Knowing issues early can help you manage risks with subcontractors.
Even the best planned construction projects may have to weather the storm caused by outside events. The dot-com bubble created massive growth opportunities for construction companies in the late 1990s; then, in early 2000, the bubble burst. Events on September 11, 2001, affected construction projects: contractors and subcontractors endured project cancellations, massive job losses and bankruptcies.
Fast forward to the mid-2000s: construction rebounded with renewed vigor. Residential and commercial projects were plenty and money was readily available, until the Great Recession of 2008 caused massive disruptions to projects as credit markets in nearly all segments essentially evaporated.
For construction companies that survived the early 21st century’s economic recessions, lessons learned on proper subcontractor selection became well-honed processes for managing risk. And, until the COVID-19 global pandemic, construction companies enjoyed a nearly 10-year run of positive results, with their biggest concern being qualified trade partners who could help them complete projects.
HOW TO SPOT TROUBLE
A subcontractor experiencing trouble can cripple a project; knowing about their difficulties early is better, but it doesn’t eliminate the risk of default. Once a general contractor or first-tier trade partner recognizes that it is faced with a struggling subcontractor, four simple guidelines can help guide you:
- Keep your eyes open. Monitor every source of information available; notice how your subcontractors are performing not only on your job, but also in their overall work program. Effective communication is vital to addressing potential concerns.
- Don’t delay. If you see a potential problem, start asking questions. Engage the subcontractor directly to learn the depth of the problem and explore potential solutions. Be proactive. Schedule formal discussions with every subcontractor on a project and develop a risk matrix. Ignoring a problem or hoping that it goes away can lead to bigger problems.
- Notify the surety once you detect a problem. if the subcontractor is bonded and unwilling to talk, you may need to act. If the general contractor or first-tier trade partner cannot motivate a subcontractor to perform or struggles to get answers to critical questions that could impact performance, then putting the surety on notice of default may be helpful in getting the subcontractor’s attention and obtaining requested information.
- Be prepared to suspend, supplement or terminate a contract. Make sure that your subcontract provides the ability to act to suspend the subcontractor’s performance, supplement the subcontractor’s workforce or terminate the subcontractor. The route you choose will depend on the bond form and job circumstances, but there are some general “rules of thumb” to help contractors decide.
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- Suspend: If the problem is a subcontractor who is ordering/storing materials now for work that will occur several weeks or months from now, consider suspending performance. The GC or first-tier trade partner will be invoiced for materials supplied to that subcontractor or by that supplier that may never make it to the project if the subcontractor closes its doors, goes into bankruptcy or is simply unable to perform. By suspending performance, contractors can potentially avoid incurring these costs because the subcontractor is not authorized to make any purchases during the suspension. However, this is less of an issue if the materials are being stored onsite or are in the GC’s or first-tier trade partner’s possession.
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- Supplement: If the issue appears to be a temporary problem for the subcontractor, and your company has the available labor forces – either your own or another reliable subcontractor – it may be best to supplement the subcontractor’s performance at its own cost.
- Terminate: If the problem appears to be more than temporary, or a temporary problem persists, then the most prudent course of action may be to diligently pursue termination and nullify the ripple effects of a nonperforming subcontractor. Again, if this is a bonded project, you must give the surety notice before supplementing forces, suspending or terminating to preserve your claim against the bond and obtain the assistance of the surety in completing the work. As always, confer with your legal counsel to make sure the action you take is the best route for your firm.
RESOLVING DISPUTES
Failure to recognize and manage struggling subcontractors properly often leads to disputes, claims, project delays and poor-quality work. Nevertheless, most issues can be resolved by working with the subcontractor, rather than taking drastic measures. If termination is the only option, follow the bond form’s protocol and the conditions to the subcontract or you may find yourself in more dire circumstances than when you started.
There is no shortage of issues that occur on jobsites, and mistakes will happen. Your role in this situation is to collect the information available, break the problem down into solvable segments, effectively communicate with all parties and make informed, calculated decisions based upon facts. The key here is to improve upon the mistakes made in the past and do better the next time around.
This loss control information is advisory only. The author assumes no responsibility for management or control of loss control activities. Not all exposures are identified in this article. Contact your local, independent insurance agent for coverage advice and policy service. Neither The Cincinnati Insurance Company nor its affiliates or representatives offer legal advice. Consult with your attorney about your specific situation.