By: Kendall Jones on November 24th, 2020
Why Not Prequalifying Subcontractors is Still Risky Business
Not that long ago, general contractors who weren't using a subcontractor prequalification process were taking a huge risk. We were in the midst of the Great Recession and good contracting opportunities were becoming harder and harder to find.
This led to more firms, both general contractors and subcontractors, bidding on projects they weren't equipped to handle. General contractors were focused more on getting the lowest bid from subcontractors rather than making sure they were capable of adequately performing the work.
With the COVID-19 pandemic still in full swing, we find ourselves in a similar situation. Many projects have been delayed, canceled, or decreased in scope. With the uncertainty surrounding the economic recovery, we again are seeing more contractors bidding on fewer opportunities.
Avoiding Risky Subcontractors
This doesn't mean that general contractors should get lax in their subcontractor prequalifications. If anything, general contractors should be paying closer attention to whether their potential subcontractors are capable of successfully completing the jobs they are bidding on.
As a general contractor, you have to be selective when it comes to the subcontractors you work with. You want to choose companies that have a dependable skilled workforce, strong management, financial stability, and can perform quality work to your company’s standards.
Dealing with a defaulting subcontractor can be a real nightmare. A subcontractor that isn’t meeting its contractual obligations can wreak havoc on a project. This can lead to delays in the schedule that impact other subcontractors and can result in costly rework.
Having to replace a terminated subcontractor or supplement their work can kill a project. If a subcontractor is experiencing difficulties it is imperative that you work with them to resolve any issues before they escalate and get out of hand.
As with any business decision, picking subcontractors to work with requires you to do your due diligence. You should be prequalifying every subcontractor you are considering working with to reduce risks that could impact your business such as subcontractor default or substandard work.
Building Strong Relationships
Maybe you have a stable of subcontractors you routinely do business with, but what happens when you decide to take on a project in another state or all of your regular subcontractors are unavailable? At some point, you are going to work with a subcontractor that you have little to no experience working with.
The construction industry is heavily relationship-based. Take the time to reach out and review each subcontractor's prequalification submittals, approved or not, to discuss your decision. Prequalifying subcontractors before you allow them to bid on your projects can lead to mutually beneficial partnerships for years to come.
Make sure you add subcontractors who are prequalified to your distribution list for future Invitations to Bid. For subcontractors who didn't meet your prequalification standards, take the time to explain why and what they can do to get qualified.
Here is some of the key information you need to obtain in your prequalification form:
General – You want to get some basic information such as company ownership, current management, the number of employees, and the states in which they have contractor licenses.
Ask about the size and scope of the projects they typically work on and whether they are certified as a Minority Business Enterprise. Have them provide a list of projects they've completed over the past year or two and include project location and subcontract amount for each.
Find out what other projects they currently have going on. Don't be afraid to ask for resumes of relevant employees along with a list of the suppliers and subcontractors they will be employing.
Safety – At the very least you need to get their OSHA 300 information and whether they’ve had any citations issued and their Experience Modification Rate for the previous three years. You can also inquire about their training program and whether or not they hold regular safety meetings.
Surety – Find out who their current surety provider is along with their agent's name and contact information. Be sure to ask about their bond rates for specific volumes along with their single project bonding capacity and their aggregate bonding capacity.
If you are using subcontractor default insurance, the burden lies with the general contractor to thoroughly prequalify their subs.
Financial – Determine if the subcontractor has ever filed for bankruptcy and ask for their Dun & Bradstreet number if they have one. You can also ask them to provide other financial information such as current year revenues, working capital, total and current assets, net equity, current liabilities, and average monthly billings. Your safest bet is to have potential subcontractors provide financial statements prepared by a CPA who has construction industry experience.
Litigation – The first thing to determine is whether the company, or any of the owners, have any active litigation. Find out if the company has had any labor law violations, had their license suspended or revoked, and if they’ve had any judgments filed against the company. You should also ask about any contract defaults and whether they’ve ever been terminated from a contract.
References – Ask them to provide three to four reference contacts that can attest to both the quality and dependability of their company and employees but can also verify the company’s creditworthiness.
Ask for an in-person visit with your potential subcontractor either at their office or one of their project sites to get an idea of how they manage their business and perform their work.
Prequalifying should not be a "one and done" kind of deal. Requalifying subcontractors every six months to a year can help you identify any possible red flags that may have developed since the last time you worked with them.
General contractors should make their subcontractor prequalification process easily accessible. Create an online prequalification form that can be easily found on your company’s website. Have a link to the form prominently featured on the page where you have your subcontractor opportunities or currently bidding projects listed.
Tips for Subcontractors
If you are a subcontractor looking for more opportunities you should contact general contractors in your area and ask to get prequalified with their company. You don’t have to wait until they have a job that meets your company’s capabilities. Be proactive and get prequalified first, this way you’ll get contacted by the general contractor first when they have an upcoming project requiring services your company provides.
Also, prequalifying can go both ways. Subcontractors should do a little research on general contractors they are hoping to work with on future projects. Talk with other subcontractors who have worked with the GC in the past. Find out what it's like to work with them, if they've ever had any issues with the GC in the past and how promptly they pay their subcontractors and suppliers.
Final Thoughts on Subcontractor Prequalification
Your subcontractor prequalification process should not be a cut and dry, yes or no decision. Yes, you need to set some minimum standards and create a process for assessing and approving subcontractors to bid on your projects, but you will occasionally need to make exceptions to your rules.
If you allow a subcontractor or supplier to bid on, or award, a project to a company that hasn't met your minimum standards, it's not the end of the world. To mitigate potential risks, you will just need to manage the subcontractor a little closer and keep a more watchful eye on them during the project.
Be open with subcontractors when you do this and let them know what risk management controls you are putting in place. Encourage them to come to you the moment they begin to experience any type of issue or delay so that you can work together to get things corrected before they get out of hand.
ConstructConnect Bid Management allows to you easily prequalify your subcontractors and suppliers. In addition you can easily create projects, upload project documents, create bid packages, and create and send Invitations to Bid.
About Kendall Jones
Kendall Jones is the Editor in Chief at ConstructConnect. He has been writing about the construction industry for years, covering a wide range of topics from safety and technology to industry news and operating insights.