CONSTRUCTION | CLIENT RESOURCE

Educating your construction clients about finding good subcontractors

Strategies and best practices for prequalifying candidates

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KEY HIGHLIGHTS

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It's crucial for contractors or other contractors who subcontract work to be judicious when selecting a subcontractor for a project. One way contractors can accomplish this is through stringent prequalification practices.

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Subcontractor prequalification may seem like additional work, but it's one of the best ways to reduce the risk of hiring unfit businesses.

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A contractor could be held financially responsible for issues with the subcontractor's work that may arise before, during or after a project's completion.

When it comes to completing projects on time and without sacrificing quality, the use of subcontractors and even sub-subcontractors may be necessary. Subcontractors are effectively an extension of a contractor's operations, and, in many ways, a contractor is only as good as the subcontractors that work under their direction.


The poor performance (e.g., substandard workmanship or workplace safety issues) of just one subcontractor can reflect poorly on the contractor and compromise a project before it even gets underway. It can also increase a contractor's liability for on-the-job accidents or completed operations issues. Furthermore, these challenges not only impact large, national contractors, but small and midsize operations, as well.


With this in mind, it's crucial for contractors or other contractors who subcontract work to be judicious when selecting a subcontractor for a project. One way contractors can accomplish this is through stringent prequalification practices.


It's valuable to understand and communicate these subcontractor prequalification best practices to your construction industry clients. Doing so not only helps your clients address their risks, it can also position you as a trusted advisor.

The importance of prequalification


There are many factors to consider when selecting subcontractors, not just their price. To secure the best subcontractor for the job, contractors need to establish a strong prequalification process. This involves reviewing potential subcontractors closely throughout the selection process and narrowing the list down to the most qualified candidates.

Subcontractor prequalification may seem like additional work, but it's one of the best ways for contractors (or subcontractors hiring sub-subcontractors) to reduce the risk of hiring unfit businesses, which could then lead to project delays, safety concerns and quality issues. While the prequalification process may differ from business to business, the following are common strategies contractors can follow:

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Examine the subcontractor's work history

Contractors should take past work performance, references and qualifications into account when vetting potential subcontractors. Specifically, contractors will want to ask for references from other businesses that have worked with the subcontractor and ensure that those businesses were satisfied with the final product. Subcontractors must also be a good fit for the project and have the skills, resources and bandwidth necessary to perform high-quality and efficient work.

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Look for red flags

It might sound simple, but contractors should be on the lookout for obvious red flags when examining a subcontractor. To identify common issues with unqualified subcontractors, businesses should review publicly available information related to lawsuits, bankruptcies and customer complaints. Contractors can also learn a lot about a subcontractor by reviewing their standing with trade organizations, the Better Business Bureau and similar entities. Finally, subcontractors that are consistently difficult to get into contract with or don't submit a bid on time should raise some red flags.

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Evaluate the subcontractor's safety practices

In the event that a subcontractor performs unsafe work or causes an accident on the job, work can stall, costing the contractor time and money. During the prequalification process, contractors should determine what policies and procedures a subcontractor has in place to ensure the safety of their workers. They should also check a subcontractor's safety record and investigate any available Occupational Safety and Health Administration records or workers' compensation information (e.g., experience modification rates).

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Investigate the subcontractor's financial health

Subcontractors need to have the financial resources necessary to secure supplies, pay their employees on time and complete a project. To evaluate their fiscal stability, contractors should request two years of financial statements. The information from these financial statements can help contractors determine if a firm is fit to handle the demands of their project.

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Ensure the subcontractor is properly licensed and insured

Contractors should acquire certificates of insurance from subcontractors that confirm the proper insurance with sufficient limits of liability in place for the duration of the project. Without these insurance protections, a contractor could be held financially responsible for issues with the subcontractor's work that may arise before, during or after a project's completion.

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Secure a written contract

Once a contractor has selected a qualified subcontractor that meets their needs, they should secure a written contract that details:

  • The project's scope of work, time frame and pricing
  • Expectations related to the quality of the work and the materials the subcontractor will need to supply for themselves
  • Requirements for insurance coverage and workplace safety

Simply put, a strong written contract will protect against poor or incomplete work. It's wise to review it alongside an attorney to identify a full set of requirements.

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Consider the five Cs of assuming risk

The insurance industry often applies the following five Cs when underwriting risk: character, competence, capacity, capital and coverage. Contractors should consider applying those same principles when selecting subcontractors.

Prequalifying subcontractors helps contractors select the best candidate for the job. This ensures projects run smoothly and provides contractors with some much-needed peace of mind.

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KEY TAKEAWAYS

To secure the best subcontractor for the job, contractors need to establish a strong prequalification process.

Having prequalification strategies in place, such as those outlined in the article, can help guide the process.

A strong written contract, reviewed alongside an attorney, will help protect against poor or incomplete work.

TAKE THE NEXT STEP


Additional information on risk transfer and other commercial insurance topics is available for appointed agents and policyholders through MyLossControlServices.com. If you're not an appointed agent, more risk transfer resources are available through IRMI. If you're an agent interested in growing your commercial book of business, please go to nationwide.com/agents.

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