Why You Should Care about Subcontractor Pre-qualification
Does your construction firm commonly subcontract work to other contractors? Have you properly vetted these subcontractors – not just the quality of their work, but their ability to perform financially? If not, you could be leaving your firm susceptible to an unnecessary amount of business risk.
Pre-qualifying subcontractors is an important step in determining if the subcontractor is capable of performing the subcontract to your satisfaction, and that they are financially healthy enough to perform the entire subcontract. If the subcontractor fails while under subcontract, you may be left holding the bag at the end of the project. Additionally, a subcontractor may perform sub-par work that causes you legal fees to go after the subcontractor, or cause you to incur additional costs to have the work fixed.
So you don’t have a good subcontractor pre-qualification program in place? There are many things to consider in this process:
- Perform key ratio analysis of the subcontractor’s financial statements (preferably audited or reviewed statements).
- Working capital analysis
- Current ratio
- Days of cash on hand
- Has the subcontractor performed work for you before? Has their work been satisfactory, and was there any indication of financial issues, such as request for early payment, or indication from their vendors they were slow to pay due to cash flow issues?
- If the subcontractor has not performed work for you before, consider:
- Requesting references
- Visiting their jobsites to view work product quality
- Communicating with internal and external project management teams
- How many jobs do they have in progress, what percent complete are they, and what is their backlog compared to their annual revenue? Do they currently have too much work to effectively complete the subcontract, or do they have too little, indicating other contractors are reluctant to work with them?
- Set a limit on the number of subcontracts that can be issued to any one subcontractor – this will limit your exposure of too much work with one subcontractor.
- Should a performance bond be required?
- Review proof of insurance.
- Consider implementing a subcontractor tracking system to maintain relevant information on all subcontractors used in the past.
One of the riskiest areas for any contractor is the jobs and contracts themselves. Implementing a good subcontractor pre-qualification program can assist in mitigating some of the risks of these contracts.
Do you have questions about implementing a subcontractor pre-qualification program? Don’t hesitate to contact a Barnes Dennig representative here or by calling 513-241-8313 to discuss this best-practice and how to best implement one at your firm.