One of the biggest risks to project success is the default of a subcontractor. It’s not unusual for a subcontractor’s contract on large projects to reach $50 million or more, so having a subcontractor default can seriously impact profitability for a general contractor.
The challenge today is to identify subcontractors who have the knowledge and skill to work on demanding, time-sensitive projects. The pool of skilled subcontractors has shrunk since the economic downturn that began in 2008, and some reports indicate that the subcontractor pool is only three-quarters what it was pre-recession. This suggests limited market capacity and high demand for the most talented workers.
General contractors experiencing a subcontractor default may suffer multiple damaging effects, including balance sheet disruption, project delays, distracted management and project team, increased costs, dissatisfied owners and reputational risk.
So, what should a general contractor do to identify a subcontractor who can deliver the project on time and within specified quality and safety standards?
One strategy is to consider the three Cs — character, capacity and capital — when evaluating a subcontractor.
Questions to ask when evaluating a subcontractor
- What is the reputation of the firm and the principals?
- Have they ever defaulted on a contract?
- Are they in litigation?
- Do they have a strong claims management program?
- Do they have a history of successfully completing contracts similar to yours in terms of scope, size, complexity and geographical area?
- What is their safety record?
- What is their current manpower and is it sufficient for the project under consideration?
- What is their quality record and QA/QC program?
- What is the strength of their balance sheet?
- Do they have sufficient equity and liquidity to support the work?
- Do they have a good credit/pay history?
- Do they have a surety relationship?
The three Cs can be a useful reference for a general contractor as their executive management team develops a structured subcontractor prequalification program. The goal of a prequalification process is to help ensure that accurate, appropriate information is compiled and evaluated in a way that allows those responsible for selecting subcontractors to make sound business decisions regarding the utilization of subcontractors on a project.
A subcontractor prequalification program that addresses both the subcontractor’s operational capabilities and overall financial strength can help a general contractor quickly and efficiently determine whether or not to include a subcontractor in bidding opportunities. Ideally, an established subcontractor prequalification process will become part of an organization’s corporate culture, similar to safety and quality management, as a tool of a successful general contractor.
Click to learn more about Zurich's subcontractor default insurance called Subguard®.