With no foreseeable end to the decline in construction volume, general contractors (GC) should recognize the potential for increased subcontracting defaults and take steps to prevent or reduce their impact.
When the industry was booming, the concern about subcontractors was whether they could meet project specs and timelines, whether they employed enough skilled workers; or how skyrocketing material prices would challenge successful project completion.
Now-a-days, here are several ways to reduce the risk of subcontractor default:
- Always require a full prequalification questionnaire on subcontractors and suppliers. Review and update annually
- Require sub’s financial information – focus on working capital and net worth
- Award subs contracts that do not exceed their proven track record. Make sure, if contract increases, the sub can be capably meet the new requirements
- Re-evaluate the adequacy and accuracy of quality assurance and quality control practices.
- Initiate post-project analysis of the sub’s performance. This will create a line of accountability between the GC and the sub.
- Look for new opportunities to improve project management practices. (use insurance and surety brokers for their best practices guidance and knowledge)
- Look into subcontractor bonding
- Look into subcontractor default insurance
In conclusion, the risks alone associated with managing and coordinating successful projects on time and on budget are significant enough. Managing sub default risk in the current market has never been more important. Taking the steps discussed will help mitigate default risk.
For more information on reducing subcontractor default risk, post a comment below or contact our Real Estate and Construction Group at 440-449-6800.