Subcontractor Operational Prequalification
Cheri Hanes | April 12, 2019
Subcontractor prequalification is a multifaceted process, and the construction industry has made strides in the last decade toward getting it right. As a result, general and financial prequalification is typically addressed, but many contractors still have challenges around the crucial, nonfinancial side of the prequalification process: operational prequalification. What can you do within your organization to strengthen this process, which is the critical bridge between corporate and project practices?
Subcontractor prequalification generally falls into the following four distinct phases.
- Acquisition, collection, and review of general information—This is the process of collecting your subcontractors' overall organizational information and giving it an initial review to determine if they warrant a deeper look, which could lead to inclusion on bid lists. This first-pass review includes general organizational information, subcontractor licensing, insurance, litigation history, default history, years in business, typical project size, etc. This portion of the prequalification determines if the subs meet the baseline criteria to do business with your firm and allows you to get comfortable investing time and resources in the balance of the process.
- Financial review—During this phase of prequalification, firms take a deep dive on subcontractors' financials, bonding capacity, bank lines, and past project sizes to determine the financial health and capacity of the subs. Typical output would include a single project and aggregate limits, and a score indicating your assessment of the subs' overall financial outlook.
- Operational review—This portion of the review examines the subcontractors' fit for a particular project and allows you to determine if a subcontractor's culture and character mesh well with the needs of the project. The typical operational review would include the subcontractors' experience with the project type, quality approach, schedule, manpower and workload assessment, proposed project team, administrative practices, history with your firm, and external references.
- Continuous review and renewal of the above—As with all information collected, it is only a snapshot in time. At a minimum, review of the information should occur annually. For larger-scale risks, first-time subcontractors, or subcontractors with higher aggregations, more frequent review may be appropriate (e.g., quarterly, semiannually, etc.).
Done well, operational review ties together all of the effort that has been invested in a sub to get them through the process. It is where "the rubber meets the road." However, it is not as rare as you may think for the operational review—and resulting award decisions—to be made seemingly independent of the first two phases and without any real documentation of why the sub is a good operational fit for your project. It is important that the processes are considered in concert. If an operational review is done in a silo, the power of your previous general and financial analysis is significantly reduced, and your organization may find itself engaged with subs you would have sworn would be rooted out in your qualification processes.
Because there are fewer clear metrics to apply to this assessment, the operational review is often the most challenging portion of prequalification to execute consistently and well. Many of the steps taken up until this point would be considered "science"; that is, there are clear formulas and requirements for passing the initial review and defined metrics for financial assessment. The operational review includes more "art." It is not simple or clear-cut. It is important to devise a consistent way to assess and document which subs will be the best fit on a given job.
The components of a "best in class" operational review include having the right people, reviewing the right information from the right sources and at the right time, adjusting appropriately, and documenting the output of the process. Let's break that down.
The Right People
- Just as in financial or insurance reviews, there is specialized knowledge needed to perform an operational review. Individuals performing this review should have detailed knowledge of the specific project requirements.
- They should also have fluency with—and access to—the subs' financial and general prequalification status, internal references, etc. It is critical that they possess an understanding of how the pieces of the prequalification process fit together with the operational decisions they will make.
The Right Information
- Make sure your operational assessment includes consideration of the subs' history with projects of similar type, size, and requirements. Review subcontractors' capacity holistically—not just as a score or ratio. Experience with similar projects is every bit as important as financial health. A subcontractor may be excellent on a $1 million project, but completely paralyzed by a $1.5 million contract, or great with K-12, but fail on a healthcare project. Geography matters too. Subcontractors who are completely solid in their hometown may struggle to staff or understand soils or codes on a job just a short distance away.
- Understand the subs' quality assurance/quality control (QA/QC) and safety approach. Make sure they understand yours as well. Have them delineate their quality and safety concerns and their approach to manage them. Are they aligned with your plan?
- Understand the subs' work for others. Review their work in progress (WIP) or otherwise gain an understanding of their work programs to find out if their overall project load will be in line with their past performance. Also, try to determine if a single large or high-profile project may threaten their focus or manpower on yours.
- Discuss manpower and schedule requirements and understand the subs' staffing plan for your project. Can they give you enough resources to meet the schedule and quality requirements? Are you getting the A team? Do they currently employ enough people, and, if not, will they be hiring for the job—in which case you may be on their learning curve—or use brokered labor? How will they manage if so? Do they have experience with their proposed approach? Many large claims have a schedule and/or quality components directly related to manpower issues, which are increasingly common as the labor pool is stretched by more and larger projects than ever before.
From the Right Sources
- Talk to the subs. What do their responses tell you? Are they readily available to talk and collaborative in their approach? Also, listen to what they don't say. How do they respond to requests for information? Have they supplied you with their qualification information, quality plan, Occupational Safety and Health Administration logs, etc., in a timely fashion? You can make some fair assumptions about whether they will be a true partner or an unproductive challenge using these factors.
- Pick up the phone! It is surprisingly common to see that references were collected but not called. Use the references you collected in the initial phase of the review and capture those conversations in notes that are accessible to future project teams as well. In addition to performance-specific questions, use this opportunity to ask about the subcontractor's management—administrative and field. Are they timely with documents, willing participants in constructability, and schedule efforts available for meetings and to answer the phone or email?
- Don't leave the information already existing within your organization on the table. There's nothing much worse than struggling with a subcontractor and having another member of your own team say that they had the same problem—last year. Make internal postproject evaluations part of your closeout process and consulting them part of the prequalification process.
At the Right Time
- Ideally, the time to look at a sub's operational capacity and character is before they are allowed to bid on your project, and certainly before relying on their number in a budget. However, in a situation where this is not possible (as in hard bid work), the effort to fully understand your sub partners is still worthwhile for risk mitigation purposes and occasionally may result in a decision to move on to a different sub at a cost. The information gained in a formal operational qualification process will help you to make the best possible decision in all situations.
Adjust Appropriately
- Think about the "what ifs." Scrutinize the subcontractor's potential impact should they fail. Understand your plan B if the sub goes out of business or falters. How disruptive will that be? Will they be straightforward to replace? Are they on the critical path? Do they control specialized materials your project can't proceed without? The stakes are highest for critical path trades with proprietary or custom systems, and your level of caution should reflect that.
- Have defined practices around low bids. Define a percentage low at which a sub's bid will get a closer look before the bid can be used. A typical threshold is 10 percent low. Assess whether a low bid is in line with other bidders and your internal budget and includes all appropriate scope. Ensure the subcontractor understands all of the specifications (including division 1 specifications) and your internal requirements for quality, manpower, and safety on the project, then proceed with due caution.
- Use appropriate risk mitigation planning. If a subcontractor is the right one for your job but shows weakness in some area (operational or financial), a strong risk mitigation plan (RMP) may protect their ability to perform and make all the difference in their success on your job. Ensure that your teams know this and are willing to create and manage appropriate risk mitigation plans for the life cycle of the subcontract. Financial RMPs are easily implemented (e.g., joint checks, dedicated letters of credit, etc.), whereas operational RMPs are tougher to deploy—but should be contemplated as part of subcontract terms, including quarterly updates of work awarded, monthly C-suite meetings, dedicated personnel and crew size, quarterly operational scorecards, increased quality and production monitoring, etc.
- Define guidelines and limits of authority (LOAs) to clarify practices for exceptions. Your team needs to understand the limits resulting from your review and that there is a firm process for using subs outside of those limits, no matter how low their bid or strong their reputation. Define LOAs for exceptions to the parameters you've set, and review awards to determine that the process has been followed. Examples of situations where an exception process would be appropriate prior to award would include the following.
- Subcontractor's largest-ever project
- Subcontract award over the sub's calculated single project or aggregate limits
- Red flags in the prequalification or information that is expired
- Subcontractor engaging in a new market, scope, or geography
- Lack of QA/QC definition
- Safety (experience modifier too high or practices not in line with yours)
- Negative internal or external reviews
- Predetermined scopes always requiring a second look prior to the decision to award—building envelope subs for example
Make It Happen
- Once you've determined the practices for operational prequalification within your organization, don't leave them to chance. Formalize the criteria for consistency. Develop a process or template to capture the factors that led to award decisions—and memorialize them. This is useful for accountability, to see trending over time, and subs' fit with various types of projects. A periodic audit process for compliance is also recommended.
Common Practices to Avoid
- Don't just "trust your gut." Decisions should be defensible with documentation of how they were reached. A best practice is to use a scoring matrix, best-value narrative, etc., to capture the factors that went into the decision. Replace "trust your gut" with "trust but VERIFY!"
- Don't rely solely on past relationships or experience. Relationships matter but need to be tempered with specific knowledge of each sub's current health and capacity. This means communication between financial and operational reviewers/subcontractor selection team. Default claim information suggests that there may be increasing instability in the very subs you have become most comfortable with—those in business for 10–15 years or more. Don't be complacent.
- Don't overlook the potential impact of smaller subcontracts. Claims data supports that subcontracts under $5 million have the largest cumulative impact when it comes to defaults.
Conclusion
In summary, the operational prequalification process offers an incredible opportunity for a positive influence on your project's success. It is not easy, but it can either magnify or destroy the value of all the prequalification efforts that precede it. Defined and thorough practices lead to greater success and are well worth the effort to develop and follow.
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