What you don’t know can cost you: Prequalify your subcontractors

You know Joe from fifth grade. You guys grew up together. Now you’re a general contractor and Joe is a mason, and he’s looking for work. You may know Joe on a personal basis, but is he qualified to work as your subcontractor?

Hiring the best people is crucial and protects the interests of general contractors. Know definitively that your subcontractors are going to complete assigned tasks by using prequalification techniques.

These days, it is increasingly common for contractors to require prospective subcontractors to answer a series of questions that will provide valuable insight into work history, financials and personal information of the owners. Although someone may be your friend, he or she may be having a tough time financially.

It’s all about what you know. Prequalification may take a bit more time, but it is well worth the effort when you consider that you could end up wasting a lot more time. Plus, the cost of finding a replacement later on could add up.

While it’s up to each company to determine how formal the prequalification process becomes, there are a number of proven ways to get the facts. If you care about quality and getting your money’s worth, here are the main questions to ask in the prequalification process.

Each answer, taken on its own, may not provide the full picture. Gain a better understanding of all the data before you make your final decision.

• Has the subcontractor been around a long time, or is he just getting started?
• What’s the overall management team makeup?
• Who are the people managing the project and what are their backgrounds?
• Can you see resumes of relevant employees?
• Where does the subcontractor do most of its work?
• Are they a local company or are they coming from a distance?
• What other work do they have now?
• Do they have sufficient resources to complete your job?
• Can the subcontractor supply references?
• Is there sufficient operating cash?
• Can the subcontractor supply recent financial statements?
• Is there is history of bankruptcy or defaults on contracts?
• To whom are the subcontractors subbing out work?
• Does the subcontractor have quality control and safety programs in place?
• Have there been any OSHA citations?
• Is there adequate insurance coverage?
• Is the subcontractor bonded?

The prequalification route is all about discovery. Joe may be a great mason and friend, but he could be seriously overbooked, having taken on more work than he can handle or has quality issues. In short order, Joe could default and walk away from the job altogether.

Once you get all your questions answered (and if you don’t, that’s a good indicator that you should not proceed), here are some red flags. If subcontractors exhibit any of these, they may not be worth the risk:

• Recurring losses on contracts
• Hesitant to disclose information
• Financial statements are incomplete or incorrect
• Heavily leveraged business
• A failed bank covenant
• Receivable write-offs
• Lack of working capital
• Inability to get bonded
• Too much profit fade

With this list of questions and knowledge of potential red flags, you are off to a great start. If you don’t have a prequalification system in place, you need to do so now. Check out how other contractors are prequalifying their subs. There are lots of online resources and prequalification questionnaires to review. Also, talk to your peers and other subcontractors. Find out what they are doing. Ask your accountant about what they have experienced with other clients.

Prequalifying is not hard, but these days you have to do it. As a best practice, regularly update this information. Make sure that you have current information. And if Joe passes the prequalification test, hire him.