A low-voltage contractor in California posted the arithmetic most people skip, and it is worth reading before anything else.
He had two part-time subcontractors, both highly skilled, both asking to come on full time. He wanted to say yes.
Then he costed it. To give a technician $5,500 a month take-home, he would be close to $9,000 a month out of pocket. His baseline running costs were around $80,000 a year. Two technicians all-in came to roughly $108,000.
Which put him near $300,000 in revenue before taking a single dollar himself.
His conclusion was that he would need to grow the business substantially and would probably earn less personally in the meantime. That is not pessimism. That is the actual shape of a first hire, and most people discover it after advertising the role rather than before.
The short answer
Work out the monthly burdened cost, divide by your gross margin, and that is the extra revenue the hire must produce every month to break even. If your pipeline cannot reliably deliver that, you are not ready no matter how overworked you feel. Being busy and being able to afford someone are different conditions, and conflating them is the standard first-hire mistake.
What a person actually costs
The wage is the smallest part of the number.
On top of the wage:
Payroll taxes. Workers compensation, which in the trades is a substantial rate and varies enormously by classification. General liability attributable to the person. Any health contribution. Paid time off, amortised across the hours actually worked. Uniforms, phone, training, and tools.
Depending on jurisdiction and trade, this commonly adds 25% to 45% on top of the wage. The California contractor's figure, roughly 60% above take-home, reflects a high-cost state and is not an outlier there.
Then the capacity adjustment, which people forget entirely.
A technician on the clock forty hours a week does not produce forty billable hours. Subtract drive time between jobs, supply house runs, loading and unloading, cleanup, warranty callbacks and waiting for access. Thirty billable hours out of forty is a common outcome.
So if you priced the hire at their wage across forty hours, you are wrong twice: the cost is 25% to 45% higher than you thought and the productive hours are 25% fewer.
Watch out
Those two errors compound rather than add. A contractor assuming $30 an hour across 40 hours believes a technician costs $4,800 a month and produces 160 billable hours. The reality is closer to $6,200 a month producing 120 billable hours, which is a 72% higher cost per billable hour than the assumption. That gap is the single most common reason a first hire quietly loses money.
The number you actually need
Three steps, and they take twenty minutes.
1. Burdened monthly cost. Wage plus every item above. Be pessimistic; you will not be wrong.
2. Required revenue. Divide the burdened cost by your gross margin percentage. At a 35% gross margin, a $7,000 a month hire requires $20,000 a month in additional revenue simply to break even on them.
3. Compare against your pipeline. Not your busiest month. Your average month, including the quiet ones.
That third step is where the decision is made. A contractor turning away work in July and idle in March does not have a $20,000-a-month pipeline; he has a $35,000 July and a $6,000 March, and the hire is paid in both.
If the number does not work, the honest options are to raise prices, improve margin, or wait. Hiring anyway and hoping the work appears is how contractors end up carrying payroll on a credit card.
Fix the margin before the headcount
A hire multiplies whatever margin you already have. If that margin is thin, a hire multiplies a small number into a negative one.
The newly licensed contractor who finished a 1,100 square foot basement for around $50,000 and cleared just over $10,000 was operating at roughly a 20% gross margin, before paying the helper he had not deducted. Adding a full-time employee to that structure does not produce growth; it produces a faster route to insolvency.
The specific thing to check first is whether your markup actually reaches your intended margin, because most contractors confuse the two. A 30% markup produces a 23% margin, not 30%, and reaching 30% requires a 43% markup. The conversion table and the reasoning are in how to price a job as a contractor.
The order that works: price correctly, confirm the margin is real on completed jobs, then hire. Reversed, you are scaling an error.
Subcontractors as the bridge
The intermediate step, and the one the California contractor was already using successfully.
| Subcontractor | Employee | |
|---|---|---|
| Cost per hour | Higher | Lower |
| Cost per slow month | Near zero | Full |
| Carries own insurance | Usually | No, you do |
| Scheduling control | Limited | Full |
| Quality control | Limited | Full |
| Available on demand | Sometimes | Yes |
| Trains into your standards | Rarely | Yes |
The case for staying with subs longer than feels natural: they cost more per hour and dramatically less per year, and the difference is entirely in what happens during a quiet month. A business with variable revenue and fixed payroll is a business with a cash problem waiting for a slow quarter.
The case for converting: control. When you cannot get a sub on the day you need them, when quality varies between visits, or when you are turning away work because nobody is available, those are real costs that a spreadsheet does not show.
The legal caution is genuine. If someone works only for you, on your schedule, with your tools, under your direction, they may be an employee regardless of what the invoice says, and misclassification carries back-taxes and penalties. The California contractor was explicit that his subs had their own registered businesses and other clients, which is what makes the arrangement defensible.
The one that ends businesses
Worth stating plainly because it appears constantly in these discussions.
A newly licensed contractor mentioned paying his helper under the table while saving up to afford workers compensation. Another contractor responded directly: if that person is injured or damages a client's property, the exposure dwarfs the premium being avoided.
A separate thread describes exactly the scenario. A contractor a few projects into a new design-build business, no insurance yet, brought on help. One of them sliced his finger open with a razor knife. His own reaction was to wonder what would happen if something worse occurred.
The connection to this article is direct. Under-pricing creates the cash pressure that makes skipping insurance feel necessary. A price that cannot fund workers compensation is not a low price; it is an incomplete one, and the shortfall is being carried as personal risk rather than as a line item.
Before adding cost, it is worth knowing whether you are losing work you already have. Our free check looks at whether your site can capture an enquiry, what it tells a prospect first, and where the enquiry goes when it arrives. Twenty checks, about fifteen seconds.
The three conditions
All three, not one.
You are consistently turning away profitable work. Consistently, not in your busiest fortnight. If the overflow is seasonal, the answer is subcontractors or a longer lead time rather than permanent payroll.
Your margin genuinely covers the burdened cost. Verified on completed jobs, not assumed from a rate sheet. This is where costing one finished job honestly, including every hour of estimating and coordination, earns its keep.
You have cash to carry them through a slow month. Three months of burdened cost in reserve is a reasonable floor. Without it, the first quiet stretch becomes a decision between payroll and materials.
Most first hires fail on the third condition rather than the first two, and it is the one nobody checks because it does not feel like part of the hiring decision.
What to fix before you hire
A second person amplifies whatever system already exists. Hiring into disorganisation produces two people being disorganised at twice the cost, which is the version most contractors experience.
Scheduling. If jobs are held in your head and a phone, a second person cannot be dispatched without you. You become the bottleneck rather than being relieved by the hire.
Quoting. If only you can price work, the hire adds capacity to deliver and none to sell, and you will spend your recovered hours estimating anyway.
Follow-up. If enquiries are chased from memory, adding volume loses more of them. Only 11% of home service businesses reply to a new lead within an hour, and a busier business is worse at this rather than better. The diagnosis is in how many leads is my business losing.
Job costing. Without it you will not know whether the hire improved profitability or simply increased turnover. Those feel identical from inside a busy month, and the method is in why am I busy but not making money.
The honest alternative
Worth putting on the table because it is frequently the better answer and it rarely gets considered.
Raise prices and stay small. A contractor at a 40% margin doing fifteen jobs a month earns more than one at 20% doing thirty, with half the driving, half the customer management and none of the payroll risk.
The landscaper who raised prices 30% across sixty-one customers lost four, and three of those were the hagglers. He made significantly more money with fewer customers and no additional staff. That is a legitimate growth strategy and it is available immediately, unlike hiring. It is covered in how to raise prices without losing customers.
The question worth asking before advertising a role: would raising prices 20% and keeping the current volume produce the same income as hiring, with less risk? For a lot of contractors the answer is yes, and nobody has ever run the comparison.
The first ninety days
Getting the arithmetic right does not survive a bad start, and most first hires that fail do so in the first quarter rather than over a year.
Have work waiting on day one. A new person with idle days learns that the business is uncertain, and you learn nothing about whether they can produce. Book the diary before the start date, not after.
Decide what they own. A hire who shadows indefinitely is a cost, not capacity. Name the jobs, the van, the customers or the tasks that become theirs by a specific week.
Write down what good looks like. Arrival times, how the site is left, when to ring you rather than decide alone, how to handle a customer asking for extras on the spot. Assumed standards are how contractors end up disappointed by people who were never told.
Watch the callback rate. A new person generating rework is normal for a while and it is also a real cost, and it is the number that tells you whether they are getting up to speed or not.
Cost a job they ran alone at the end of the quarter. Compare the margin against one you ran. That comparison, rather than a feeling about how it is going, is what tells you whether the hire is working financially.
Set a check-in date in advance. Ninety days, in the diary, both sides knowing it is coming. It makes an honest conversation normal rather than confrontational, and it is the point at which a mismatch is still cheap to resolve.
A decision checklist
- Calculate the fully burdened monthly cost, wage plus everything.
- Divide by your real gross margin to get required additional monthly revenue.
- Compare against your average month, including the quiet ones.
- Check three months of reserve exists.
- Confirm your margin is real by costing one completed job end to end.
- Fix scheduling and follow-up before adding a person to them.
- Price the alternative: what would raising prices 20% produce instead?
- If hiring, start with subcontractors and convert when the volume is proven rather than hoped for.
Step seven is the one nobody does, and it is the cheapest experiment available. Step three is the one that most often changes the answer, because busy and consistently busy are different conditions, and payroll does not distinguish between them.