What is construction subcontractor management?
According to the Design Buildings wiki, contracting is the activity of constructing a building by a pre-agreed set of requirements. We can extend this description to construction subcontractor management as well. So the main contractor is the one who is contracted by the client and also subcontracts part of the construction to subcontractors.
Construction subcontractor management involves working with specialized companies that implement a specific part of a construction project. It is an alternative to hiring employees for every task that needs to be done.
The process of subcontractor management lasts throughout the lifecycle of the whole construction project. It actually starts before the project starts and ends after the project ends. It takes a lot of effort to ensure that you work with qualified partners. That is because you, as the general contractor, are also responsible for the work that the subcontractors have done.
If quality issues occur or work is not according to specifications, the general contractor must resolve the issues. The general contractor has different safety nets in place, but you need to follow them to ensure that no problems occur.
These issues are not necessarily only due to the subcontractor. Since there is an external party involved in the project, you have to make more effort for communication. All documentation, drawings, etc., have to be clearly provided and defined for the best result. The conditions that the subcontractors offer for completing a job depend on input from the general contractor.
Why work with subcontractors?
Each man is capable of doing one thing well. If he attempts several, he will fail to achieve distinction if any.Plato
Specialization is the key to efficiency and quality. Even though it isn’t quite as black and white in construction as Plato described, it is still very relevant. There are different operational and financial reasons why working with subcontractors makes sense.
Hiring subcontractors is also becoming more and more common since finding and retaining a qualified workforce is becoming increasingly difficult. In addition to that, the quality is usually higher as well since subcontractors can be excellent in one specific job. As opposed to being good or average in most jobs.
Hiring your own team might be viable for smaller projects. But if you are building a skyscraper, it is not realistic to quickly hire thousands of qualified workers right before the project. It is just more efficient to buy it in.
When the project ends you might not need so many people for your other projects. Making it very costly and inefficient to first hire and then fire the workers again. This type of HR effort would need a dedicated HR department to take care of.
There is also the question of quality and progress management. Middle managers will need to manage the employees, control the quality of their work, and compose progress reports. This increases the headcount needed in the company.
Types of subcontracts
Depending on the type of project and subcontracted jobs, different types of contracts should be used. The contract defines the different agreements, deliverables, timelines, and payment conditions of the relationship.
The contract payment type defines who has to provide the materials and who assumes how much of the risk. Different payment types also make sense when the scope of the work is unknown. Or when either party doesn’t want to fix the amount of work that this subcontractor will do.
Unit Price Subcontract
One way of defining unscoped work is the unit price contract. This method does not necessarily define how much is going to be done. It just provides the cost per unit (hour, meters, etc) of work done. The total cost of this type of contract depends on how much work was done at the agreed price.
Unit price subcontracts are often used when the design of the job is not fully defined yet. This can be due to unfinished design or the customer not sure yet how they would like something done.
An additional reason for this type of contract is to be able to spread the same job between multiple subcontractors to finish it faster. If you agree on the quantities that a specific subcontractor will do, it will not be trivial to agree with them to reduce their agreed-upon quantities.
Assuming that there are no design issues that could increase the total price for the general contractor, then this contract is a good balance for both sides regarding risk. The subcontractor can be relatively sure that they didn’t make mistakes in estimations. The same goes for the general contractor. Since there is no risk, there is also a smaller chance to make a profit on both sides.
Lump-sum or Fixed Price Subcontract
Lump-sum contracts are useful if the general contractor is confident in their estimates. The subcontractors will submit bids to a specific quantity and package of jobs. This type of subcontract is a bit easier to compare as well since the total cost of the jobs is provided. It just needs the scope, timelines, and drawings to be accurate before the tender process starts.
In this type of subcontract, the general contractor assumes most of the risk since they give the quantities in the bidding process. If the actually needed quantities are above the contracted amounts, then the subcontract total increases via change orders or variations. Here it is critical to make sure that the change orders are properly kept track of to make sure the cost overruns are not critical.
Depending on the billing agreement to the client, the general contractor may have to assume these costs that went over. Since 9 out of 10 projects go over budget, this may end up a likely and costly mistake.
Cost-plus Subcontract
The cost-plus method is also used when the project’s requirements are unknown. The subcontractor defines a profit margin or markup that is applied to all costs—labor and material—that the company incurs.
This type of contract also reduces the risk of invalid estimations hurting the project outcome. On the other hand, it increases dependency on the subcontractor, who is in charge of finding the best offers.
The costs can end up higher than expected since the subcontractor is not incentivized to find the best prices for materials. Actually, they would rather want to find goods that are as expensive as possible since they are making a percentage of the material costs.
Because of this, the cost-plus model is more commonly used between the owners and the main contractor. And more rarely used between the main contractor and subcontractors.
Time & Materials Subcontract
The time and materials subcontract is similar to the unit price contract, but where the costs are more broken down. Instead of a fixed unit price for a job, the subcontractor defines the labor and materials separately.
This can be helpful when comparing subcontractor bids to bargaining with the subcontractors potentially. This might help the general contractor get a better price for the materials or the labor.
Stages of subcontractor management
For simplicity, we have defined subcontractor management as four different phases. If the project is complex, you can break down the stages of subcontract management into more detail. You can make it more detailed because of either its long duration or its pure scale.
Pre-award stage
In this stage, the general contractor is doing all of the preparation work. This includes specifying the project budget and job packages and also running the tenders to get the bids in.
Award stage
In this stage, the general contractor will define the conditions of the contract and how the subcontractor should fulfill the contract. This includes how and when the progress reporting (progress reports or valuations) should be done. Additionally, you also need to define the retainage amounts and conditions.
Post-award stage
In the post-award stage, the work is ongoing. The subcontractor submits periodical progress reports that you have to pay. Retainages will be held back from the progress reports in this stage as well. These will be released when the project is finished and the warranty period is over.
In addition to that, daily communication and issue-resolving take place. Also, the change orders or variations show up at this stage. These can include changes from the client or also mistakes in original estimates.
This is also the most complicated phase since the project managers, contract managers, and quantity surveyors are busy. They have to verify whether the subcontractor reported amounts are corresponding to the work that has actually been done on-site.
Close-out stage
In this stage, most of the works have already been done and most of the contract amounts are paid out.
When the agreed-upon retainage period is finished and no issues are present, the funds will be released to the subcontractor.
In this stage, it is also good to record the performance of the subcontractor to make subcontractor selection easier in the future. This can include internally rating the subcontractor or storing the financial performance and accuracy.
Finding subcontractors
Finding good subcontractors is not easy. Especially in the current economic state where all of them are flooded with offers and jobs. This means that you should use all means possible to get as many subcontractors as possible in the tender process and then qualify them when their bids are relevant.
There are different ways of finding subcontractors for your projects – ask current or past subcontractors, ask your colleagues in other companies, use social media and online forums, or use an online registry to find newly founded companies.
An additional way to do find them is to put a contact form on your website so that subcontractors can send you a message themselves. You can then go through the messages and mark the contacts down in a place where you can find them later when a relevant tender is happening.
To make sure that you do not lose any contacts and that you can share the contacts between your employees, a subcontractor management system can make life a lot easier.
Getting competitive bids from subcontractors
In addition to sending the bid request out to all relevant subcontractors, you also be specific in what you send out. The more accurate the bid request description and materials are, the more accurate the bid will be. If the information is vague, the subcontractor can make costly assumptions.
When you specify the bid packages in as much detail as possible, it makes comparing possible. If the subcontractors submit bids in the same structure, then you will be easily able to look at the numbers side by side for a simpler comparison.
You should also look at the data of past projects and subcontracts to see what kind of estimation mistakes were made so that you can avoid them this time.
Qualifying your subcontractors
When you have received bids from the subcontractors, you should examine the conditions to ensure they are suitable for the job. Many of them can be found in different registries or by asking around.
The first thing to check is the company experience. What kind of projects have they worked on? Do they have any similar references where you can look at the work yourself or ask for a reference from the previous general contractor they worked with?
An additional thing to check is whether they have any tax debt and whether their public records look good. You also want to make sure that they have no safety citations on their previously done jobs.
Selecting the best bid
There is always more to the best bid than just the price. According to EverythingSupplyChain.com, you should “focus on the lowest total cost of ownership, not the lowest price.” Going with the lowest price might increase maintenance costs or require redoing some of the work.
After you have received the bids in the same “apples to apples” format from all subcontractors and done the due diligence on their background, all you need to do is just make your pick.
If running tenders or comparing bids is difficult and time-consuming, then maybe a bidding software made for construction can make your life a lot easier. You need to prepare the bid package. Sending out requests and collecting the bids in a comparable format is done automatically for you.
Prepare the subcontract documents
When you have found a suitable bid from a company whose financial and safety history looks good, it’s time to draft the contract documents. Written agreement documents are essential since they define how to deal with disputes if they should occur during the project.
The document should include both parties’ business information. This makes it clear between whom the contract is and who is signing the contract from either side.
You also need to define the scope of the jobs done or at least the unit prices. If there are retentions or special conditions, they should also be included in the contract document.
To make the payments correctly, you also need to define payment deadlines and other payment terms. The document can also include the progress payment frequency—monthly, bi-weekly, etc.
Depending on the contract type, it should probably also include a schedule or some form of deadlines for deliverables. You need to define the process for submitting and approving change orders so that no work is done that isn’t approved.
Since most subcontracts are very similar in structure, it makes sense to standardize the process with templates. The template can have variables in the document so that the company info, payment conditions, and scope of work can be automatically replaced. Ideally, one should use a specialized contract management system that does all of this for you.
Monitor delivery of the subcontract
When the project work has started, you need to follow the subcontract fulfillment process. We have written a guide on construction payment applications that explains the process in detail.
Learn from working with the subcontractor
When the contract ends, be sure to write down the subcontractor’s experience in a central place so that when you are looking for a subcontractor for a similar job in the future, you can easily see how it was.
You can use a subcontractor management system to see the fulfilled contracts and the ratings of the subcontractors. This helps you weed out problematic subcontractors to avoid working with them in the future.
You should also keep track of the change orders that resulted from estimation errors. This information will be valuable for estimating your next projects and should not be ignored.
Avoid common mistakes
Make sure you look enough into your subcontractor’s background to see that they take safety seriously and that their finances are in order.
You also need to define the contract scope enough that you can safely manage it as a fixed-price contract. If you can not take the time to define the cost structure in enough detail, go for the unit-priced contracts to reduce risk.
Another mistake is not managing change orders (or variations) sufficiently. If you do not know what has to be done or how much of it has already been done, you will probably overpay the subcontractor. The same goes for tracking the fulfillment of the jobs that were originally agreed on.
Automate as much as possible
Many of the steps mentioned in this guide require extensive manual work to verify. This includes background checks, the bidding process, subcontract preparation, and progress reports. You also need to collect data from different sources and put together various reports to ensure that they match.
Most of the challenges are easily automatable if a suitable tool is used. There are various tools to manage contacts, run your bidding, and do progress reporting. Without these tools that do the work for you, it is possible that managing the process is too complex, and mistakes are easy to come by.
Conclusion – the 10 tips
Building complex projects using subcontractors has some downsides, but it also has many upsides. When you mitigate the risks of using subcontractors by using supporting tools, you get the good sides of subcontracting and eliminate most of the bad sides. All of the additional communication and number crunching can be automated, and financial risks can be mitigated.
- Choose the right type of subcontract (unit price, fixed cost, etc.)
- Have enough subcontractors to send the bid request to
- Prepare your job packages in enough detail for your contract type
- Provide all relevant documents to the subcontractors
- Do safety and financial checks for the subcontractors
- Automate bidding, document preparation, and progress reporting
- Keep track of the change orders
- Do not go for the lowest bid
- Store subcontractor performance for future use
- Store change orders that were estimation mistakes for future use