem.

Measure Margin Against the Constraint

Most contractors are constrained by one of two things: field labor capacity, or project management capacity. Measure margin against whichever binds you.

If labor-constrained, the number that matters is gross profit per direct labor hour. Job A generating $150,000 on 3,000 hours earns $50 an hour. Job B generating $75,000 on 400 hours earns $187 an hour. Suddenly the subcontracted job is the better use of a scarce resource.

If PM-constrained, measure gross profit per PM-month. Jobs that consume disproportionate management attention for modest fee are the ones quietly costing you.

The Risk Difference Is Real

Higher margin on self-performed work is not free — it is compensation for risk you are carrying.

• Productivity risk. If the crew takes 20% longer, that comes straight out of margin. A sub on a fixed price absorbs their own overrun.
• Idle time. Crews cost money between jobs. Subs do not.
• Sub default risk. The mirror image — if your sub walks, you are exposed to completion cost with no crew.
• Markup pressure. Owners scrutinise markup on pass-through work more than they scrutinise a unit rate.

A contractor earning 30% self-performed and 15% subcontracted is not necessarily doing better on the first. They may simply be paid for risk they had not noticed they were taking.

What You Need in the Books to See This

Almost none of this is visible unless your cost structure separates the two. Practically that means:

• Subcontract costs in their own cost type, never mixed with direct labor or material
• Direct labor hours captured by job, not just dollars
• Indirect costs allocated on a base that does not unfairly load self-performed work
• Revenue split by work type where a job contains both

That last one is the hard part on mixed jobs, and it is usually approximated from the schedule of values.

The Decision It Should Inform

Run a year of completed jobs, split by work type, and compute gross profit per unit of your constraint. Most contractors find one or two trades where self-performing genuinely earns, and others where they are carrying crews out of habit rather than economics.

That is a strategic answer, and it comes out of job costing that was set up properly. Which is usually where our diagnostic starts.