HOW TO DIVIDE THE PIE: MASTERING MONEY MANAGEMENT WITH SUBCONTRACTORS

For most of us, setting our rate and managing our time within the client’s budget is a big step into making money. When you add in having to manage a budget and time for other freelancers, that can feel like too much, to well, manage. Without a plan in place, we’re likely to walk away, shaking our head, saying, “Nope, I’ll just manage my own pie, thank you very much.” 

But, as we mentioned in previous blogs, working with subcontractors is a great way to grow and scale your business, so let’s tackle the big question of how to handle the money side of this endeavor.

Working with Subs: Know your Terminology

There are a few key things to understand before bringing on subcontractors – and maybe some new-ish words to add to your vocab bank.

Example project: Your client wants a logo created. Their budget is $1,000. You can’t do the logo, but have a subcontractor who is great at logos. They agree to $750 to create the logo for you. You make $250 on this project.

Margin – This is the difference between what a client pays you for your service and what you pay a freelancer for that service. The margin on this project is 25%. 

Revenue – This is the total amount you invoice your client. This project is $1,000.

Expenses – Sometimes called cost of goods sold (COGS), this is the cost of your freelancer, which for this project is $750.

Profit – This is what you earn after your expenses. In this case,  you made $250 in profit (before taxes).

What’s the Right Profit Margin?

The big thing you need to think about as a business is what you want your margin to be on projects. Basically, how much do you want to clear from a project?

There are a lot of little nuances and other things to consider, but a good rule is to try to keep it between 20-30%. There are a few things to consider when setting your margin. 

• You’re going to pay taxes on your revenue 
• You’ll want to factor in the cost for growing your business (more projects might mean an account manager or bookkeeper)
• When you take on larger clients, it might mean more oversight (which means more of your time)

Once you have your margin set, you’ll use that number to create your budget. It’s pretty simple math (which I love). 

• You need your overall client budget. 
• You need your margin to deduct from the budget. 
• You need a 3-5% wiggle room for project surprises. 

Now you have your talent budget.

Client budget – $1,000
My margin goal – 20%
My wiggle room – 5%
My talent budget – $750
My projected profit – $250

Take a look at our margin calculator here »

Breaking Down the Budget

A few questions you may be asking. 

Why “wiggle room”? It’s great when projects go perfectly, like when a client’s scope doesn’t change or when every freelancer is just the right fit. But then there are the other times. You should always include that wiggle room of 3-5% (higher for newer “unknown” clients). If you don’t, you’ll just see your profit go down as those little surprises eat it away. Nom nom nom.

Do I need to care about margin if it’s just me on a project? Yes, you should think about your margin even if it’s just you. Think about yourself as working for your business as the talent. I know it’s a little mind-bendy. If you, as the business owner, hire you, then how much should go to you, the talent, and how much should go back to the business? This is the best way to prep for growth and also save money for future business needs. What if my desired margin and the talent’s desired project budget don’t work? Sometimes that happens. You have someone you really want on a project, but their estimate is higher than your budget. Then you just have to make the best decision for you. Do you go back to the client and ask to increase the budget so you can retain your margin? Ask the talent to come down in their estimate? Reduce your margin? It’s really up to you. Sometimes it makes sense to make less on a project for the opportunity or because the project budget is higher, which will bring in a high dollar amount. Overall, it’s less about per project profit and more about your overall margins. If you can look at your margins monthly, or even quarterly, and they are in your margin goal, you are good!

Subcontractors: Next Steps

Once the budget is decided and you’ve found your freelancer, the next thing to do is  communicate the project and budget to everyone involved.

Step 1: Establish Clear Budgets and Expectations

First things first. Have a clear scope. All of the project details – including expectations, deliverables, timeline and rounds of revisions, payment terms, and budget -should be clearly laid out and agreed upon by your end client and then by your sub. This means you will have two documents: a client SOW (with their estimate) and a subcontractor SOW (with their budget). Sometimes, the freelancer might want to draft a document as well. That’s fine as long as you are clear on what it says. Get signatures.

Step 2: Manage the project and communicate

Once the project is off and running, meaning documents are signed, make sure you establish check-ins with the client and freelancer. It’s up to you on how you run the project. You may prefer to operate as the intermediary, or connect the client and freelancer directly. Just make sure you have a clear understanding where the project is going so you can keep the scope on track. Communication is key, but you can communicate without micromanaging.

Step 3: Payment, feedback and review

At the beginning of the project, you covered the payment terms in the contract, but you should keep in touch with the freelancer as they are working. Let them know what types of documents (timesheet and invoice, for example) you need to process payment and when they will get it. Communicate feedback from the client and ask for their feedback on how they feel the project is working. Let them feel like an active participant in your business. 

Working with subcontractors is a huge step in seeing the power your business has to really grow. Tackling the money side of project management is what will get you there. When you feel confident in managing the money and knowing how to communicate budget, you will see that working with subs is not about taking less of the pie. It’s about being able to eat even bigger pies. Yum!