Risk management is essential to a successful project. What could be riskier than hiring a new, unfamiliar contractor or subcontractor? One bad egg could affect the project schedule, the quality of performance, project safety, and it could even determine whether payment disputes will occur. Establishing a prequalification process can help contractors, subs, and suppliers minimizes risk.
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Prequalifying contractors and vendors is incredibly important
Before hiring someone, or taking on a job, it’s important to have a good idea of the character and capacity on the other side of your contract. For many contractors and project managers, the prequalification process is simple: It’s all about who they know. They just work with the contractors and subs they’re comfortable and familiar with! The same is true for subs and suppliers. They’re more inclined to work with customers who have a history of treating them right.
But what if the usual suspects aren’t available? Or, what if you’re trying to grow your business? How can you be sure that the companies you’re working with know what they’re doing and don’t stir up trouble? That’s where prequalification comes in.
What do you Look for During the Prequalification Process?
Prequalifying a contractor or supplier is all about gathering information. When sending a request for qualifications, you should have a checklist of the different characteristics you are looking for in a contractor, sub, or supplier. This list can include a number of different factors, but the big 3 are business information, financial stability, and safety record.
This is the baseline of where to start when prequalifying contractors. You should know if there are any problematic officers, shareholders, partners and any other stakeholders involved in their business. This includes any parent, affiliate or subsidiary companies, as well as any alias company names that the business may operate under.
Perhaps most importantly: if their work requires licensure, check to see if their business is licensed. Most states (including Arizona, California, Florida, and Texas) make license searches incredibly easy. If you know your customer, sub, or vendor needs some form of licensure, it’s important to ask about it and then double-check on the back end. Trust, but verify.
Finally, it might be a good idea to take a look at their reviews with: the Better Business Bureau, Angie’s List, Google, Facebook, and elsewhere online. If there have been past problems with a company, they’ll often show up online. It can help to request some work reference letters, too. These could be from past customers or vendors to get an idea of how they operate on a day-to-day basis, and it will show if there’s a history of disputes or litigation.
This is another important aspect of protecting the project and your business. It may not seem as important as safety, but it shouldn’t be overlooked, either. Request some information on the past job history, including their past few contracts and the size of the largest contract they performed.
Some questions worth asking might be:
- Has this contractor ever filed for bankruptcy?
- What is their expected annual revenue volume?
- How large is their current workforce?
- Do they have a work backlog?
- Do they have the capacity for this job?
Having a clear picture of a subcontractor’s finances can help you assess the amount of risk you may be taking by hiring them.
Everyone on a construction project, from the owner down to the smallest material supplier, wants payments to flow smoothly. The property owner wants to make sure subcontractors and suppliers get paid for the work they do. Smooth payments help to avoid mechanics liens or bond claims. And the GC, subs, and suppliers want to get paid on time!
If you’re considering working with a new construction company, it’s important to look at their payment practices over time. If a contractor has a history of slow payments, lien filings, or other payment disputes, do you really want to work with them? I’m guessing you’d much rather work with the contractor with a history of on-time payments; the builder who gets raving reviews from the subs and suppliers they work with.
There are a few different ways to look into a construction business’s payment history. If they’re large and well-established, you can check the GC or property owner’s credit through a reporting agency like Dun & Bradstreet.
An easier option: Research payment history, reviews, and ratings on their Contractor Payment Profile. Look up their track record of payments, including lien filings or slow payments that subs and suppliers have warned them about. Read what their past customers and vendors have to say about their payment practices. You can filter contractors by location, size, and payment speed.
Safety Statistics & Procedures
This is another big one! Safety concerns should be one of your top priorities when hiring contractors. One of the best measures of a company’s safety track record is their EMR or (experience modification rating). This is a number of insurance companies use to gauge not only the past costs of injuries but also the chances of any future risk. The lower the EMR (industry standard is 1.0) the lower their worker’s comp premiums will be.
This information can be obtained by submitting a signed Letter of Authority to the National Council on Compensation Insurance (NCCI). The NCCI will provide you with their current rating, past rating, and a risk history report of the past 5 payroll years. You should also look into their safety and OSHA 300 log record-keeping history. Any previous compliance issues should be a red flag.
Those are just a few important considerations when deciding who to hire. Depending on the size and complexity of your project, the amount of information you request will vary. Ultimately, having a sound, methodical evaluation process before signing a contract will help identify, analyze, and potentially eliminate any contractors or subs that could cause problems to your project or your business. Pre-qualifying can have a significant impact on time and quality of performance. Knowing who you are in business with can prove the difference between a project’s success or failure!
Establishing a Prequalification Procedure
The answer to all of these questions is contractor prequalification (and, of course, subcontractor and supplier prequalification). The pre-assessment of potential contractors and subs can occur at different points.
This means sending requests for qualifications before accepting any bids and restricting bidders to only a group of pre-approved contractors subs. Through a pure prequalification process, the party reviewing bids can ensure that every bid was submitted by someone who’s been vetted. Obviously, this limits the pool of potential of contractors and subs, and that might affect how competitively priced bids will be. The tradeoff, though, is that the risk of hiring the wrong business is minimized – as long as the contractor prequalification process is sound.
Prequalifying at Bidding Stage
Another method is to have the requested information sent along with the actual bids themselves. When a contractor or subcontractor’s qualifications are reviewed at the bidding stage, a contractor will likely have more bids to choose from. Plus, this might give a better chance to evaluate whether the risk level associated with a given subcontractor would be worth the bid they’ve placed.
Reviewing Qualifications is an Ongoing Process
Keep in mind, though, contractor or subcontractor prequalification before the job isn’t enough. Rather, qualification should be an ongoing process. Even the most qualified contractors or subs can run into risks and liabilities. A useful practice is to periodically “re-qualify” or perform evaluations. This is mutually beneficial because it maintains peace of mind from the owner/management side but also forces the contractors and subcontractors to regularly assess their own financial liabilities.
Advantages of Prequalifying Bidders
Benefit to Contractors Qualifying Bidders
Using a pre-qualification process can help owners assess the interest generated by the project among qualified firms. If there’s little interest, adjustments may be necessary to make the project more attractive. This also helps reduce the time and work involved when evaluating bidders. The weeding out process helps to decrease the volume of bids and problems associated with low bids from unqualified contractors. Plus, it increases the odds of getting the best contractor at the right price.
Benefit to the Bidders Themselves
Pre-qualification procedures help simplify the bidding process for both qualified and unqualified subcontractors. Those who are under-qualified can evaluate whether submitting a bid is even worthwhile. Or, if they still want to pursue the project, they may consider forming a joint venture with some other firm to increase their chances of success.
For those contractors and subs who are already qualified, they’ll have an advantage on under-qualified firms to be weeded out in the bidding process – which could encourage more qualified firms to compete. They’ll that some unqualified business won’t be able to swoop in and undercut their bid. Plus, the bids will also be more competitive since bidders know they’re only competing against those who meet the minimum level of competence required.
Advantages of Contractor Prequalification
Benefit for Subs and Suppliers
Working with a new customer is scary! It takes a long time to get paid in construction. Many businesses build relationships and then try to work within the circles their comfortable with. It’s not a bad idea, honestly – but there are only so many jobs available with the same old customers and vendors.
Sometimes, you’ll need to step out of your circle to keep the cash flowing. And, for a business that wants to grow, working with new customers is mandatory. Contractor prequalification is a great way to assess the risk of taking on a new project outside of your comfort zone.
Benefit for Customers
Turning down a job where you’re not comfortable with the customer helps them, too. Maybe they’re using payment terms you know you wouldn’t be happy with. Maybe a look into their recent reviews shows you’ve got a different style and that you’d butt heads from the jump.
If you’d benefit from turning down a customer, chances are, they might benefit from not working with you, too. It’s not (necessarily) a condemnation of either side – some businesses just don’t operate in a way that compliments some others.