Are your subcontractors making money? Why you should care.

Many General Contractors are probably unconcerned with whether their subcontractors make or lose money on their construction projects. Why should it impact them? It would after all seem to be an anomaly, because if a subcontractor is making money it’s probably at the project’s expense? But no! In fact some GC’s make a habit of squeezing their subcontractors so the GC can be more profitable.

Why it’s helpful when your subcontractor is profitable

A subcontractor who is profitable is usually a happy subcontractor, and a happy subcontractor will:

  1. Be more likely to treat your project with the importance it deserves, allocating their time and resources when needed.
  2. Be more willing to assist and accommodate the contractor when required.
  3. Want to work for your company again, possibly even giving you a better price than they provide your competitors on your next project, which could give you a competitive advantage.

But a subcontractor who loses money:

  1. May cut people and equipment on the project to save costs, which may jeopardise the project’s safety, quality and schedule.
  2. Could take short cuts to save money which could endanger safety and affect quality.
  3. Might use inferior, cheaper products to minimise their losses.
  4. Often go to any lengths to lodge claims for additional costs and additional time, which if justified will cost the project money. However many might be spurious and merely an attempt to claw back some of the subcontractor’s losses. Yet these claims will still tie-up the contractor’s staff and cost money to evaluate and refute them.
  5. May become bankrupt on the project, meaning you will have to engage another contractor at additional costs and delays to finish the outstanding work. Guaranties and warranties will become worthless putting additional liability on the General Contractor.
  6. Won’t want to price your next project, or will add a premium to their price knowing that you are a difficult customer.

How can you assist your subcontractors?

So why do subcontractors lose money and how can you assist them? Many smaller subcontractors aren’t astute as they should be, or don’t have the management skills and knowledge that they should. Some subcontractors are working on a number of projects at one time, trying to share their time and resources between their different projects and clients. They often don’t have the money for a large number of supervisors or project managers. Some General Contractors are happy to let their subcontractors flounder; only taking action when there’s a major problem.  However, I suggest managing your subcontractors and providing help and guidance when needed.

How can you help your subcontractors?

  1. Pay them on time and don’t unduly hold money due to them.
  2. If the subcontractor is producing poor quality work which has to be redone they will incur additional costs not allowed for. Point out poor work as soon as it’s noticed and ensure that the subcontractor has the appropriate quality systems in place before starting the project.
  3. Many subcontractors don’t have suitable staff or supervision on the project causing them to manage their works inefficiently, resulting in poor productivity and planning. Assist subcontractors where possible to plan and manage their contracts as efficiently and productively as possible. This doesn’t mean doing the work yourself, but it may mean calling them and pointing out potential problems which they haven’t seen.
  4. Subcontractors often lose money when they don’t have access to their work area due to the general contractor, or another subcontractor, blocking their work area and delaying them. Many subcontractors will, of course, claim for these delays. Ensure that your subcontractors aren’t held up by your work, other contractors or the customer.
  5. Adjudicate subcontractor prices thoroughly to ensure that they understand the project, their price is market related and that they have the skills and resources to undertake the project.
  6. Another reason for not making money may be because they aren’t maximizing their revenue, although, of course, you don’t want them doing this at your cost. Often though, subcontractors end up performing additional work for the customer due to an increase of scope, or a change in the specifications, resulting in additional or more expensive items being required. If you’re aware of any reason for the subcontractor to request additional monies from the customer you should, in general, be encouraging your subcontractor to claim for these, and if necessary even assist them. If the claims are successful the subcontractor not only earns more revenue, resulting in them making money, making them happier, but the general contractor usually earns additional profit as a result of their mark-up on the subcontractor’s claim.

It should be remembered that many subcontractors may be unsophisticated in their approach to claims and may require assistance to not only maximize the claim against the customer, but also to present it in such a way that it’s not refuted by the customer. By assisting the subcontractor you could also have some control in ensuring the claim is presented in such a way that your company, and project, doesn’t risk being in the position where it has to pay monies that should be covered by your customer.

When your subcontractor is in trouble

However some subcontractors will never make money on a project, due to their incompetence, or a contract price that is too low. I certainly don’t advocate you pay them money which isn’t due to them. Still, it’s important the Project Manager is aware of problems a subcontractor may have, particularly if they are losing money on the project. They can then take mitigating actions which could include:

  1. Removing tasks from the subcontractor’s scope to ensure that work proceeds according to schedule.
  2. Assisting the subcontractor where possible, and when unnecessary costs will not be incurred.
  3. Preparing a replacement contractor (this may take the form of getting quotations for the outstanding work and checking on the availability of other subcontractors), to ensure minimal time is lost should it become necessary to appoint another subcontractor.
  4. Ensuring the subcontractor completes all work they have started so, should they leave the project, there aren’t numerous unfinished tasks which will be difficult and costly to complete.
  5. Safeguarding that major items of equipment and material already procured by the subcontractor are installed as soon as possible.
  6. Expediting the delivery of long-lead items supplied by the subcontractor.
  7. Checking that the subcontractor hasn’t been overpaid, the retention money held is correct, and the bonds and sureties are valid.
  8. Understanding your contractual rights so that if you terminate the contract it is done correctly.

Conclusion

Construction requires teamwork. Often subcontractors are vital to the success of a project. A delay or poor quality caused by a subcontractor usually impacts the project as a whole and negatively impacts the General Contractor’s reputation. Proper selection of subcontractors including correctly adjudicating their quotation will help minimize problems. Managing subcontractors properly is essential.