Continuing the chapters about the tools that can be used to help you have a Successful Construction Business. This is also a continuation of Resource Allocation and focuses on allocation of the Human Resource. This chapter discusses part of the staffing for the field operations, Sub-Contractors.
Let us start with your responsibility before getting into the factors you are trying to use for qualifying sub-contractors. The following is critical to your business whether you are dealing with sub-contractors or employees.
New responsibilities in the field
Third Party Over-Actions
Potential liability for employees injured on the job is a major risk facing contractors. Workers’ compensation has traditionally been the exclusive remedy for worker related injuries. However, a growing trend is to bring suit against another party for injuries that had previously been treated solely as workers’ compensation. These claims are brought against a third party (e.g. you, the project owner or general contractor) that may have caused or contributed to the injury and has a contractual relationship with the injured worker’s employer.
The basis for many of these claims is a failure of the third party to provide or maintain a safe work place. Some examples of the principles often used in these claims are negligent enforcement of the project’s safety regulations, failure to inspect sub-contractor safety practices, and a failure to discontinue observed hazardous work practices.
Depending on the contract language and hold harmless provisions and state laws and statutes, the claim can be presented by the third party to the injured workers’ employer as a liability claim and be in excess of the state prescribed workers’ compensation benefits. This creates a circle of liability which may include many defendants and many years before the allegation and suit is resolved. Meanwhile, costs rise, business reputations are tarnished and relationships erode. Be sure to in addition to pre-qualifying sub-contractors and employees:
- With input from your legal counsel, agent or broker, include favorable indemnity and hold harmless clauses as well as insurance requirements and additional insured status in all sub-contracts.
- Establish and monitor insurance requirements.
- Monitor case law or participate in a trade association that will provide this service and lobby for change on your behalf.
- Report any claims promptly and cooperate with investigations and negotiations.
- Review all contract changes offered by sub-contractors with your legal counsel, insurance agent or broker. Do not accept language adverse to you in your contracts.
Contractors’ liability issues continue to emerge and challenge the profitability and insurability of contractors. By being proactive and taking strong leadership steps, active contractors can mitigate the exposures, prevent losses and control risks. In establishing programs to help you do so, it is important to seek expertise including legal counsel, insurance agents and loss control professionals.
Construction Quality Allegations
and liability for defective construction is a growing trend. The purpose of a construction quality program is to prevent claims through the use of proper construction methods, materials, and documentation. The use of sub-contractors that do not have documented and effective quality assurance programs expands the potential for defective construction claims. To mitigate these claims in your contractor selection efforts you should:
- Specify what the project owner should do in the selection process.
- Have a policy in place that emphasizes quality craftsmanship.
- Develop and implement quality and safety controls for the construction process.
- Assign responsibilities for quality to all employees and sub-contractors including crew members, purchasers, superintendents.
- Select materials that meet the job specifications, building codes, are compatible with other materials, are UL listed or FM approved and have a satisfactory performance history. Be alert for recalls or product warnings.
- Verify that received materials meet the specifications selected.
- Ensure tradesmen have adequate skills or expertise.
- Ensure proper installation of materials components.
- Have an inspection process in place that identifies and corrects improper materials or installations prior to accepting the phase of the job.
- Implement a completed project checklist to verify that all job requirements have been met.
- Receive acceptance sign-off from the owner or general contractor.
- Retain job records for future reference and use.
Remember, you are selling value to your customers and in order to have the value to sell it must be promoted in all parts of your business practices. Let’s talk about what that means in qualifying sub-contractors.
The importance of a subcontractor selection program can be summed up in the following statement: Your company is ultimately responsible for the success of your client’s project. The selection of a subcontractor should not be taken lightly. The subcontractors you select represent your company in the eyes of your client. Clients do not differentiate between those tasks performed directly by your staff or your subcontractor. The subcontractor’s job performance, professionalism and errors are directly reflected on your organization. The client equates your firm’s role as expansive, with greater accountability for not only design flaws, but also construction errors.
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. Matching the sub’s capabilities to your requirements will help assure your jobs get the resources and attention they deserve.
Understand the subcontractor’s supervisory structure. Find out who runs the business and who manages the workers on the job site. Verify that the sub’s structure supports your needs for prompt decision making, compliance, and issue resolution.
Look into the company’s safety record. What type of safety training programs does it have in place? Has it received any safety awards? 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 whether or not they hold regular safety meetings. Good indicators would be:
- The sub-contractors workers’ compensation experience modification factor. A factor of 1 or less indicates average or better injury experience.
- Investigate work history such as recent OSHA citations and fines. OSHA publishes their inspection activity on their web site at http://www.osha.gov/pls/imis/establishment.html.
Request and review general liability, automobile and workers compensation three year claim history. Look for trends and inquire what the sub-contractor has done to prevent the claims in the future.
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. Confirm that the subcontractor has the appropriate bonding capacity and insurance (for certain size jobs, bonding requirements may include performance bonds).
If you are using subcontractor default insurance, the burden lies with the general contractor to thoroughly prequalify their subs.
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.
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. This step is critical to reducing your risk from a compliance perspective.
Ask how the sub handles labor time capture and reporting (for certified payroll) as well as other processes that will affect its compliance in areas that put you at risk.
Do a simple Google search to uncover feedback on the company, keeping in mind the credibility of the sources. While an Internet search may provide useful information.
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. Don’t forget to also ask for tried-and-true references from other contractors, material suppliers, and banks.
Many subs have a kind of tunnel vision. They focus on their work and don’t necessarily see what else is around them. Examples include a plumber who put his greasy toolbox down on a $30,000 Persian carpet, and another plumber who cut large notches in the floor joists across the middle of a room, nearly collapsing the floor.
Most subs are highly competent and efficient at their trade. However, in some cases, they user cheaper material than specified or work faster than they should and cut corners, producing substandard work.
Not all subs are the greatest schedulers and when there is a conflict, you’re probably not at the top of their list. Also, they may be out of town or out of business by the time you need them.
Talk to the references and determine if the sub can be trusted to think past themselves on the job.
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.
You don’t want to just rely on what others think, however. You need to see the subcontractor’s recently completed work just as your client asked to see your previous projects. No two people look at something the same way. The work done for your colleague may not compare well to your needs.
The price you pay
You have gone to a lot of trouble to find the exact right person or company. Be prepared to pay a fair rate for doing the job. If your offer is too low, the sub may be insulted and refuse to work for you and will likely tell others that you don’t pay well. This can narrow your choices next time you need a subcontractor.
Do your research and find out what the appropriate wages are for the type of work being done. You can talk to the same people who recommended the subcontractor as well as look online for a website that compares salaries in the region and by specialty.
Back to selling value, you want to look good for your client so you will get good word of mouth. This means anyone who deals with your client in your name, be it employee, subcontractor, or anyone else, must represent you well.
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. It’s also a proactive way to assure that the subcontractors you use are also compliance minded.
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.
Qualifying Generals by Sub Contractors
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.
Portions of this content came from Kendall Jones at http://www.constructconnect.com/blog/