Project teams are only as good as their weakest link, and it takes just one underperforming subcontractor to derail a job. Thankfully, prequalification can help minimize this risk.
In the prequalification process you'll consider a subcontractor’s past performance and assess their potential to successfully complete work before inviting them to bid on a project. The prequalification process can be performed on a job-by-job basis, or periodically (quarterly or annually), covering projects during that period.
Key Takeaways
In our experience, there are five main benefits to prequalifying subcontractors.
Instead of constantly trying to course-correct with underperforming subs on the job site, it’s always a better idea to go through the prequalification process before breaking ground.
Your company’s prequalification process should be able to answer three key questions:
Does the subcontractor meet the minimum criteria to bid on projects? This question considers whether a potential subcontractor meets the licensing, insurance, aggregate bonding capacity, experience modification rate (EMR) safety record, and other requirements specified by the bid documents and local laws.
Is the subcontractor capable of performing the work? Does the subcontractor have the required financial health, workforce capacity, management team, and so forth to complete the work on time while meeting quality and OSHA and EMR safety requirements? Unfortunately, it’s not always possible to hire subs who meet 100% of these criteria, which means GCs should be prepared to provide additional support if needed.
Will the subcontractor perform the work? This last question considers a subcontractor’s ‘soft skills’ like communication and ability to collaborate. Are they ultimately a good fit for the project at hand?
Taking a look through the following criteria can help you answer the three questions we mentioned above:
Insurance: As the GC, you should verify that subcontractors have the required insurance coverage to protect you against any claims. At a minimum, the subcontractor’s insurance should include general liability, workers’ compensation, commercial automotive, and inland-marine (covering off-road equipment) insurance. For subcontractors providing design services, make sure to consider whether they need professional liability insurance to cover errors and omissions in the subcontractor’s design. Lastly, we recommend tracking all subs’ insurance renewal dates to verify renewal.
Licenses: Most states require general contractors and certain specialty contractors to be licensed. Additionally, many municipalities and some states require companies to have a business license as well. Before bringing a sub on, GCs should verify that they have the required licenses. Also, double-check to confirm that there are no disciplinary actions or citations listed against the subcontractor.
Bonding: You may require bonds from your subcontractors for two reasons: either because they’re required by government statute or the owner’s contract, or because there are concerns about the sub’s ability to perform. Often, bonds are only required for subcontractors performing a substantial amount of work, because a default poses a significant risk to the project’s completion. Work closely with your bonding agent to determine which subcontractors need to be bonded, and consider if the risk justifies the bonding cost.
Experience: Any subcontractor hired should have experience constructing projects of a similar size and type. Along with their first-hand experience, take the time to review their past projects, and ask for references from previous owners and GC. When considering the type of construction, take into account the type of contract (such as design-bid-build versus design-build), the type of structure (such as steel versus wood framed), the project’s use, and the type of owner.
Financial Resources: Subcontractors require a substantial amount of cash to perform their work. Until they receive payment from you, they have to fund their own labor costs, which can amount to several weeks or months of payroll and heavy cash flow. What’s more, they either need to fund the material for the job or obtain financing from the supplier. When subcontractors have insufficient funding, they often have problems procuring materials and retaining labor. Before hiring someone, review their financial statements, backlog, credit reports, or other documents to verify they have the resources and financial stability needed to complete the work.
Safety Record: Construction accidents are both life-altering and expensive. First and foremost, it’s your job as a general contractor to provide a safe work environment for your workers. At the same time, building a safe work environment means hiring subcontractors with a documented safety program and strong safety record. In the construction industry, vetting safety records can be accomplished using the subcontractor’s EMR or experience modification rating. As a best practice, you should require this information on prequalification forms and questionnaires. Think of it like a subcontractor’s credit score or driving history.
Workforce Capacity: In today’s tight markets, sometimes experience alone isn’t enough. Subs need to have sufficient unused labor to perform the required work, or have the capacity to expand the number of employees on their workforce. Labor shortages often lead to construction delays, which can increase overhead costs and owner dissatisfaction. When looking at a sub’s workforce capacity, don’t forget to check out the quality of their labor force, including the project management team assigned to the project.
Quality Work: Quality problems often increase costs and construction time. Look for subcontractors who perform work that meets the required quality standards the first time with limited rework. Additionally, you often won’t receive final payment on a job until the completion of the punch list. If you can find subcontractors who are proactive and complete punch lists quickly, that means less time waiting on a payday.
Team Player: Projects run smoother and everyone makes more money when everybody works together. It only takes one uncooperative subcontractor to turn a good project into a bad one. Skills to look out for include: good communication, willingness to work collaboratively with trade partners, making and keeping commitments, ability to adapt to changes, sound conflict-resolution and problem-solving skills, respect and empathy for colleagues, and an attitude of comradery.
Litigation History: If you’re considering hiring someone with pending litigation, it might be worth thinking again. Litigation costs and judgments against the subcontractor can strain their financial resources, leading to problems funding construction work. In some cases, it can even put them out of business. Additionally, ongoing litigation is a distraction and can leave management with insufficient time to oversee the construction projects. Lastly, watch out for litigation with other general contractors especially. It may indicate that the subcontractor is not a good team player.
Job-Specific Criteria: The contract documents for a job may include specific requirements that go above and beyond what is typically required for subcontractors used on the job. Take the time to carefully review the contract documents and identify any unusual requirements early in the bidding. Only subcontractors meeting these requirements should be invited to bid. If it is unclear whether a subcontractor meets the requirements, discuss the issue with them directly.
Company-Specific Criteria: Along with the other criteria we’ve listed, you should also develop your own criteria based on both your experience and your clients’ needs. For example, if you specialize in government projects, part of your subcontractor prequalification process may include verifying security clearances. If any problems with subs arise, consider adapting or changing your prequalification criteria
Of course, this isn’t a one-size-fits-all list, nor is it all-inclusive. When creating your own prequalification process, don’t forget to take your company’s unique needs into account.
As a GC, you’re responsible for who you hire. And because subcontractors can make or break the success of a job, you want to do everything in your power to hire the right ones. Prequalification can help you put the right team together, and give you back more time to focus on what you do best: running your business well.
Interested in learning more about construction bidding? Check out How to Create a Standardized Construction Bidding Process