Expert Commentary

Project Pursuit Decisions Affect Subcontracting Risk

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?


Subcontractor Performance Risk
July 2019

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.


Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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