As an industry, construction spends a tremendous amount of time and resources
addressing the risks involved in subcontracting. The attitude is "We have
a building to build, so we will make it work." Our project teams are
downright heroic in their willingness to do the daily work required to get a
troubled subcontractor over the finish line, and most would say that's just
the job. To an extent, it is; subcontracting is inherently risky. BUT if we
could proactively reduce that risk, how much more productive could our teams
be?
Turns out, we have several tools for this, and I think one doesn't get
all the respect it deserves when it comes to protecting your subcontracting
strategy: the project pursuit decision—also known as the go/no-go process. Much
of the risk of building, and especially subcontracting, is "baked in"
at the very earliest stage of a project: the decision to pursue the work in the
first place. The results of this decision-making process determine your
subcontractors' potential for success or distress in dozens of ways.
Let's take a look at some of the ways in which your go/no-go can
mitigate the risks of subcontracting or at least allow you to engage projects
with your eyes wide open. What are the critical questions to ask?
Who Are the Players?
The parties involved in each project set the stage for a productive and
collaborative workflow—or not. Who are the players, and how do they influence
sub risk?
The Owner or Developer
As soon as a potential project arises, start asking about your
organization's history with the owner. If they are new, learn about the
owner's reputation with other builders. What can you learn about their
character and values? Will they be realistic and collaborative or idealistic
and adversarial? Is their philosophy regarding project delivery aligned with
your firm's? A win/win attitude on the part of the owner empowers everyone
to make intelligent decisions when issues arise. Your subcontractors'
ability to get things done can be significantly impacted by an owner's
inability to compromise when constructability conflicts arise regarding a
specific vision for a detail.
Does the owner have a history of success with the project type and
geography? Buildings aren't the same, and every variation carries its own
specific risks. The risks of condos, for-rent, commercial, K–12, etc., are all
distinct. Risks in South Carolina and South Dakota are very different.
It matters if the owner is familiar with the differences and accommodating
of the risk mitigation you are going to need—contractually and in the
performance of the project—to protect your common interests. Do they have a
defined risk strategy related to the project? If they do, does it align with
your firm's strategy? In the absence of history with the project type, are
they at least able to articulate how they intend to manage the project risks,
and does their plan pass your "smell test"? If the owner is versed in
the building practices for the type and geography, the likelihood of conflict
over a subcontractor's work or schedule requirements goes down.
While you're doing your diligence, take time to understand the
owner's reputation regarding payment. It can matter—quite a lot from a
subcontractor risk perspective—if they have a slow or contentious payment
practice. "Pay when paid" can seriously affect your
subcontractors' ability to stay viable on the project, and a protracted
dispute can spell disaster. Reasonableness has to be present in the process,
and your up-front detective work will provide many clues as to whether you can
expect it.
Designer
Many of the same questions apply to designers. Have they delivered this type
of project before? Do they have a reputation for delivering completely detailed
documents and working through submittals and requests for information in a
timely fashion? Project-specific, vetted details prevent rework. Keeping a
clear and defined flow of work in front of your subs keeps them engaged on your
project and working per the plan; waiting for an answer does not.
Responsiveness matters if you don't want your subs distracted and off
track.
Your Internal Teams
Do you have the bench strength available for the project, with experience in
the project type, size, geography, and market sector? Your project personnel
are your primary assurance that the job will be done as intended.
Subcontractors can all perform their scope, their way, but if you want it done
to your standards, you need on-site people who know and can enforce them. New
personnel, no matter their industry experience, simply don't have the
foundation of your practices to build on. Obviously, there will be times when a
pivotal hire is made for a specific project, but a team with mostly new people
or new people in leadership positions can lead to inconsistency and result in
challenges for your subs.
Subcontractor Market
Understanding the strengths and weaknesses of the sub market in relation to
your project puts you in an ideal situation for sound decision-making.
Considerations include the following.
- Labor. Sufficient workforce is maybe the hottest issue
of our time. You must consider the size and schedule of your project against
the available labor in the market. Important factors to consider include the
presence of jumbo or high-profile projects in the area likely to pull
workforce and attention away from yours or whether there is a project in the
area known to be challenging from a sub perspective. It is also critical to
understand whether you will be dealing with trades that broker work and to
consider if you are prepared to manage their production and quality if that
is the case.
- Familiarity with project requirements. Are there scopes
not typical to the area, for example, precast in a place where it is not
typical? This problem is most frequent when the designer is from a different
region and is one of the reasons to understand the designer's experience
as described above. If this is the case, the subcontractors will likely be
working in an unfamiliar medium, have logistical challenges, or travel from
outside the region and will, therefore, be hard to supplement or replace if
they struggle to deliver their work.
- Special project requirements. Determine if the subs have
experience delivering the required finish levels, insurance, safety
practices, quality control, documentation, and technological savvy required
for the project. Consider whether it is likely that the subs in the area will
be able to qualify for your subcontractor default insurance (SDI) program or
be able to provide payment and performance bonds if required. If your project
has sustainability or other special requirements, you will also need to
consider the sub's experience with those particular standards.
- Minority or teaming requirements. If there are minority-
and women-owned business enterprise (MWBE) requirements or a goal on your
project, it is important to understand the capacity of the qualified players
in that space. It is a delicate balancing act between mentoring and/or
helping a particular sub to grow and encouraging them to "overeat."
When a subcontractor fails spectacularly, it is more likely to be from taking
on too much work too fast than not enough work. Do not award subcontractors
work that is not supported by their financials; it is necessary for them to
stretch to progress, but calculations from your financial analysis can
indicate whether what you are asking for will result in growth or
failure.
Other Factors in Play
Contract and Bid Type
Negotiated work puts your firm, and your subcontractors, at an incredible
advantage over a hard bid. It allows you and your subs to be involved early and
influence constructability, empowers proactive teamwork, and lets you
understand the subcontractors you are considering fully rather than being put
in a quandary of whether to rely on an unknown subcontractor's number on
bid day. If you take on a hard-bid project, do so in circumstances where you
have excellent knowledge of the sub market and a strategy to make quick,
informed decisions around outliers. At a minimum, you need to be able to
quickly understand their typical project size and reputation in the market.
Design build and projected integrated project design take the beneficial
collaboration described above to another level, but there are considerations to
be made around the additional liability when you take on these models. The
bottom line is that if your firm traditionally performs in one model, you may
find the others to be challenging in unexpected ways, and that challenge may
affect your subs as well. Consider carefully before switching spaces, no matter
how tempting the project.
It is also important to consider whether the contract itself is generally
fair. Does it allow for unforeseen conditions, force majeure events, or other
project delays? Are there uncapped or excessive liquidated and/or consequential
damages? Are you held responsible for each milestone or only the overall
completion date? This may seem unrelated to your subs' success on your
project, but those provisions all flow down to them (right?), and defaults have
resulted when that happens.
The reasonableness of the schedule also comes into play. In the ideal
situation, the subs will have helped create the schedule, giving you reasonable
certainty that they can meet the milestones. If that is not the case, ensure
the schedule durations seem sufficient for the project type and size by asking
them.
Geography
There are times when it makes sense to strategically enter a new market, but
it is challenging. Where a project sits can be just as important as the project
itself. Variations in codes, licensure, inspections, soils, typical scope
inclusions/exclusions, and labor availability can all impact projects and merit
careful consideration in your pursuit decisions. If the job calls for unusual
materials, means, or methods required for the area, there is a higher
potential for subcontractor failure as they struggle to learn on the job.
It is also critical to account for the subcontractor relationships you have
in a new geographic market and to your ability to analyze their capabilities
against the demands of the job. In the absence of existing relationships, an
effort to understand the sub market should involve not only getting to know the
subs directly but also conversations with local general contractors, designers,
industry groups, and suppliers to understand the subs better. This takes time
and resources and still does not fully eliminate the risks of doing business
with subs unfamiliar to you. Consider the cost of this effort in your
calculations.
Capacity is also a factor when moving into a new geographic market. The
interplay between subcontractor financial capacity and project size is
challenging to assess in an unfamiliar market. One way to gauge this is to look
at typical project sizes in the area. If your project is outsized for the area,
take the closest possible look at the potential for splitting up sub packages
by scopes or phases, and take that strategy into account in your pursuit
decision.
Remote locations can also complicate things considerably. In a remote area,
you may have only one option for a sub on one or more scopes; that is a recipe
for pain, especially if combined with limited financial capacity. In the event
of sub distress, you may have to nurse them along, manage their workforce, be
their bank, or worse. If they fail anyway, bringing in a sub from outside the
area will certainly come with a premium. As you make these considerations, pay
special attention to the critical path or specialized subs with the potential
to be particularly disruptive to replace.
Climate/Seasonal Factors
Local weather conditions are risk factors too. In areas with extreme
weather, seasonal access may come into play. Productivity factors, weather
days, and sequencing certainly will, as well as methods including temporary
hoarding, heating or cooling for concrete, etc. Any of these challenges may
cause a subcontractor to struggle to meet planned production.
Summary
Taking these subcontractor-related factors into consideration as part of
your go/no-go process can result in a greater likelihood of your projects
coming in on time, on budget, and to the required standards with a minimum of
stress. Include as many as possible when defining your go/no-go practices, and
really use them to make or break the business case for taking on the work.
Chasing only the "right" work is best for everyone involved.