CONSTRUCTION Accounting ARTICLE -
Contractor Practices Preventive Medicine with Subs
Target Audience: Construction Industry Professionals, General Contractors, Construction Accountants
Landing a job to build a multimillion-dollar hospital wing was a dream come true for one medical facilities contractor. He knew, however, that he’d need to hire multiple subcontractors to supplement his workforce. Although he’d obviously done so before, the contractor wanted to leave nothing to chance on this big job. So he asked his construction accounting firm for some advice on selecting the right subs.
The firm told the contractor he was smart to plan ahead. A subpar subcontractor could lead to costly delays. In a worst-case scenario, the contractor might have to terminate one of his subs, which could mean paying attorneys’ fees, scrambling to complete or redo the work, and damaging his construction company’s good standing with the project owner.
Smart subcontractor selection
Before selecting his subcontractors, the advisor said, the contractor should scrutinize the details of the contract, focusing on the terms and specifications that will likely be affected by subcontractors’ work. In addition, knowing the finer points ahead of time could help the contractor avoid disputes with his subs over the project’s overall scope or their respective scopes.
When the contractor was ready to hire, the advisor continued, he should consider each applicant’s project history to gauge whether the prospective subcontractor could perform the required work. A big project probably wasn’t the time to take a chance on an inexperienced sub.
The contractor also needed to compare each subcontractor’s bid with industry averages, noting if any bids seemed suspiciously low. And he should call banking, insurance and supplier references to discuss each sub’s timeliness in paying bills and whether the company has had previous cash flow problems.
On-the-job protection
Documentation would be the key to financial protection once the contractor and his subs broke ground, the advisor emphasized. The contractor should be extra diligent to record meeting minutes, require field supervisors to keep a daily log, file written correspondence, keep trade inspection reports and take pictures to strengthen his case should he need to terminate a sub.
In addition, the advisor noted that each subcontractor’s surety would also play a pivotal role. While some sureties will complete a sub’s work, other performance bonds simply require the surety to indemnify the contractor from costs stemming from the subcontractor’s default. Knowing what kind of coverage he has will help minimize unpleasant surprises if things go south.
Up, not south
Fortunately, the hospital wing didn’t go south — it went up. Thanks to a thorough selection process, the contractor’s subs performed adequately and, in some cases, quite well. Ultimately, the project finished on time and on budget.
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