By Dennis Kennelly, founder of DashlyHR
Unvetted hiring leads to unwanted turnover, injury risk, and mis-hires, which is costing contractors huge portions of their margin. These labor management costs run a 200-person subcontractor over $500,000 annually, with 500+ employee shops losing $1,000,000+.
However, through vetting and proactive risk assessment of craftworkers, these problems can be largely fixed with a few easy-to-implement changes. Statistics show construction companies often deal with 20%+ employee turnover, though subcontractors in high-volume trades can see 50%+ turnover annually.
Internal client turnover breakouts have shown:
- 20% of turnover is unwanted loss (1+ year of experience and substantial company investment).
- 35% is mis-hire (poor fit, ill-equipped for the trades, gone within ~six months).
- 45% is structural (employee moves, job rolls off, life circumstances).
- Each unwanted loss costs up to 30% of the annual salary of the employee ($20,000+ for skilled trades), and each mis-hire costs 10% in added inefficiencies (often ~$5,000).
Additionally, new hire breakdowns look like this:
- 50% of new hires are “Green Flag Fits” – where the employee is reliable, consistent, and eager to grow.
- Up to 45% of employees are “Yellow Flag Fits” – employees who are not productivity drivers but may be reliable enough to remain employed, though with a potentially spotty employment record. These employees often bounce around as structural turnovers or mis-hires.
- The 5% of remaining new hires are “Red Flag Fits” – these are employees who may be struggling with substance use and may pose a danger to themselves or others on the job site. These employees need help, and employers should utilize the warning signs apparent (missed days, lateness, appearance) to intervene and welcome employees back after treatment proactively. Intervention can often be a simple one-on-one conversation that starts the process of recovery. There is no better employee than one in active recovery.
With lost productivity of up to 25% from no-shows, scheduling delays, and hiring inefficiencies, job sites are often thrown into crisis due to labor-management issues.
Let’s Look at a Case Study Example
You are a mid-size electrical contractor in a metro market (Dallas, Miami, Phoenix, for example).
After a painstaking RFP process with a well-known local general contractor, you are informed that you have won the bid for $3,000,000 on a multi-family out-of-ground project in the outskirts of the city; it’s a good win for your merit shop.
While you have timed the cycle well and can move some staff around, this new project brings the need to hire an additional 10 electricians (preferably with some work experience).
You start the process the same way as you have in the past. You go to your superintendents, Fernando and Mike, and ask if they have any good leads on available manpower. You also post to Indeed, “Electrician, Mechanic & Helper wanted.” You need to staff this job up within the next month, so time is of the essence.
Applications trickle in on Indeed, and you weed through the clear misses, including a few 25-year-old candidates claiming 15 years of work experience. A few resumes list a few friendly competitors you bid against regularly, so you decide to have your supers interview these candidates. They also have picked up a few names through the men and women in the field and text you some names with limited context: “Steve said he has a friend Cole has some low-voltage experience – might be a fit.”
The process now includes about 20 potential fits – 15 helpers and five mechanics. You figure you can get away with hiring two or three mechanics and seven or eight helpers.
You still interview the experienced hires but stopped interviewing helpers a few years ago after scaling to more than 80 electricians in the field. The supers talk to the helper applicants and pick seven, including two right out of Apex trade school, and five who claim some limited small-scale residential electrical work.
You hire two mechanics who came in through field referrals and one who worked on a major project for a competitor but wants a shorter commute time. The field referrals don’t have resumes but seem to be highly regarded.
You think about phoning your competitor to get a sense of the new mechanic, but after a long day on-site, it feels good to jump on the phone again, especially with another owner.
The job starts, and within three months, three of the seven helpers have quit (both trade school hires and one of the young helpers).
The one mechanic who worked on a major project for a competitor claimed to have been on the job from risers to finishes, but after asking around some more, it appears he was bounced out of there in months for management reasons.
One of the helpers who seemed solid for the first two months starts getting spotty with missed days, showing up late, and appearing out of it. You tell your foreman to keep an eye on him, but in month three, he steps off a podium ladder and is hurt. A workers’ comp claim is initiated, and your EMR increases from a 0.97 to a 1.22; you expect 25% higher insurance costs next year.
One of the other new hire mechanics, who is a good worker, realizes you are in a bind and asks you for a retention bonus – you are stuck between the need to keep the job moving and the demands of a new hire. You let him go and move a mechanic from the rough-in on another job.
The vicious hiring process strikes again, and you have lost five out of 10 of your hires with one sizable workers’ comp claim.
Cost breakouts look like this on your job:
- $3,000,000 RFP win x 15% net margin = $450,000 in profit
- Additional costs:
- 1 claim = $50,000
- 1 regrettable turnover = $18,000
- 4 mis-hires = $22,500
- = $90,500
- New Profit = $359,000 or 12%
Now, imagine you are the general contractor, with this same process repeating for your other eight trades, substantial scheduling and productivity issues, and claims eating into your CCIP profits.
You struggle to balance the needs of your new job with those of the mid-build and are constantly moving manpower around to fill the gap.
For sizable subcontractors and any general contractor, vetting employee hires and ongoing labor risk management will change the project landscape of their jobs.
Understanding the real past performance of new craftworkers and managing the performance of existing employees to enable proactive intervention in potential risks is the next step to safer, more efficient, and more profitable commercial job sites. Utilizing data analytics, vetting processes, and statistical performance verification can quickly eliminate risk from your field hiring and management.
Dennis Kennelly is the founder of DashlyHR a labor vetting and risk management software platform for construction companies. Dennis previously spent ~10 years working in finance as an Investment Banker for Guggenheim Partners and then as Controller and ultimately CFO of his family electrical contracting merit shop, Anthony G. Ferry Inc. in the Bronx, NY. Dennis has his MBA from Dartmouth College and a B.A. from Amherst College, where he participated in varsity track and field.