Self-Performing: the Good, the Bad, and the Ugly

Self-Performing: the Good, the Bad, and the Ugly
Photo by Mina Rad / Unsplash

Most commercial general contractors in North America today focus entirely on managing and coordinating the work of others.  Beyond a small crew to handle the few odd jobs related to general requirements, general contractors typically avoid taking on any of the direct scopes on their projects leaving that work to subcontracted trades.

There are some generals, however, who do undertake one or more scopes of work directly with their own forces.  Whether they started out as a trade contractor and evolved into a general contractor, or they saw a market opportunity to spin up a trade division - the decision to self-perform work as a general contractor has interesting implications for the business.  

General contractors who self-perform work are wearing two hats: the construction manager overseeing the work of others, and the trade contractor who installs a scope of work.

In this article, I'll examine the good, bad, and ugly aspects of self-performing work as a general contractor.

The Good: The Case for Self-Performing Work

There are several reasons why a general contractor might consider self-performing some of the work with their own forces: financial opportunity, scope gaps in trade definitions, and labour availability for remote jobsites.

Opportunity for increased margins

There is a very simple case for self-performing work: margins are better for the trades than they are for the generals.

This is the simple truth behind most decisions when general contractors decide to take on a scope of work.  On a project delivered as a cost-reimbursable construction management contract, a general contractor could reasonably expect to generate a gross margin of 2-8% depending on the scale, complexity and duration of the project.  The trade contractors working on stipulated price contracts on the same project could generate gross margins of 8-25%.  The high end for the general is the low end for the subcontractor, and the difference between the margins of coordinating the work vs performing the work is often the major driving factor that leads a general contractor to explore self-performing a scope(s) with their own forces.

Scope gaps in trade definitions

In some jurisdictions, there are self-governing bodies or regulators who have written descriptions of standard trade scopes.  If you find yourself in one of these places – what it means to be a plumber, and what the plumber is responsible for on a project could be dictated by the trade association.  Even in the face of project specifications that state otherwise, a trade contractor may bid “in accordance with XXX construction trade specifications”, which could lead to a number of work elements that aren’t covered by any one trade scope.

It is the responsibility of the general contractor to get the entire project done and if there are gaps between what’s in the contract documents and what the subs have been hired to do then the general contractors will often undertake this work with their own forces rather than trying to piece out small scopes to specialty contractors.  Repurposing a workforce who are on site to help with general requirements to install some of the finished product can be a way to close gaps and improve profitability on a project (if the workers have the skills to do the job!)

Remote Jobsites

Remote jobs with limited access to local labour present many challenges to the general contractors hired to complete them.  It can be the case where travel to and from the jobsite takes a long time resulting in significant mobilization costs to bring new or different workers to the site.

General contractors working in remote areas may choose to self-perform work because this provides better control over the schedule, and even if the work is done by a crew of generalists it can be more cost effective to use labour currently on site instead of mobilizing specialists for short duration activities.

The Bad: Project Risks

Risk and reward are linked.  Larger opportunity for financial reward means assuming larger associated risks.  The majority of costs for general contractor are time based, where as the majority of the costs for a trade contractor are unit based.

The ways time based costs are managed are fundamentally different than the ways unit based costs are managed, and this presents a major challenge to the self-performing general contractor.  To hit your profit targets when self-performing work, you need to concern yourself with strategic sourcing of building materials and with maximizing labour productivity.  Neither of these concerns are particularly relevant for pure construction managers.

Optimizing for the master schedule and optimizing for crew productivity require different ways of thinking

Optimizing for the master schedule and optimizing for crew productivity require different ways of thinking and unique skillsets, and more often than not the general contractor's project management team will specialize in one or the other but rarely both. The self-performing general contractor is competing against trade contractors who specialize in the given scope of work, so the budget for the work can't be padded with extra dollars for fear of being too expensive.  This means that if the crew is poorly run, there is a good chance you will not hit your productivity targets resulting in missed fees, or worse yet, losing money outright.  

Another issue that arises is that the concept of quality is also different when viewed through the lens of a pure construction manager as compared to a trade contractor.  The definition of quality for a construction manager is to deliver the project at a level where their customer (the project owner) is satisfied.  The definition of quality for a trade contractor is to meet the requirements of the contract documents.  If you've ever argued with a subcontractor about what a clause in the specs says, you know what I mean.

Technically, the latter definition of quality applies to the construction manager too - but in practice, quality is subjective and it is usually more beneficial to align the definition of quality with the owner's expectations than to stick to the letter of the law in the contract, especially when working on a cost-reimbursable basis.  

If the general contractor's team is wired to approach quality in the same way even when acting as a trade contractor, you can end up in situations where you are forced to complete rework to meet the whims of a client often without the means to recover the associated costs.  Again, this can be very expensive and erode your profit margin.

The Ugly: Business Risks

There is another consideration to keep in mind when thinking about whether or not to start self-performing a scope of work:  as soon as you decide to start perform a trade, you are now in competition with all of the other pure subcontractors of that trade in your market.

As a general rule, subcontractors don't bid to the generals who self-perform the same scope of work as they do, but they will continue to bid to the competition.  This has a major downstream impact for the self-performing general - if you don't have the best price in town on your self-performed work, not only do you NOT get the self-performed work, but you also do NOT get the prime contract either.  

The core business of a general contractor is managing and coordinating the work of others.

The core business of a general contractor is managing and coordinating the work of others.  Starting a division to self-perform can have a material impact on the ability to secure work for the core business, which is often enough to stop the self-performed conversation in its tracks.

Wrapping Up

For most general contractors the potential downsides of self-performing work exceed the potential upsides, and they choose to stay in their lane as the coordinators of the project.

For others who are well positioned because they have teams who are experienced in managing work with their own forces, self-performing work presents an opportunity to earn more profit from each job.  

If there is one thing I've learned in my career it's that there is no one way to run a general contracting business.  The decision to self-perform work as a general contractor is a complex decision that has pros and cons on both sides.  I hope this article was helpful in considering the decision for your business.

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