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Subcontractor Performance Risk

Tackling Subcontractor Performance Issues from the Ground Up

Cheri Hanes | October 25, 2019

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Deserted construction site

Subcontractor defaults happen, and when they do, the 20/20 hindsight view typically reveals that there were critical warning signs that could have been addressed to avoid or mitigate the problem. As painful as a sub default can be, finding out that you had a chance to prevent one—but didn't act on it—is even worse.

How can your organization ensure you're doing all you can to avoid this scenario?

It Starts with Culture

It's all well and good to have a strategy around identifying and managing sub performance issues, but, as the saying goes, culture eats strategy for breakfast. In other words, if your culture doesn't support open sharing of subcontractor challenges, there is no hope of getting that information in a meaningful or consistent way—regardless of your strategy.

Frame It Right

The first piece of this puzzle is to build a culture where it is OK (and expected) to raise issues.

Communicate Your Intentions for the Information

Clearly communicate that senior management knows things can get challenging and values the lessons that can be learned from those situations. Stress that you want this information surfaced because the entire organization will benefit. It must be clear that senior management is looking to partner with teams to solve issues and are grateful for the information and the lessons that may come from talking about them.

Communicate Expectations

Make it an expectation that teams will actively look for sub performance lessons learned or near misses to share. Many organizations already do this with safety, and we've seen the benefit of that practice. Teams need to feel it is expected and encouraged to escalate issues before they result in serious project impacts, not try to handle them in secrecy until they boil over. This is a challenge! Your project teams wouldn't be in construction if they weren't optimistic problem solvers. They feel that they can deal with problems before they get serious, and they often do, but claims observations support that this won't always be the case. It is not uncommon for issues to become very serious prior to senior management's involvement. Communicate the expectation of collaboration on challenges.

Another hurdle is the perception that the response to sharing an issue will be punitive. Problems are hidden when teams are afraid of outsized repercussions. If there is an identifiable issue with a particular employee or team, address it, but don't make it more painful than is strictly necessary. Treat these events as collaboration and teaching opportunities.

Listen to All Voices

Ensure that your process values all voices. Obviously, the project team has a lot to share. They can supply performance "near misses" as part of a team's weekly reports, on company calls, etc., but don't stop there! Other corners of your organization hear things too. Often accounts payable may be the first to identify issues via the notices or calls from suppliers. They are on the front line. Anyone, in any corner of your organization, should know that they can raise an issue at any time that it seems appropriate and have it taken seriously.

Put the Message on Blast

More people paying attention to issues means a higher likelihood of a strong outcome. Experience, collaboration, and brainstorming—these can all be engaged when information is shared freely. It may seem that disclosing an emerging issue is for the benefit of the concerned project team, but other project teams also benefit—whether they are using that particular sub or not—by hearing the warning signs, results, and mitigation practices used. Corporate may be able to identify company-wide trends and address them proactively. Preconstruction and purchasing can make informed decisions about bid lists and awards. Anyone who has any contact with subs may benefit, so make sure they all get the message.

Early Detection: What Are You Listening FOR?

What might you hear through this process that lets you know there's trouble brewing?

Precontract Award

  • Difficulty getting prequalification information. This might include insurance certificates, bond letters, financials, etc.
  • Sub proposing on work in an unfamiliar geography, new market segment, or using unfamiliar materials
  • Large bid spread
  • Largest ever project size
  • Labor force insufficient—which may result in untrained or brokered labor

Financial Signs of Problems

  • Overbilling
  • Crews not being paid timely
  • Billing for unapproved change orders
  • Cash on delivery orders
  • Evidence of factoring
  • Second-tier lien notices
  • Calls from suppliers

Performance Signs of Problems

  • Challenges getting subcontract, submittals, or shops
  • Lack of production or deviation from planned sequence
  • Lack of workforce or inconsistent workforce
  • Change in supervisory personnel from expected
  • Quality issues/rework
  • Lack of appropriate materials or tools
  • Difficulty getting a sub on the phone, email, or to project meetings

When You See the Signs, Take Immediate Action

Several considerations should be made immediately upon discovering a sub performance issue; how you act on them will vary, but the conversations need to happen.

  • First, inform preconstruction/estimating so that they can decide whether to continue to include the sub on bid lists. It may be appropriate to stop or hold awards to the sub.
  • If you decide to implement risk mitigation on one project, take the time to understand what other exposures you have to the sub, and assess whether the same steps need to be taken on those projects as well.
  • If holding money on one project, consider whether it makes sense (and is allowable) to hold payments on all projects until the issue is remedied against the backdrop of the sub's financial position.
  • If there are safety or quality issues, understand whether it is local to the team you have on one site or is a systemic problem with the subcontractor that needs to be addressed across your entire enterprise.
  • Systemic holds can serve a number of these if your internal subcontract and payment systems are set up, but the conversations are important so that the full color of any given issue is fully understood in context.
  • Keep full, contemporaneous documentation of events.

Depending on the timing and type of distress the sub is experiencing, decide what steps to take. The following are some examples of potential strategies.

  • Preaward strategies. If you find potential issues at the preaward stage, count yourself lucky. Issues you avoid prior to award are issues that don't seriously affect your project's success. Proceed with caution if you must, but plan to mitigate risks if the sub is the right one, even with issues, and then monitor the implementation of your plan.
  • Mitigation strategies for financial issues
    • Joint check
    • Payroll support
    • Descoping portions of work
    • Direct purchase of materials
    • Materials access agreements
    • Increased frequency of pay application
  • Mitigation Strategies for Performance Issues
    • Production/workforce monitoring
    • Requirement for safety or quality rep
    • Additional management from project team or team member focused on the affected scope
    • Sub management or ownership required in weekly meetings
    • Focused sequencing/scheduling effort
    • Increased frequency of planning/scheduling meetings
  • Learn your lessons—and share them! If there's anything worse than having a sub struggle on one of your jobs, it's having them have the SAME struggle they had on the last job. Complete and then use internal sub references so that challenges/issues of heightened concern are known when engaging a particular sub. Learn from what almost happened as well as what did happen. When something does go wrong, brainstorm on how it could have been prevented or mitigated and talk about it openly.


Managing subcontractor performance issues starts with communication across your organization. To empower that communication, build a culture of openness and learning, facilitate communication, collaborate to determine strategies, and enact appropriate actions based on what you hear.

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