The subcontractor enrollment process for contractors can be time-consuming and has the potential to delay a project before it starts. From verifying credentials, to negotiating legal terms, to defining project requirements, the entire process can take weeks, if not months. The delays present the possibility of variations between a bid price and the eventual procurement price, exposing the contractor to significant risks in a volatile market. These include:
- the subcontractor becoming unable or unwilling to lock in material prices, resulting in price escalations;
- long lead items not being timely ordered, impacting the project completion date;
- a breakdown of negotiations due to disagreement on terms and conditions or lack of qualifications, forcing the general contractor to look for another subcontractor; and
- too little time devoted to project specifics, leading to gaps in scope coverage.
A general contractor can take steps to mitigate the delays caused by a protracted subcontractor procurement process, reducing these risks. These measures include (1) moving the subcontractor pre-qualification step outside of the bidding process, and (2) bifurcating the subcontract negotiation process between legalese and project scope for routine trade partners. With the right strategies and support in place, this process can lead to increased efficiency and cost savings for the general contractor, the subcontractor, and the project developer.
In this article, we will explore some tips on how to do just that.
- Pre-Qualify Subcontractors
Before the parties enter into a subcontract, it is important to pre-qualify potential subcontractors, especially subcontractors with significant scopes of work who could cause significant issues if a default occurs. Usually, the pre-qualification process entails checking credentials, verifying experience and reputation, reviewing bonding capacity and financial strength, and ensuring the subcontractor has the necessary licenses and insurance in place. The time to pre-qualify subcontractors is either prior to or during the bidding process. Alternatively, it may be beneficial to direct subcontractors to a pre-qualification process even when there is no specific project in mind. An ideal way to accomplish this is by implementing the prequalification process after meeting potential subcontractors at networking events or as part of your business development endeavors. This way only the pre-qualified subcontractors are invited to bid and unreliable proposals are weeded out. By pre-qualifying subcontractors as part of business development, the general contractor potentially reduces both the time to lock in a contract during pre-construction and the risk of needing to find alternate subcontractors in the event the targeted subcontractor fails to pre-qualify. Additionally, by having a regular pre-qualification process with standardized forms and dedicated pre-qualifying personnel, you can more effectively and efficiently implement the process. These efficiencies are especially vital when material prices and market conditions are in flux.
- Manage the Pre-Qualification with Subcontractor Management Software
Subcontractor management software can also help reduce the time needed for pre-qualification by automating at least a portion of the process. Available software can assist in tracking and managing prequalification forms, insurance certificates, and contracts. Some software can also integrate pre-qualification into the bid process, meaning that subcontractors must submit this information electronically with their bids. It can also send out reminders and notifications to ensure that subcontractors meet appropriate deadlines. Additionally, it may be effective in keeping up to date subcontractor contact information and changes in personnel. With the right subcontractor management software, you can save time, reduce errors in the information submitted, maintain contact between contract and subcontractor, and speed up the entire pre-qualification process.
- Utilizing a Master Terms and Conditions Form for Fixed Contractual Concepts
Generally, a Master Terms and Conditions form can be created which will set forth all the fixed, non-project specific terms, which typically include such things as insurance, licensing, indemnification, safety, and payment. For routine trade partners, these terms tend not to change significantly from project to project. This will often leave only project specific terms to be negotiated when the prime contract is executed, ultimately reducing the time required to contract. The fixed terms are intended to be a set standard, but allow for changes agreed upon by the parties. In a volatile market, utilizing a standardized terms and conditions for subcontracts can offer several advantages over traditional subcontracts (i.e. those subcontracts which contain all the terms and conditions). These include:
- Consistency: With a Master Terms and Conditions you can establish a set of standardized terms and conditions that will apply to all subcontracts. This ensures consistency across all your subcontracts and minimizes the risk of misunderstandings or disputes.
- Efficiency: Because you have established standard terms and conditions in advance, the negotiation time required for individual subcontracts can be significantly shortened during the procurement phase because the terms that frequently precipitate issues have already been negotiated. Time and effort can therefore be focused on negotiating and reviewing the project scope as opposed to getting bogged down in the legalese of such things as indemnification, ultimately saving time for the project teams to focus on operational matters such as logistics, scheduling, and ordering long lead time materials. There would still be time for the parties to negotiate changes to the Master Terms and Conditions. However, any changes should be minor since the bulk of modifications will have taken place prior, or during a previous project. An additional benefit of using the same terms and conditions is that the general contractor's employees gain a greater familiarity with the provisions.
- Flexibility: Despite the standardization of terms, the Terms and Conditions can also be crafted however the general contractor chooses for particular subcontractors. For example, the general contractor could choose to remove certain provisions for subcontracts that are less than a certain dollar amount or use a short form contract.
- Control: A Master Terms and Conditions gives the general contractor more control over the terms, as they can set the terms and conditions upfront and try to ensure that all subcontractors are subject to the same requirements.
Once the general contractor and subcontractor have agreed to the fixed Terms and Conditions that define their relationship, the next step is to execute the project-specific subcontract. This subcontract should provide the relevant information for a particular project, such as subcontract amount, location, exact scope of work, schedule and the start/completion dates. Moreover, the subcontract form is versatile and can also be used to modify the Terms and Conditions for the needs of the project. For example, perhaps a new project will involve the use of a wrap insurance policy, whereas previously the parties had never used such an arrangement. The subcontract can easily modify the Terms and Conditions to allow for a subcontractor to enroll in the wrap policy. A result of these efficiencies is a reduction in the time required to negotiate the subcontract.
By following these tips, general contractors can alleviate the risk of variance from bid price to contract price by speeding up the process of signing up subcontractors and negotiating the subcontract for your projects.
This article was written for the ConsensusDocs newsletter and first appeared here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
