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 a 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 who focused more on getting the lowest bid from subs rather than making sure they were capable of adequately performing the work.
The construction industry has been in growth mode the past several years and construction spending has gotten back to pre-recession numbers. This doesn’t mean that general contractors shouldn’t get lax in their prequalification of subs. With a skilled worker shortage affecting many areas of the country, general contractors should be focusing on whether their potential subs have the personnel and manpower to handle 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. 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.
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. Prequalifying subcontractors before you solicit pricing or sub bids can lead to mutually beneficial partnerships for years to come.
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. You also want to find out 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 subs 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 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.
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 subs and suppliers.
3 thoughts on “Not Prequalifying Subs is Still Risky Business”
while an excellent idea, there is little protection for a subcontractor should a GC / owner “be in trouble” this article had a 3 sentence paragraph that is of little help to insure that the sub-contractor is dealing with a healthy GC or owner. to say “talk to your competitor (other subs) really is not a reliable answer.
Thanks for the comment, Micky. Talking to other subs who have worked with a particular GC in the past is just one option, but it definitely shouldn’t be your only source when researching a new GC or owner to potentially work with. Also, it doesn’t have to be a sub who is your competition, find any sub from any trade that has had recent experience working with that GC.
Hi i am a small business interpreneur who is still crawling and need recognition with my work.i need more experience in this industry. i am registered with NHBRC. I need help if possible please.