Subcontractors look cheaper on paper. Employees feel safer to manage. But without understanding the true cost of each, and the compliance obligations that come with both, trade businesses are flying blind on their single biggest expense.
For most Australian trade businesses, labour is the single largest cost on the books. It shapes every quote, every margin, and every call about whether to take on more work or ease back. Yet when it comes to whether to hire employees or bring in subcontractors, the majority of trade business owners are making that decision based on gut feel rather than a genuine understanding of what each option actually costs them.
The belief that subbies are always the cheaper option and employees are always the safer bet is one of the most common financial misconceptions in the building and construction industry. Getting it wrong can cost a business far more than just a blown budget.
The Classification Problem Most Tradies Do Not See Coming
Before the numbers can even be compared, the classification has to be right. In Australia, this is where a significant number of trade businesses are sitting on risk they have no idea about.
The Australian Taxation Office and Fair Work Australia use a specific set of criteria to determine whether a worker is genuinely a contractor or should legally be treated as an employee. It is not simply a matter of what both parties agree to put on paper. A worker who takes direction from the business, uses the business’s tools, works exclusively for that business, and cannot pass the work on to someone else is very likely to be classified as an employee regardless of what the invoice says.
This is what the ATO calls sham contracting, and the consequences are serious. Penalties for misclassification can include back payment of superannuation, PAYG withholding obligations, workers’ compensation liabilities, unpaid leave entitlements, and substantial fines. In some cases those obligations reach back several years.
The key factors the ATO looks at when assessing classification include:
- Whether the worker genuinely operates their own independent business
- Whether the worker has the ability to subcontract or delegate the work to others
- Whether the business controls how, when, and where the work gets done
- Whether the worker uses their own tools and equipment
- Whether the worker carries real financial risk if something goes wrong
- Whether the worker operates across multiple clients or relies almost entirely on one business
A genuine subcontractor will typically tick most of those boxes. A labour arrangement that looks like contracting on paper but runs like employment is a compliance problem that tends to surface at the worst possible time.
The True Cost of an Employee: What the Hourly Rate Does Not Tell You
One of the most consistent errors in trade business budgeting is treating an employee’s hourly rate as the actual cost of having them on the books. The base rate is just where it starts. Sitting on top of it is a range of additional obligations that, when properly added up, typically push the real cost 25 to 35 percent above the base wage.
For a full-time tradesperson on $35 per hour, the true cost to the business looks more like this:
- Superannuation at 12% of qualifying earnings — the final legislated rate, now paid every payday under Payday Super rules that took effect 1 July 2026
- Workers’ compensation insurance, which varies by trade and state but commonly runs between 3 and 8 percent of payroll
- Annual leave of four weeks per year, plus a 17.5% leave loading on top of that under some awards
- Personal/sick leave of ten days per year under the National Employment Standards
- Public holidays, paid at ordinary or penalty rates depending on the applicable award
- Payroll tax, relevant in most states once payroll exceeds the applicable threshold, typically sitting between 4.75 and 6.85 percent of wages plus super above the threshold
- Long service leave entitlements for longer-serving staff
Once all of these costs are properly factored in, that $35 per hour employee is likely costing the business somewhere between $44 and $47 per hour in real terms. Trade businesses that build quotes around the base wage without accounting for on-costs are underpricing every single job where employed labour is involved. Add to that labour time overruns which are the most common way to lose your profit, charging the correct labour amount is critical.
The True Cost of a Subcontractor: What the Invoice Does Not Tell You
Subcontractors look clean on paper. They send an invoice, the business pays it, and most of the compliance obligations stop there. No super to manage, no leave to accrue, no workers’ comp to juggle. For specialist or irregular work, that flexibility is genuinely useful.
But there are real costs on the subcontractor side of the ledger that tend to get overlooked. Experienced contractors price their day rates to account for all the entitlements they are not getting, their own business running costs, and a margin for the risk of operating independently. That is how it should work. But it does mean that a like-for-like comparison between a subcontractor rate and an employee base rate is rarely as straightforward as it looks.
There are also practical risks that carry a financial cost:
- Availability: a subcontractor has other clients and cannot always be scheduled around the business’s needs
- Quality consistency: without the same level of day-to-day oversight, managing standards takes more time and attention
- Business continuity: heavy reliance on a small number of subcontractors creates real risk if they become unavailable or move on
- Margin impact: in some arrangements, the subcontractor’s margin comes directly out of the job margin
Neither model is automatically more expensive. The right answer depends on how consistent the work is, what kind of trade expertise is needed, and how well the business can manage the obligations on each side.
| TPAR: THE REPORTING OBLIGATION MOST TRADE BUSINESSES ARE MISSING Any Australian business in the building and construction industry that makes payments to contractors for building and construction services is required to lodge a Taxable Payments Annual Report (TPAR) with the ATO each year by 28 August. The TPAR records the name, ABN, address, and total payments including GST made to each contractor during the financial year. The ATO uses it to cross-reference what contractors declare as income and to identify gaps across the industry. Failing to lodge, lodging late, or submitting incorrect information can result in penalties. If the business pays contractors and has not been lodging a TPAR, this needs to be treated as an urgent compliance matter. |
Making the Right Call for the Business
The subcontractor versus employee question does not have a single right answer, and the most commercially sharp trade businesses tend to use a considered mix of both depending on the type of work and where they are in their growth.
Employees make more sense when the work is steady, ongoing, and central to what the business does. The on-costs are real but so is the return. A good team member who understands the business, its clients, and its standards is an asset that a rotating pool of subcontractors simply cannot replicate.
Subcontractors make more sense for specialist work, busy periods, or project-based demand that does not justify adding to the permanent headcount. The flexibility is genuine and valuable, as long as the classification is correct and the TPAR obligations are being met.
What does not work is making the call without a clear picture of what each option actually costs. Trade business owners who are still treating labour as a single flat line in their books rather than a properly costed part of every job are exposed on two fronts: financially and from a compliance standpoint.
Why Getting the Books Right Makes All of This Easier
The reason many trade businesses struggle to answer the employee versus subcontractor question properly is that they do not have the financial visibility to do it. Without accurate job costing, payroll tracking, and contractor payment records, the true cost of labour on any given job is essentially a guess.
Tradie Books Australia works exclusively with tradies and construction businesses to build the bookkeeping and payroll systems that bring those numbers into focus. From tracking contractor payments for TPAR lodgement, to calculating the real on-cost of employed staff, to making sure super and payroll obligations are up to date well before they become a problem, the team gives trade business owners the piece of mind that all of their compliance is lodged on time and the financial clarity to make labour decisions based on facts rather than assumptions.
For any trade business looking to grow, getting the labour cost structure right is one of the highest-leverage things the business can do. It feeds into every quote, every margin, and every decision about how the team is built. Clean books are what make all of that possible.
| INDUSTRY INSIGHT A tradesperson on a $35 per hour base rate costs a business closer to $44 to $47 per hour once super, leave entitlements, workers’ comp, and other on-costs are properly added up. Trade businesses that quote and price using only the base wage are undercharging on every job where employed labour is involved. Knowing the real number is the starting point for every accurate quote and every sound labour decision. |
| Get Your Labour Costs and Compliance Sorted. Tradie Books Australia works exclusively with trade businesses and construction operators, handling bookkeeping, payroll, TPAR lodgement, super compliance, BAS preparation, and cash flow visibility so labour costs are accurate, compliant, and never a surprise. Bookkeeping | Payroll | TPAR Lodgement | Super Compliance | BAS | Job Costing Visit tradiebooks.au or email info@tradiebooks.au |
