Managing Subcontractor Risk: 7 Best Practices
General contractors must establish best practices for managing subcontractor risk to reduce the hiring company’s exposure in the event of an incident.
General contractors are redirecting their focus toward project management and hiring subcontractors to handle the day-to-day work. This change in thinking requires general contractors to vet and oversee their subcontractors properly. This arrangement adds a new layer of risk to the hiring company, and the general contractor must protect its client against any liability resulting from subcontractor incidents on the worksite.
However, managing subcontractor risk is not straightforward, and general contractors must create and execute a process that safeguards against the potential hazards of subcontractor errors.
This article discusses seven steps the general contractor might take to avoid unnecessary liability.
7 Best Practices for Managing Subcontractor Risk
1. Verify the Subcontractor’s Credentials and Qualifications
Managing subcontractor risk begins during the screening process, wherein the general contractor must verify the subcontractor is appropriately licensed and qualified to perform the work.
Proper vetting should include the following steps:
- Considering multiple subcontractors before choosing one
- Reaching out to previous customers and references to ensure the subcontractor produces quality work
- Confirming the subcontractor’s availability, qualifications, and insurance
- Reviewing pricing terms
Even if the contractor has previously worked with a subcontractor, pre-qualifying them is still crucial because situations change. Their work may suffer due to expired certificates or the loss of essential team members.
2. Have All Parties Agree on the Safety Requirements to Mitigate Subcontractor Risk
The general contractor must review the hiring company’s safety criteria before accepting a subcontractor’s proposal. The general contractor should also confirm that the subcontractor has plans and processes to follow the Occupational Safety and Health Administration’s safety regulations (OSHA).
Also, the general contractor should inform the organization if the subcontractor will take on some of their responsibilities for site safety. The subcontractor may suffer productivity losses or be obliged to hire more staff if the safety program demands more than anticipated, increasing costs for all parties.
3. Establish the Necessary Communication Channels
No construction project can flourish without effective communication between general contractors and subcontractors.
More specifically, subcontractors should be aware of whom to contact with any project-related inquiries, which may include the following:
- Status changes
The general contractor must enforce the proper communication necessary to ensure all parties are aware of progress and collaborate successfully.
4. Require a Written Agreement Between the General Contractor and Subcontractor
This step may seem obvious, but not all general contractors vet their subcontractor agreements thoroughly enough to catch all potential risks.
However, general contractors who understand good subcontractor management appreciate the value of securing significant commitments with subcontractors in writing. Verbal agreements are susceptible to mistakes and are less legally binding than those established in a written contract.
All general contractors should draft specific deliverables in writing to avoid potential problems for them and the organization.
5. Understand the Subcontractor’s Payment Terms
The payment terms on which the general contractor and subcontractor agree can significantly affect the project’s finances. Two standard payment terms are as follows:
- The customer net 30. The general contractor owes the subcontractor a payment within 30 days of completing a specific action item.
- Pay-when-paid. The contractor waits to pay subcontractors until they receive money from the hiring company.
The second payment choice, which safeguards general contractors if the organization’s payment is late, is becoming more common. However, this tactic becomes problematic if the organization makes repeated overdue payments. Subcontractors’ motivation and productivity will suffer if they go uncompensated for long periods.
In other words, the general contractor must ensure the hiring company is aware of a pay-when-paid arrangement because late payments to the general contractor could mean subpar work from the subcontractor.
6. Make Sure the General Contractor Treats Subcontractors Fairly
The power in negotiations with subcontractors rests with general contractors. Because the former wants future employment, they frequently go above and beyond to satisfy the general contractor, even if some requests are unrealistic.
However, the general contractor should never take advantage of this arrangement. Subcontractors may continue to work under harsh conditions, but the chances are high that they will need more motivation to produce their highest-quality work. Worse yet, some subcontractors may turn down future employment under extreme circumstances.
Abusing subcontractors can adversely affect the general contractor and the hiring company. According to research, when companies encourage unethical behavior, their employees frequently reciprocate by acting unethically toward them. Time theft, dishonesty, and other corrupt actions may increase.
7. Leverage the Proper Resource Management Software
The days of using spreadsheets to track subcontractor status are long gone. General contractors should require modern subcontractors to utilize specialized solutions to coordinate the following:
- Work orders
- Licenses and Certification
This software should help plan labor strategies accurately and view resource allocations. Then, the general contractor can assess how adjustments impact current budgetary allotments as projects advance.
Consider These Steps to Manage Your Subcontractor Risk
Reducing the risks associated with subcontracting is essential for general contractors. They must thoroughly vet subcontractors to ensure they are adequately licensed and insured, understand the project terms and safety requirements, and receive fair treatment. Not doing so can result in liability should an incident occur at the job site.
However, identifying and hiring the most qualified and capable subcontractors to partner with your team requires our industry-leading risk management technology and tailored solutions for your business.