Subcontractor vs Direct Labour: Pricing a Job Either Way
Two builders quote the same extension. One phones a bricklayer he's used for six years and agrees a day rate over WhatsApp. The other puts two of his own lads on it, both on the payroll since March. The building goes up either way. Only one of those prices was built on what the labour actually costs to get on site, and it isn't always the one you'd guess.
Two ways to staff the same job
Every job needs labour from somewhere, and for most small firms that means one of two routes. Direct labour is your own employed team: PAYE, a wage slip, an employer's National Insurance bill you carry whether or not there's work on that particular Tuesday. Subcontracted labour is someone self-employed, or another firm, engaged for an agreed price on that job and that job only.
Neither is automatically cheaper. The mistake is pricing them as if they were the same thing with different names, because the cost that sits underneath a day rate is genuinely different depending on which one you're using, and that difference has to show up in the quote.
What direct labour actually costs you
The wage is the visible number. It isn't the whole number. On top of it sits employer's National Insurance, statutory holiday pay building up whether it's taken or not, and for most firms now a pension contribution too. Add tools, van costs, and the fact that a wet week or a gap between jobs still gets paid, and the real hourly cost of an employed tradesperson usually runs well above what's on the payslip.
Our guide on setting your day rate covers how to build that full figure properly rather than guessing at it. The number that matters for pricing a job isn't the wage. It's everything that wage drags in behind it.
What a subcontractor actually costs you
An agreed subcontract price is much closer to the whole cost, because the subcontractor is carrying their own National Insurance, their own holiday pay or lack of it, and their own downtime risk. What you're paying for is a finished piece of work, not a person's time, and that's a genuinely different thing to price.
Two adjustments still apply. First, most contractors add a coordination markup on subcontracted trades, commonly somewhere in the 10–20% range, to cover the admin, the scheduling risk, and the fact that if the subbie's work is wrong, the client's problem is still with you. Our guide on margin vs markup explains the mechanics of adding that on properly rather than folding it in invisibly. Second, there's CIS.
CIS: what changes when you pay a subcontractor
If you're paying anyone for construction work as a contractor, even for one job, you're in the Construction Industry Scheme whether you've thought about it or not. Before the first payment you verify the subcontractor with HMRC, and depending on what comes back, you deduct 20%, 30%, or nothing at all from what you pay them.
- 20%: the subcontractor is registered and verified. Standard rate for most working relationships.
- 30%: unregistered, or HMRC's check can't match the name, UTR or National Insurance number given.
- 0%, gross payment status: the subcontractor has passed HMRC's compliance tests and is paid in full, settling their own tax through self-assessment or Corporation Tax.
The deduction only applies to the labour element, not materials, provided the invoice separates them properly. It isn't extra money out of your pocket either way. It's the subcontractor's tax, held back and passed to HMRC on their behalf, and it doesn't belong anywhere near your own margin calculation. If VAT is also in play on the same invoice, our guide on the VAT reverse charge covers how CIS registration status feeds into that separately.
You'll also need to file a monthly CIS return for every subcontractor paid. It's routine once it's set up, but it's a real piece of admin that direct labour on your own payroll doesn't create, and it's worth factoring into whether subcontracting a small, occasional job is actually less hassle than it looks.
Insurance and liability: who's covering what
If you employ anyone, Employers' Liability insurance isn't optional. It's a legal requirement under the Employers' Liability (Compulsory Insurance) Act 1969, minimum £5 million cover, and the fines for not having it are real: up to £2,500 for every day you're without it, and up to £1,000 if you can't produce the certificate when asked.
Subcontractors are a different picture. They should hold their own Public Liability cover, and their own Employers' Liability if they have employees of their own. Check the certificate before they set foot on site, and keep a copy rather than taking their word for it. If something goes wrong and the subbie turns out to be uninsured, a client with a claim will generally come after whoever engaged them. That's you, not the subbie who's since stopped answering the phone.
Mixing both on one job
Most small firms don't run purely one model. A core team does the trades you handle most, and specialist work such as electrics, roofing or plastering gets subcontracted out job by job. That's a sensible way to run a business. It's a poor way to price one, if the two labour costs get blended into a single day rate instead of costed as what they actually are.
Price your own team's time at your true day rate. Price the subcontracted trade at their quote plus your markup. Keep them as separate line items rather than one averaged figure, because a job that's two-thirds your own labour and one-third a subbie's needs a different number than one running the other way round, and a blended rate hides that until the invoice doesn't add up.
| Subcontractor | Direct labour | |
|---|---|---|
| Cost basis | Agreed price for the job | Wage + NI + holiday pay + on-costs |
| Tax handling | CIS deduction: 20%, 30% or 0% | PAYE, run through your own payroll |
| Insurance to check | Their Public/Employers' Liability | Your own Employers' Liability, £5m min |
| Idle-day risk | Usually theirs to carry | Yours, paid whether there's work on or not |
| Best suited to | Specialist trades, lumpy workload | Core trades, steady pipeline |
Where BuildEstimate fits in
BuildEstimate won't decide which subbie to call or whether it's time to take someone on. What it does is let you price a mixed-labour job the way it should be priced: your own day rate on one line, a subcontractor's quote plus markup on another, instead of one blended guess that only looks right until the final invoice lands. An itemised quote also gives the client a clear answer if they ever ask why a specialist bit of the job cost what it did.
Prefer to see the numbers first? View pricing: it is £20 per month or £220 a year, with a 7-day free trial and no card required to start. For the other half of getting a job priced right, see our guides on estimating a job and writing a construction quote.
FAQ
Do I have to register for CIS if I only use subcontractors occasionally?
Yes. If you're a contractor paying anyone for construction work, even a single job, you need to register as a contractor under CIS and verify each subcontractor with HMRC before the first payment. There's no threshold for occasional use. One job with one subbie is enough to bring you into scope.
What's the difference between the 20% and 30% CIS deduction?
20% applies to subcontractors registered with HMRC and verified against your details. 30% applies if they're not registered, or if HMRC's verification can't match the name, UTR or National Insurance number they've given you. Either way it's a deduction on account of their own tax bill, not an extra cost to you. It's their money, held back and paid to HMRC on their behalf.
Does CIS apply to the cost of materials on a subcontractor's invoice?
No, not if the invoice separates them out properly. The deduction is calculated on the labour element only. A subcontractor's invoice that lumps materials and labour into one figure risks having the deduction calculated on the whole amount, which is one more reason to insist on an itemised invoice from anyone you engage.
Can I use my own day rate to estimate what a subcontractor will charge?
Not reliably. Your day rate is built from your own wage, overheads and margin. A subcontractor's price reflects theirs, plus whatever risk and coordination cost they're pricing in for working on someone else's job. Ask for an actual quote rather than assuming their number will land near yours. It's often close, but treating it as a given is how quotes come in short.
Do I need to see a subcontractor's insurance certificate before they start?
Yes, and keep a copy on file rather than taking their word. If something goes wrong on site and they're not covered, a client with a claim will usually come after whoever engaged them. That's you, not an uninsured subbie who's since stopped answering the phone. Checking the certificate takes five minutes and it's the cheapest risk management on the whole job.
Is it worth getting my own employees instead of relying on subcontractors?
It depends on how steady your workload is. Direct labour pays for itself when you can keep people busy most weeks, because you're covering their cost whether there's work on or not. If your pipeline is lumpy, subcontracting spreads that risk onto people who are set up to carry it, at the cost of a bit less control over who turns up and when.
What happens if I get CIS deductions wrong?
HMRC can charge penalties for late or incorrect monthly returns, and if you under-deduct you can end up liable for the shortfall yourself. It's fixable: correct the return and pay any difference. But it's the kind of admin error that's cheaper to avoid than to unwind, particularly if you've paid several subcontractors on the same return.
The labour source doesn't change what a job is worth. It changes what it costs you to deliver it, and that's the number that has to end up on the quote, not the wage slip or the WhatsApp message you agreed the price in.