When Should a Developer Bring Contracted Services In-house?

When service providers prove themselves to be trustworthy and reliable, bringing them back for more projects is the clear choice. However, as development projects grow larger and more frequent, relationships with these external providers can start to become more of a dependency. For example, what if your go-to construction manager is brought onto another major project and not available for your next one? 

Having to hire another service provider after months of working with a specific team can set back your timeline, impact your workflow, and throw off your cost estimations. Internalizing key services can help eliminate this uncertainty and streamline overall operations — the key is figuring out if you’re ready. 

Why Do Developers Bring Services In-House?

Internalizing services allows developers to better manage risk and possibly cut costs. It could even bring about an opportunity to open up new revenue streams, helping developers scale faster while using resources more efficiently.

What are some of the key benefits of bringing providers in-house?

• Risk Management: Greater insight and control over key service providers, like MEP engineers, can put you in a position to pursue more aggressive timelines. On top of that, you can better enforce compliance with safety and quality standards, reducing your liability for accidents and errors while improving project outcomes. 
• Cost Savings: Extra fees and markups tacked onto invoices by external providers add up quickly. Bringing teams in-house allows you to negotiate more favorable rates and budget with greater precision. Additionally, wages and benefits might be tax deductible and any equipment you purchase (like for excavation or HVAC) can further reduce your tax burden through depreciation. 
• Streamlined Operations: Fully integrating service providers into your workflow saves time on communication and decision-making, especially during critical phases of a project. Plus, when your projects can’t take a backburner to the provider’s other clients, revisions, inspections, and adjustments can happen more quickly, keeping your projects on schedule. 

When is a Developer Ready to Internalize Services? 

As your projects grow, bringing the services you’re most dependent on — like MEP or excavation — under one roof can make scaling easier. But how do you know if you’re ready to bring services in-house or which ones you should start with? 

Key elements that can help you measure your readiness:

1. Cost-Benefit Analysis  

There is a point where the cost of hiring external providers consistently outweighs the benefits of investing in an internal team. But your revenue must also be high enough that the operational overhead will be manageable, even during slower periods. If you aren’t sure how to determine where that threshold is, a financial consultant could be an invaluable source to help evaluate your position. 

A good starting point is to calculate the break-even point for any service you’re considering internalizing. How long would it take for your upfront investment in equipment and/or staff to pay for itself? For example, hiring a full-time MEP engineer might cost your firm $135,000 in the first year (for the cost of recruiting, training, salary, and benefits) then $110,000 each year after that (salary and benefits). If you’ve been spending $125,000 outsourcing these services, you’ll break-even in the second year and begin to see cost savings add up.

On the other hand, while you may be spending $75,000 per project for environmental site assessments, if you only have a few projects requiring these services, the long-term cost of maintaining an in-house Environmental Professional likely outweighs the benefits. 

2. Administrative Capabilities 

The larger your team grows, the greater the need for expanding your HR services. Recruiting, onboarding, salary negotiations, performance evaluations, insurance/retirement benefits, employee relations — proper management of all these areas is paramount to retaining great employees and meeting your legal obligations. Do you have the administrative capabilities, whether in-house or outsourced, to keep up? 

With a growing team, you may also face additional tax responsibilities, but of equal importance is the chance to tap into new tax advantages, like deductions and write-offs. Working closely with a trustworthy tax consultant who has deep experience in the sector of real estate development can help you reduce your burden and avoid costly filing errors. 

3. Long-Term Market Outlook

For all that you gain in terms of project control and predictability by bringing service providers in-house, it’s essential to recognize that growing your team brings about its own set of challenges — especially when it comes to being agile and flexible during times of uncertainty.   

The roles you choose to bring in-house, and the specific people you choose to fill them, can have a direct impact on your ability to diversify and scale your business as things change. Specialists like structural engineers or environmental consultants, for instance, may not be as valuable if the market shifts and you decide to pivot your focus to a new sector.

Unexpected things can always happen, so take steps to ensure your in-house expansion is the right move. Conducting a detailed market analysis, having clear long-term goals for your firm, and using scenario-planning to plan your moves in different situations will give you much greater confidence in your hiring decisions. 

Moving Forward With In-House Services

If you decide that internalizing key services is the right move for your company, make sure to explore your options. Hiring providers as direct employees can streamline operations, but it can bring on extra administrative overhead. Other options, like creating a subsidiary to oversee your service providers, can provide more flexibility and even allow you to hire out to other developers under a different brand. But, it means more legal and financial obligations to manage the new company properly. 

Ultimately, while it will involve new hurdles and challenges, finding ways to transition your most-used services in-house could prove to be a highly profitable and strategic move. If you’re seeing key indicators in your business — whether in the form of rising outsourcing costs or a lofty backlog of projects — now could be the time to start weighing your options, so you can keep scaling more seamlessly.