What is construction subcontractor management?
According to the Design Buildings wiki, contracting is the activity of constructing a building in accordance with a pre-agreed set of requirements. We can extend this description to construction subcontractor management as well. So that the main contractor is the one who is contracted by the client and also subcontracts part of the construction to subcontractors.
Construction subcontractor management is the process of working with specialized companies that implement a specific part of a construction project. It is an alternative to hiring employees for every task of a construction project that needs to be done.
The process of subcontractor management lasts through the lifecycle of the whole construction project. It actually starts before the project starts and ends after the project ends. It needs a lot of effort to make sure 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 there are issues with quality or work is not according to specifications, the general contractor has to resolve the issues. The general contractor has different safety nets in place, but you need to follow them to be sure 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 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 are highly dependent 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.
The cost-plus method is also used in the case when the requirements of the project are unknown. The subcontractor will define a profit margin or markup that will be applied to all costs – labor and material – that the company incurred.
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 as they are 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 labor and materials are separately defined by the subcontractor.
This can be helpful when comparing subcontractor bids to potentially bargain with the subcontractors. This might help the general contractor get a better price for either the materials or the labor.
Stages of subcontractor management
For simplicity, we have defined subcontractor management to be in four different phases. You can break the stages of subcontract management down into more detail if the project is complex. You can make it more detailed because of either a long duration or just the pure scale of the project.
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.
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.
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.
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 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 look at different conditions to make sure they are suitable for the job. Many of them can be looked up from 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”. This means that going with the lowest price might increase maintenance costs or cause you to redo 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 you are finding running tenders or comparing bids difficult and time-consuming, then maybe a bidding software made for construction can make your life a lot easier. You just 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 important since they define how to deal with disputes if they should occur during the project.
The document should include the business information of both parties. 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 that are done or at least the unit prices. If there are retentions or some special conditions, then they should also be included in the contract document.
You also need to define payment deadlines and other payment terms to make the payments correctly. The document can also include the progress payment frequency – monthly, bi-weekly, etc.
Depending on the contract type, it probably should also include a schedule or some form of deadlines for deliverables. Also, 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 work on the project has started, you need to follow the fulfillment of the subcontract. We have written a guide on construction payment applications that explains the process in detail.
Learn from working with the subcontractor
When the contract has come to an end, be sure to write down the experience with the subcontractor 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 the experience was.
You can use a subcontractor management system where you can see the fulfilled contracts together with the ratings to the subcontractors. This helps you weed out problematic subcontractors so that you can avoid working with them in the future.
You should also keep track of the change orders that happened due to estimation errors. This kind of information will be valuable for estimation for your next projects and should not be ignored.
Avoid common mistakes
Make sure you look enough into the background of your subcontractor to see that they take safety seriously and that their finances are in order.
You also need to either 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.
An additional mistake is not managing change orders (or variations) in enough detail. 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 need a lot of manual work to verify. The background checks, bidding process, subcontract preparation, and progress reports all need a lot of manual work. You need to collect data from different data sources and put together various reports to make sure they are matching.
Most of the challenges are actually easily automatable if a suitable tool is used. There are various tools to manage contacts, run your bidding, and do the 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 a lot of upsides. When you mitigate the risks of using subcontractors by using supporting tools, then you get the good sides of subcontracting. And you also get rid of most of the bad sides of subcontracting. All of the additional communication and number crunching can be automated and financial risks mitigated.
- Choose the right type of subcontract (unit price, fixed cost, etc)
- Have enough subcontractors to send the bid request to
- Prepare you 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
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- See tähendab projektijuhtidele ja raamatupidajatele topelttööd.
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