A 2020 survey of contractors conducted by Levelset and Fieldwire found that 28% of respondents said they always finish projects by their deadline and within the established budget.
In the construction industry, there are lots of opportunities for work to slide off course. While collaborating with subcontractors is indispensable, there are many potential obstacles that prime contractors could experience throughout the course of a project. In addition, prime contractors must protect themselves against the potential for subcontractor default, and they have to ensure that their construction insurance policies clearly reflect the manner in which coverage is determined.
Common Issues When Working With a Subcontractor
A carefully considered and thoughtfully executed construction subcontractor agreement can help head off many of the potential problems that could come from working with a subcontractor. Prime contractors would also be wise to thoroughly vet and continuously monitor subcontractors to ensure they stay on track. Early intervention can help prevent the emergence of large-scale problems down the line that could jeopardize the success of the entire project.
Documenting Changes and Keeping Subcontractors in the Loop
Inevitably, construction projects will often involve some amount of alteration to the initially agreed-upon work order, as well as processes and methods of completion. Too often, top-level changes are communicated to the prime contractor, and though they may be shared with the subcontractor as well, these new directives aren’t written down. As a result, downstream work needs are not altered accordingly, and problems can arise. If changes aren’t documented, this can also present an issue when a construction insurance claim is filed.
Prime contractors must carefully document all changes and clearly note how project alterations were communicated to the subcontractor.
Failure to Communicate Down the Chain
Occasionally, prime contractors will not deliver a complete picture of potential changes to the subcontractor, or they might leave out the rationale behind certain alterations.
Contractors would be wise to ensure that there are clear and open lines of communication flowing in both directions. By establishing a comprehensive feedback loop with the subcontractor, it will be easy to discern if a miscommunication occurred, and the prime contractor can take steps to address the issue.
The Subcontractor Only Gets a Narrow Window Into the Project
Frequently, for subcontractors to successfully complete their work, they’ll need a broad view into the overall scope of the project, beyond just the tasks they’re responsible for completing. Without understanding how their activities connect to the overall project, they may not be able to bring their full expertise to bear as they execute the order, and oversights can present future obstacles for the prime contractor.
Prime contractors should share as much information as they can in the construction subcontractor agreement while maintaining privacy and confidentiality as needed.
Time and Pricing Changes
Just as it’s important for prime contractors to keep subcontractors apprised of shifting project needs, subcontractors should notify the prime contractor promptly — ideally in advance — if they’re experiencing difficulties with certain time frames or supplier interactions.
If a prime contractor can step in earlier to help address these issues, they can often prevent concerns from snowballing and impacting the overall success of the project.
Subcontractors That Operate Outside Their Competencies
Occasionally, a subcontractor will be taken on for a task that they’re not in a position to complete, whether due to financial constraints or because they’re not able to scale their operation in time to meet the scope of the challenge.
It’s important to prequalify subcontractors before initiating a construction subcontractor agreement and to have construction insurance in place that adequately addresses any risk assumed by working with the subcontractor. If it becomes clear that the subcontractor is struggling with the demands of the job, the prime contractor should create a documented strategy for providing supplemental work.
What Kind of Coverage Prevents Subcontractor Defaults?
Various forms of construction insurance and bonding can help keep the prime contractor from experiencing extra financial strain due to subcontractor defaults. A 2016 article in Surety Bond Quarterly documented the similarities and differences between the two principal forms of coverage in this area: subcontractor default insurance and subcontractor surety bonds.
Subcontractor Default Insurance
Subcontractor default insurance (SDI) is a two-party policy purchased by the prime contractor and underwritten by an outside insurance company, possibly along with other construction insurance coverage. The onus is placed on the prime contractor to conduct a robust and sophisticated prequalification screening. While this method can produce some cost savings, the prime contractor must be capable of conducting their due diligence during the prequalification stage, and SDI will not meet certain regulatory requirements that mandate bonding.
In contrast to construction insurance, subcontractor bonds are provided by surety companies to prime contractors upon subcontractor award. Bonds are three-party agreements, and thorough prequalification is conducted by the surety. The three main types of bonds are those used for performance, payment and bids. Subcontractor bonds also have a longer history, while SDI is something that emerged largely toward the end of the 20th century.
What Happens When a Subcontractor Incurs a Claim?
Construction insurance can be a complicated matter, and determining what happens when a claim originates from the actions of a subcontractor depends heavily on the circumstances surrounding the situation. In general, this is another reason to make sure that a construction subcontractor agreement is carefully developed and scrupulously maintained. The prime contractor should be able to verify in writing which parties were responsible for what work. It’s also important to make sure that construction insurance policies clearly state how claims will be handled when there is an ongoing and evolving work relationship between the prime contractor and a subcontractor.