Subcontractors — a quick guide to managing relationships and risk

“If you want something done right, do it yourself.” Whoever came up with that old saying must have had a lot of time on their hands. In reality most projects would never get done on time and on budget if one crew had to do every component of the work themselves. As a result, subcontracting has become almost a standard of construction work. Take home building as an example. The National Association of Home Builders surveyed general contractors and found that 70% used between 11 and 30 subcontractors to complete a single family home. [1] Across the countless types of projects and builds that a general contractor (GC) might be hired for, the scope of subcontractors contribution may vary. However, they are a critical part of many (perhaps even most) projects. This reality raises several critical concerns. How can a GC manage their relationships with subcontractors to ensure that their projects are complete on time and with high quality work? How should a GC assess and mitigate their risk to ensure the long term health of their business? Let’s break down 3 key tips for subcontractor relationship and risk management.

Relationships are vital. That fact transcends contracting and applies throughout organizations, teams, and even our personal lives. Your work and confidence in its completion will hang on your subcontracting relationships. The more you can trust that they will complete work on time, on budget, and at quality, the more you can focus on vital tasks like managing your crews or costing and bidding on future jobs. The disclaimer we have to give here is that trust shouldn’t be placed blindly and it doesn’t appear overnight. However, there are several ways to begin building healthy relationships with contractors that will serve as a foundation for your long-term success.

Find the right sub-contractors

I remember one night in high-school, I asked my parents if I could go spend the night with some friends from school. The answer I got was something along the lines of: “I don’t want you spending time with those kids, they are a bad influence and nothing good will come of it.” The point they were making (lost on me at the time) was that the people you surround yourself with will impact the course of your life.

GC’s relationships with subcontractors are a little bit like high-school friends. One of them might consistently miss deadlines, another might cost you more than you planned for, and another might do work at a standard that isn’t acceptable to you. Their actions impact your clients, your business, and your reputation. Make sure you surround yourself with the right subcontractors for your projects. Check out subcontractors’ reputation and reviews. Examine their financial and physical capabilities. Do they have the appropriate experience for the project you are hiring them for? Examine their safety records and litigation history. This article has a good starting checklist of categories to evaluate your prospects. Leave no stone unturned when evaluating new potential subcontractors to bring into your operation.

Keep the right subcontractors

Once you have found the right sub-contractors, you will need to work to build a relationship with them. Here are a few critical tips:

Establish clarity and communication

Both the GC and the sub need to be on the same page going into a new project. Expectations for outcomes and deadlines should be clear, agreed on by both sides, and PUT DOWN IN WRITING. There should be documentation for terms and conditions, specifications, timelines, and payment methods.

Communication shouldn’t end there. Throughout the project, GCs need to get updates from their subcontractors on progress, as well as give the subcontractor updates on project changes. One tip here is to leverage technology like construction management software that can provide real time data that will make keeping everyone in the loop more streamlined.

Trust Goes Both Ways, and Takes Time

GC’s have to be able to trust their subcontractors to perform as promised, meet the schedule, and follow the project’s guidelines. But, that trust is a two-way street. The subcontractor needs to be able to rely on the GC as well for accurate information like construction documents, communication, change order approval and more. There will be frustrating moments as trust and relationships take time to develop. GC’s should do their best to create an exceptional experience for their subcontractors Over time, they will fine tune how the team operates and build a relationship that will set both up for long term success.

Reward Performance, Keep it Real

Over time, subcontractors will begin to stand out from the crowd. Whether it’s the quality of their work, how seamlessly they work with your crew, or how they are a part of your most profitable projects, let them know you appreciate their work. The most obvious way is to keep giving them work. One other practice to consider is project recaps where you can recognize what went well and give honest feedback about what could be improved.

Build Trust, Manage Risk

While relationships are foundational, it would be unwise to move ahead without an honest assessment of the risk subcontractors introduce, as well as a strategy and plan to mitigate that risk and protect yourself against any potential incidents. The primary risk category a GC faces with subcontracting comes from the failure of a sub to complete their work according to the project’s requirements: time, budget, and quality. Often subcontracting is described as being less risky as it should reduce your exposure to lawsuits due to waiving of rights. For example, a subcontractor can’t sue a GC if they decide to fire them from a project as they waive the right to sue for wrongful termination. [2]

Unfortunately, a narrow focus on the ways subcontractors can fail to acknowledge the risks they bring to a project. Subcontractors are especially exposed to issues like labor shortages and cost increases, and are far more likely to default on their work than a more established contractor. [3] As previously mentioned, pre-qualifying your subcontractors should go a long way towards ensuring your project’s success. However, there are several other strategies a GC should employ in order to mitigate the risk to a projects profitability.

Surety Pre-qualification

A staple of the skilled trade industry, surety bonding should be a part of your risk mitigation strategy. A surety company examines subcontractors’ capacities across a variety of categories including their financial stability, credit history, past experience on similar projects, operation size, current workload and more. The result is a decision to offer a surety bond to the subcontractor. You should consider assessing your subs based on surety companies assessment in addition to your own relationship and investigation of their capabilities. For more on the surety bonding process, you can read through this quick overview sheet, or you can reach out to our bonding expert.

Require Insurance

Unfortunately, though liability may rest with the subcontractors, some carriers may attempt to hold you responsible for claims. In order to protect against this outcome, the prime contractor should ensure that their subcontractors have the appropriate insurance in place:

• Workers’ Compensation
• General Liability Insurance
• Fleet Insurance
• Umbrella And Professional Liability Insurance (project dependent)

Consider reading this short article by the International Risk Management Institute that outlines the minimum insurance requirements surety underwriters are looking for. You could also work with a risk management and insurance expert to evaluate what your requirements for your subs should be.

Safety Practices Matter

Having a safety culture as a GC matters. It enables your team to thrive, creates an environment that sets an organization and its employees up for success, and can even help you save in the long-term on your insurance premiums. Keeping your own organization on a path of safety is already challenging, but strongly consider requiring subcontractors to demonstrate that safety is a top priority for them as well. Failure to comply with OSHA standards could result in jobsite shutdowns, significant project delays and could come at the dire cost of injury to their crew or even your own team if it is a shared jobsite [4]. Some steps to consider could be requiring a detailed safety plan from subs, as well as evaluating contractors’ experience modification rate to get a basic picture of their safety practice standards. If the process of evaluating safety seems daunting, you could also work with safety experts to develop a plan for keeping your worksites safe.

There is no getting away from subcontracting. The complexity of projects and the time-crunch of deadlines require them. But by managing your relationships with subs and ensuring that you have an accurate assessment of your risk exposure and strategies to mitigate them, you can begin to ensure that they are a healthy part of the organization. If you don’t know where to start, want more info on subcontracting, or need specific risk management solutions, we would love to learn more about you and your organization. Simply follow this link, and let’s chat!

References:

1. Emrath, P. (n.d.). Subcontracting: Three-fourths of construction cost in the typical home. NAHB. Retrieved October 6, 2021, from https://www.nahbclassic.org/generic.aspx?genericContentID=247385.
2. Fishman, S. (2011, October 10). Pros and cons of hiring independent contractors. www.nolo.com. Retrieved October 6, 2021, from https://www.nolo.com/legal-encyclopedia/pros-cons-hiring-independent-contractors-30053.html.
3. Five strategies for reducing subcontractor risk and hiring qualified subcontractors. Construction Executive | Welcome. (n.d.). Retrieved October 6, 2021, from http://www.constructionexec.com/article/five-strategies-for-reducing-subcontractor-risk-and-hiring-qualified-subcontractors.
4. OSHA. (2020). Strategic Partnership Between OSHA and Associate Builders and Contractors. Washington D.C.