Contractor’s Conundrum

*This article was first published in Nov 2019.

A recent story on BBC reported five reluctant hitmen have been jailed in China after attempting to subcontract the hit to each other.

The first hitman hired another hitman, who subsequently hired another hitman and so on… until the fifth and the final hitman contacted the target of the hit and offered to fake his death instead of carrying out the hit. The whole plot collapsed when the target alerted the authority.

Per below chart, each time the work was delegated down the chain, the offer on the table got smaller. The first hitman was offered $282,000 for the job and negotiated additional $141,000 upon the completion of the hit. But he contracted the work to another hitman for $141,000. The second hitman offered the job to another person for $38,070 with a completion bonus of $70,500 and so on.

Being a hitman sounds like a very risky career choice in general. Particularly for the subcontractors and sub-sub-contractors towards the end of this chain, this does not seem like a profitable enterprise. How profitable is it, really? Is it worth the risk they are taking? We will evaluate the viability of their business model below.

When a hitman receives a new job, he can either execute it himself, delegate it to another subcontractor or forfeit all together. Each scenario would have a different risk and reward structure. Intuitively, one would think executing the job would come with high risk and high reward. In order to test that assumption, we will borrow a corporate risk assessment approach and evaluate the net balance of P/L under each scenario.

Let’s start with the reward. The reward can be extracted from the above list. In the case of our first hitman, the total reward payable to him after the completion of the job was $423,000. If he were to delegate the job, he would have to pay $141,000 to the second contractor, leaving him with $282,000. If he decided to pass the job, he would gain $0 revenue.

This is the “P” (Profit) side of the hitman’s P/L. What about the “L”, or the loss side of the equation? One major risk associated with this line of business is the risk of going to prison. We can quantify this risk by calculating the opportunity loss of income he could be earning if he was not behind bars.

According to a 2016 report by the Bureau of Justice, the median time spent in prison for murder was 13.4 years. That is 13 years and 5 months of lost income for our hitman if he got caught. We know the median weekly earnings in the US is $919, which translates to annual wage of $47,788. Our hitman will be able to make $47,788 a year working in an office or a restaurant if he doesn’t get caught. How likely is it though, that our hitman will get away with a hit job if he goes ahead with it? Sadly, a lot more likely than you and I would have liked. According to FBI’s data, 61.6% of murder cases were cleared by arrest or other means in 2017. In other words, our hitman has nearly 40% chance of getting away with a hit job. Here is the loss for him in this scenario.

Annual potential income $47,788 x 13.4 years in prison x 61.6% chance of getting caught = $394,461

If he delegated the job to someone else and got caught, he would still spend time in prison. In many US states, Accessory Before the Fact is treated similarly to a principal offender. We can use 13.4 years here again for the potential prison sentence. In the case of the hitmen in China from the story above, it took them five (reluctant) subcontractors trying to delegate the work to each other before the plot was busted. That is 1 / 5 = 20% chance of getting busted. Under this scenario, here is the loss for our hitman if he decides to delegate the job.

Annual potential income $47,788 x 13.4 years in prison x 20% chance of getting caught = $128,072

The P&L for the contractor #1 is positive for both “Execute” and “Delegate” strategies. His net balance is $28,539 if he executes the job himself and is $153,928 if he delegates. If he declines the job, he will receive $0 reward $0 loss of income. The best strategy for him is to delegate the work. He would have to share the revenue with his subcontractor but the reduced risk of getting caught pays out in his favour.

P&L for Contractor #1

For the contractor #2 however, the prospect looks grimmer. He would make a loss whether he executes or delegates the job. The net loss for his P/L is $253,461 if he executes the job himself and $95,642 if he delegates. In his case, the most favourable strategy should be “forfeit”, “delegate” and “execute” in that order.

P&L for Contractor #2

From here, things only get worse. If the prospect for the contractor #2 was bad, that of our third hitman is abysmal. He stands to lose $2285,891 if he executes the job, and $118,202 if he delegates.

P&L for Contractor #3

In summary, this job is only profitable for the first hitman. For subcontractor #2 to #5, the revenue is below the break-even point. The general take away for us is if you are contacted by the original client for a potential hit job, you will be better off delegating the job than executing it yourself. But if anyone other than the original client approaches you for a subcontract job, it’s best to pass on the opportunity and move on.

Revenue per contractor and break-even point (Execute)

Revenue per contractor and break-even point (Delegate)

Sources:
“Hesitant hitmen jailed over botched assassination in China” (BBC) https://www.bbc.co.uk/news/world-asia-china-50137450
Median wages in U.S. (Bureau of Labor Statistic) https://www.bls.gov/news.release/wkyeng.t03.htm
Median time served in state prison (U.S. Department of Justice) https://www.bjs.gov/content/pub/pdf/tssp16.pdf
Crime clearance rate (Vox data by FBI) https://www.vox.com/2018/9/24/17896034/murder-crime-clearance-fbi-report