November 22nd, 2011 | Published in Uncategorized
According to an article recently published in AGC’s Constructor magazine: “Contractors are taking more extensive measures to protect themselves from the risk of subcontractor and supplier defaults. As the construction industry continues to falter in a poor economy, an increasing number of subcontractors and suppliers are merging, defaulting or simply going under. Consequently, contractors are paying much closer attention to—and spending more money on—managing subcontractors.”
As the article explains, in many cases, the subcontractors are not to blame as they face scarce work available and slim profit margins, which cause overly eager subs to accept work that turns out to cost them money. And that’s a slippery slope toward default.
One expert reveals that in the case of subcontractor defaults and failures, the “ripple effect is typically 2.5 times the bond price” and emphasizes how important it is for contractors to have a plan in the case, explaining that “if the general contractor has to come in due to sub failure, there are expenses for things like materials, job scheduling and delays [that can’t be replaced] for as-is cost.”
Concerned general contractors use subcontractor default insurance and are enforcing stringent subcontractor prequalification criteria and a detailed review process, which may include audited financial statements for several years and strong balance sheets. More GCs are also scrutinizing subcontractors’ past performance and financial capacity for job completion. This due diligence often demands more time and overhead expense, but the article shares opinions of some construction executives who feel it’s surely worth the effort.
Value of Software
Of course, many contractors are also investing in software to help ease the burden of managing subcontracts and minimize risk throughout the process. At Maxwell Systems we see contractors using the capabilities in our complete, all-in-one solution to streamline document workflow and more easily ensure subcontractors have liability, workers compensation, and correct bonding in force during jobs, as well as have an easy way to track and hold retainage.
And because the solution can be used to manage the entire project lifecycle, the benefits are experienced by the whole team. For example, the controller is able to ensure that invoices are applied to correct cost codes, that a contractor does not overbill, and that subcontractors are not paid if insurance, license, or bonding information is not up-to-date. Plus the project manager can easily know which subcontractors are assigned to which work, understand what the committed cost is on a phase of work, and efficiently track original contract versus revised scope of work for each subcontractor. Check out Maxwell Systems for construction software.
Download our free article, “All for One and One for All” and read more about how a complete software solution can help with managing subcontractors and minimize risk.
To read the Constructor magazine article, authored by Angelle Bergeron, in its entirety at AGC’s web site, click here.