Construction Accounting Article -
General Contractor Focus - Separate the Good from the Bad With Subcontractor Prequalification

Target Audience: Construction Industry Professionals, Accounting Consulting Interest, Subcontractors, Architects, Construction Companies

With the economy stuck in slow-mo, you may find the list of subcontractors who want to bid on your projects is growing. The challenge is to separate the good subs from the bad before you put them on a job. Prequalification can be a good way to start. A solid prequalification process can help you ensure that you work only with financially sound, qualified subs that will perform as promised.

Consider the Universals

If you’re like most contractors, you probably rely on a group of preferred subcontractors for most jobs. You’ve built excellent working relationships with them, and they understand how you work and meet your expectations for quality and price.

In many cases, the bonds you’ve forged are strong enough that these subs will juggle their schedules to accommodate yours. But sometimes that just isn’t possible, and you’ll need to use someone else.

In such cases, if you already have a list of prequalified subs on file, the task of finding a replacement will be much easier. There is no one right way to go about prequalification, but there are some universal considerations, such as:

How long has the company been in business?
How long have the current owners and managers been with the company?
Does it have the proper licenses and license numbers?
Is the business involved in any lawsuits (or has it been recently)?
Does it possess adequate insurance coverage?
Does it have a healthy financial history?
What is its bonding capacity?
What were the size and scope of its previous projects?
Can it provide suitable trade, financial and business references?

One of the easiest ways to get answers to these and other questions is to require subcontractors to fill out a prequalification form. See your construction accountant for details on how to find sample forms. They are available on the Internet, including Form A305, developed by the American Institute of Architects (aia.org) and the Associated General Contractors of America (agc.org). If you are a subcontractor, consider taking a proactive approach to getting yourself prequalified by preparing a package of this information and working hard to get in front of the contractors that might need your services.

If you want to dig a little deeper, you could visit a new subcontractor’s offices and a job site or two. Look for signs of a well-run company, such as an organized office with helpful employees, and talk to some employees to get a sense of how the subcontractor operates.

You should also require information from potential subcontractors regarding their surety relationship. And you may want to inquire about his or her safety and training programs as well.

Don’t Focus Solely on Price

At the end of the prequalification process, you’ll probably have several subs from which to choose. It’s tempting — and all too common — to let price be the determining factor in the decision, but doing so may not be wise.

Let’s say the low bidder in the group is a small company that does excellent work. The price is right, but the sub has a large, very complicated project under way across town. If that project has tight deadlines and something goes wrong, is the sub flexible enough to accommodate both jobs? If you’re not sure, you may be better off paying another sub a little more.

Finally, in considering which sub to use, bear in mind that you’re entering into a relationship in which price isn’t the most important factor. Find a sub who will be a partner, one who shares your safety, quality and business priorities.

When you use top-notch subcontractors, you’re reducing your own risk and adding value to your projects. Don’t settle for the lowest price — you must consider other factors as well.

Get Home Field Advantage

When you’re selecting your subcontractors, you’re picking your team. And when the players are right, quality goes up as time and cost go down. That’s a home field advantage your competition won’t be able to beat. Contact our forensic accounting services department to learn more.

Find out how our expertise in construction accounting can add value to your business. Email us or call us at 1 (888) 875-9770.

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