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Essentials of Subcontractor Management

Each project has its own unique characteristics however; a common thread between most of them is the presence of subcontractors. Given today’s construction economy, risk environment and competitive subcontractor pricing, general contractors are self performing less of the contract’s scope of work. Therefore, on most construction projects you’ll find one or more subcontractors that are integral, if not critical, to the success of the project. As such, if general contractors are to complete their work successfully, not only must they properly price and manage their own work, but they must be as diligent when it comes to managing their subcontractors. 

Based upon our Construction Engineering Service Group’s experience over the years on projects around the country, we have seen management approaches that are common to successful Subcontractor Management. This paper is intended for use as a tool that can be used in conjunction with other analytical information and data that is available to the contractor. 

Subcontractor management is critical to the success of any construction project and involves five (5) key phases of oversight which are PreQualification, Bid Phase, Proposal Review/Analysis, Subcontract Preparation, and the Construction Phase. 

1. Pre-Qualification Phase

Subcontractor management should begin well before the start of construction with the pre-qualification of potential subcontractors. 

The American Institute of Architects ( AIA) and Consensus Docs, as an example, provide forms often used for this purpose. This process can provide a wealth of information regarding each subcontracting firm, Including company history, licensing, work experience, safety, references, surety credit and financials. 

Other factors to consider are whether or not your firm has previous experience with the subcontractor. Who were the personnel involved from each firm? How were the relationships and what, if any, issues arose between your firm and the subcontractors? Was there any litigation involved or are there any ongoing legal issues? Did the subcontractor properly manage the project? Was there any issue with respect to its payment, or payment to its suppliers? Whether the subcontractor has had prior work experience with the project’s Owner and/ or Architect / Engineer and whether such relationship was a positive one is good information to have. In addition, has the subcontractor worked in the location before and will it be able to provide sufficient qualified manpower to meet the project schedule? 

We recommend that the contractor maintain a database which encompasses all of the above information. This can be done in different ways; Including anything from a classic paper filing / record keeping system to an internal computerized subcontractor management system. In addition, there are web-based systems which are available and becoming more popular today. Ideally, the system will provide notifications if concerns are encountered on any project. Regardless of the system used, it needs to be easily accessible to its estimating and project teams and be maintained and updated on a regular basis. 

2. Bidding Phase

The next step in subcontractor management is the bid process. The contractor must ensure that the documents which are provided to a subcontractor Include all of the necessary information regarding the project in order to eliminate any questions regarding the subcontractor’s scope of work. Every construction project is different; however bid documents and the subcontracts should contain certain essential elements. 

The bid documents must be adequately detailed, clear, concise and contain all documents necessary to define the “scope of work.” This begins with inclusion of the documents which have previously been provided to the contractor by the Project Owner, Architect or Engineer. These typically include Instructions to Bidders, Special or Supplementary Conditions, General Conditions, Specifications, Drawings, Addenda, etc. All of these, along with related documents, combine to become the subcontractor’s “contract documents.” 

The scope of work should define specifically which specification section(s), including inclusions and exclusions, the subcontractor shall be responsible to complete. Inclusions and exclusions complement the drawings and specifications and serve to further define and clarify the scope of work. Inclusions should be limited to only items of work that are in addition to that shown or specified, or used to carefully clarify items of work which are shown or specified. Exclusions should note only which items of work contained in the drawings and specifications are not included in the scope of work. It is important to remember that often “less is more,” and in the case of inclusions and exclusions language should be limited where and when possible. 

The bid documents should also include the subcontract form to be used which is critical to ensure that the bidder or subcontractor is fully aware of all contract requirements that it will be expected to meet. 

During the bid phase the contractor may receive questions from the bidders. It is important that such questions be both received and answered in writing, and copied to all bidders. The same is also true for the issuance of any Addenda. This will ensure that all bidders are basing their estimates on the same information. Lastly, care must be taken by the contractor to determine whether or not the subcontractor bid documents include not only the drawings and specifications which pertain to the bidders’ specific trade, but also all other drawings and specifications. Quite often there is a clause in both the Owner’s contract form as well as the subcontract form which states that the complete set of drawings, specifications and other contract documents are complementary for purposes of defining project requirements. The contractor / subcontractor cannot rely only upon the drawings and specifications associated with their specific trade as references may be included to other plans or general notes which affect their scope of work. 

3. Proposal Phase

The next phase of subcontractor management begins with receipt of the bids and a determination of which is the lowest responsible bid. “Responsible” is defined as a bid which meets all of the bidding requirements, including the required scope of work, addenda, schedule, qualifications, etc. 

A scope review meeting should be conducted with the selected bidder. Some items to review prior to or during this meeting:

– The bidder’s pricing compared to the other bidders i.e., does it appear to be reasonably within range. 

What the reasons are for any significant differences in price. 

Detailed discussion regarding the scope of work in order to gain assurance that the bidder has included all of the required work in its bid.

– Review and understanding of any qualifications, terms and conditions referenced in the bidder’s proposal ( don’t ever assume that these conditions are boilerplate).

– Discussion of any other critical work-related details and requirements to determine if the bidder fully understands all aspects.

– Understanding of the project schedule and their ability to adequately man the project and expedite key materials.

Questions and/or updates concerning the bidder’s pre-qualification information.

4. Subcontract Phase

It is not the intent of this paper to discuss every section of subcontract forms. Although subcontract forms vary, there are certain essential items which should be considered and/or incorporated into every subcontract, especially as it relates to subcontract management. These are as follows;

Scope of Work Once the scope review meeting ( s) and any resultant final pricing adjustments and clarifications have been completed, the subcontract is prepared by the contractor and provided to the bidder for execution. One of the critical subcontract terms is the scope of work which needs to be clearly and concisely defined in the subcontract. As with the bid documents, the subcontract should define specifically which specification section ( s), including inclusions and exclusions, the subcontractor shall be responsible to complete.

Flow-Down Provision – The subcontract shouid include a “flowdown” provision which creates a responsibility by the subcontractor to provide to the contractor any and all requirements which the contractor must also provide to the owner. 

Proposal Reference – The subcontract should avoid including a copy of the bidder’s proposal or describing it as a “Reference.” Doing so can result in possible conflicts, and/or disputes, between the language in the proposal versus the language included in the subcontract scope of work. It is highly recommended that all scope of work language be contained solely within the subcontract form. 

Payments – The subcontract should clearly state the requirements for payment, including any applicable “pay-if-paid” clauses which are contained within the contractor’s contract with the owner. The required payment application form, including schedule of values and any other forms or submittals which must be included with each payment application prior to its approval, should be referenced.

Insurance – Typically the subcontractor’s insurance requirements must be at least equal to the Owner’s contractual requirements. In addition, be certain of the requirements for an Owner Controlled Insurance Program (OCIP) and ensure that the subcontract contains all necessary language.

Schedules – The subcontract requirements for project schedule submissions and related coordination and responsibilities must be clearly outlined.

Liquidated and/or actual damages – Owner contract clauses regarding liquidated and/or actual damages can be referenced in the subcontract form.

Performance and Payment Bonds – Depending on the size and critical nature of the work, serious consideration should be given as to whether performance and payment bonds should be required.

5. Construction Phase

Having all of the above recommendations in place will increase the chances that subcontractor management during the construction phase will proceed smoothly. But as we know this is not always the case, and it is imperative that certain processes and procedures are in place and maintained. 

a. Safety/QAQC – First and foremost is safety. The contractor must ensure that the subcontractor remains in full compliance with all applicable laws and regulations, as well as any special contract and project-specific requirements. The contractor, and thus the subcontractors, may be required to submit safety plans for approval. The subcontractor must also have current insurance policies in place which meet contract requirements.

b. Quality Assurance / Quality Control (QA/QC) – programs and adherence to the project schedule are two of the most important aspects of a successful construction project. The subcontract may need to provide the requirement for a QA/QC plan submittal from each subcontractor or a formal acceptance of and adherence to the contractor’s approved plan.

c. Schedule/Manpower – The subcontractor must provide adequate manpower in order to meet schedule requirements. This should be managed by the receipt of daily manpower and activity reports for the comparison to the projected manpower necessary to meet scheduled activities. The subcontractor must maintain qualified, and an adequate number of, project staff. Key project staff must be available and attend any required progress, coordination and schedule meetings, including meetings between trades for purposes of coordination of work and schedules. 

In a situation where a subcontractor does not provide an adequate workforce, the contractor may be faced with having to supplement that workforce. In that event, the contractor must be careful to follow all steps required by the subcontract agreement. This typically includes certain notice requirements and other documentation prior to supplementing the subcontractor’s workforce. Proper documentation is also required in order to document associated costs and process a backcharge to the subcontractor’s account. 

Many times we have found that with everything going on at a project site during construction, the contractor may not take the time to issue required notices or to document costs. Contractors need to be diligent in their notice provisions and record keeping in order to avoid disputes. A little time spent on notice and cost accounting at the onset of the event can save time, costs and resources during contract closeout. 

Another critical element of subcontract management, to avoid schedule impacts, involves the subcontractor’s adherence to submittal requirements. Lack of complete and timely submission 

of shop drawings, catalog cuts, samples, mockups, coordination drawings and corresponding material deliveries can negatively impact delivery dates and the overall project schedule. Project schedules should dearly delineate all major and critical submittal and material delivery requirements. 

Adherence to the above-mentioned schedule and manpower management requirements becomes especially important in the event of a subcontractor default. 

d. Payment – The subcontractor payment process is an important and effective management tool. As such, the payment process must be managed in accordance with contract requirements and local and state laws.

The contractor and subcontractor must agree on the payment format to be utilized, which is typically addressed in the subcontract agreement. It is recommended that the format include a schedule of values which must be approved by the contractor prior to the first payment being issued. The schedule of values must be sufficiently detailed in order to pay the contractor only for the work it has accomplished as well as to serve as another form to document the progress of work. A schedule of values is typically utilized on building projects, whereas on roadwork and certain civil projects quantity estimates and tracking thereof essentially takes its place. It is very important throughout the construction phase that the contractor takes precautions to ensure subcontractors do not get ahead of the contractor, as it relates to billings. Time and time again, we have seen this as a reoccurring problem on projects that get into financial distress. Contractors can avoid this pitfall by ensuring onsite project management staff independently maintain careful records of subcontractors’ work-in-place. 

Critical to the payment process is to take all reasonable steps to ensure that the subcontractor has paid his subs and suppliers. The contractor should be in receipt of proof that the subcontractor meets all insurance requirements as well as performance and payment bond requirements. Releases and waivers of lien for previous payments must be received prior to any payments, including the final release and waiver of lien prior to final payment. In addition, prior to final payment, the subcontractor must have completed all work to the satisfaction of the contractor and the Owner, including punchlist and submission or completion of all close-out requirements (warranties, guarantees, as-builts, attic stock, training, etc.). Likewise, other reports such as certified payrolls and MBE/WBE reports may be a prerequisite to payment. 

In conclusion, subcontractor management is critical to a successful project. By following the above five key phases of oversight, Travelers Bond’s construction surety accounts will find themselves in a much better position to ensure this outcome .

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