My business may be growing past the point beyond which I can no longer handle the jobs alone (yay me!)... If mine is an hourly job, with little to no overhead, and I bring someone on to work the jobs with me, how do I determine what to pay the person and what to keep as a Business Owner?
How do I determine what to pay the person?
You pay them either what you believe the work is worth to have done for you, vs doing it yourself, or how much they ask for after negotiation.
There's no rule of thumb because it's driven by the market. There will always be people who are willing and able to do the work for less than you, but can't always get work (which is the reason they are charging less) just as there will always be people who charge much more than you and have to turn work away.
You are at a comfortable medium where you have enough work to charge a moderate rate, and can amplify your reputation/network/client by subcontracting the work out.
As an example:
If I charge $120/hr to do engineering work, but I want to subcontract it out, then I have to take into account that:
- I'm still handling the customer
- I may be liable for the subcontractors work, even if they are insured
- I may have to handle additional administrative overhead (tax, payment, etc)
- If the customer doesn't pay, I may still have to pay the subcontractor
- I'm taking on risk - they might not show up, they might leave a bad impression on a customer, etc
- In all likelihood I'm going to spend some time reviewing and checking their work
- I have to convey the requirements to the subcontractor successfully
So, let's say I have a contract for 20 hours of work at $120/hr ($2,400), and I figure that I can subcontract out all of it. However it's going to cost me about 4 hours of work to: review their 20 hours of work, deal with administrative overhead, interpret and pass along requirements, etc.
So if I work 4 hours, then the maximum I can pay the contractor for 20 hours of work is the remaining 16 hours x $120 (the contractor would be doing 20 hours for $96/hr) to break even on cash, and I only make 4x$120 worth of profit for 4 hours worth of work. That's actually a net loss, unless you can already fill those other 16 hours with paying work.
I don't think that would be worth it.
But if the contractor only required $60/hr, then you're paying him $1,200 for 20 hours of work, and you get to keep $1,200 for only 4 hours of your time. The subcontractor has turned your $120/hr rate into $300/hr.
Now, you still only net $1,200 rather than the full $2,400, so your revenue is down, but if you can find work for that other 16 hours at your normal rate, then you're still ahead. Alternately you might find that working only 12 hours a week is a fine way to live, and choose to forgo that revenue for personal time.
The costs and break-even point vary greatly from situation to situation, but hopefully this gives you a framework to evaluate the decision for yourself.