The more you know about a potential construction project, the better prepared you’ll be to take it on. As the old adage goes, “Knowledge is power.” This is especially true when you’re considering a project with a new General Contractor. It’s crucial to do some homework and prequalify a GC. If you’re bidding on a new project, you want to make sure the GC has the chops to manage a successful project, collect payment from the property owner, and distribute funds on time. If the General Contractor has a history of red flags – payment disputes, poor reviews, or predatory contract language – make sure you are protecting your interests, and minimizing risk.
The 5-Step Process for Prequalifying a General Contractor
Prequalifying a General Contractor is a critical first step to help ensure your project runs smoothly. Following the prequalification process will help you understand whether or not they can complete the job — and make sure everyone gets paid on time.
Here are 5 steps to take when prequalifying a General Contractor before a new project.
1. Review their payment history on past projects
Payment disputes are a clear red flag for both subcontractors and property owners. Everybody wants to avoid mechanics lien or bond claims. They slow down the project, they strangle cashflow, and end up costing everyone a lot of time and money.
Levelset’s Contractor Payment Profiles makes prequalifying a General Contractor simple. The platform makes information about payment practices publicly available, and uses a variety of data sources to calculate the company’s payment speed. A contractor’s profile will show a record of liens or legal actions filed against the firm. This can be an excellent indicator of whether or not this venture is worth it for you.
Take a look at the GC’s history of disputes, both actively and historically, and dig into the details. Keep in mind that conflicts and disputes occur on jobs for a number of reasons.
While the General Contractor may not always cause a payment dispute, their role is to help facilitate the payments and their smooth distribution. Issues at this stage in several projects might give a clearer picture of the GC’s practices.
Keep in mind that the sheer number of disputes won’t always tell the entire story. A history including 10-15 disputes may seem like a dealbreaker, but over the course of 500 jobs, that’s a pretty good track record. Three disputes may seem like a safe number to take a gamble on, but not so much when you consider the GC has only completed ten jobs.
For example, if you’re looking into working with ABM Construction in Benicia, CA, their profile shows that they have a fast payment speed. It also shows that out of 67 recent jobs, subcontractors were paid on time on 61 of them. That’s a good track record. Property owners who hire ABM are more likely to avoid lien claims on their property, while subcontractors can expect fewer payment delays.
2. Get a copy of the GC’s credit history
Checking the GC’s credit history can also give subcontractors important insight that helps with prequalifying a General Contractor. A GC’s credit score will highlight their ability to secure loans and their timeliness in making payments on them. It also provides a general overview of how responsible they are. As they say, the way you do one thing is the way you do everything.
There are three credit bureaus that owners and subs can contact to purchase a credit report: Dun and Bradstreet, Experian Commercial, and Cortera. They publish reports contain information about past liens or disputes. They also provide information on the credit lines available from the company’s vendors.
You can also try asking the GC for a copy of their credit report. Their responsiveness or willingness to provide a credit report might tip their hand. If they’re willing to fork over a report quickly, it’s probably because they have nothing to hide. Conversely, a contractor that’s unwilling to show you their credit report or history probably doesn’t want you to be aware of some skeletons they have in their closet.
You shouldn’t base your decision based on the availability of a credit report, however. While this is a helpful tool, it can’t be your only tactic. The truth is that many reputable companies won’t even have a credit report. Credit reporting has a lot to do with the company’s size and capacity. Until a company reaches a particular threshold, most of the credit history is based on the owner’s personal credit.
You can try requesting a personal credit report from the owner, but you should expect some pushback. That’s not necessarily a red flag in this case. A personal credit report for a project is a pretty big ask, but those GC’s willing to provide one might be worth shortlisting.
3. Get feedback from other subcontractors
There’s a lot of value in getting firsthand opinions on a General Contractor’s reputation. Subcontractors or owners that have worked with the GC before can give you an inside look into their payment practices, their jobsite management skills, and the likelihood of disputes. Past clients will also give you a better sense overall of how they treat the companies and laborers that work for them.
Reach out to a contractor or owner that has worked with this particular GC for a firsthand narrative of what they’re like to work with. Ask them to tell you about the GC’s payment process, how easy it was to get paid, or what types of challenges they faced. You’ll be getting valuable information about payment issues and how they were resolved directly from the horse’s mouth.
A firm’s Contractor Payment Profile shows reviews from other subcontractors or suppliers that provide a lot of insight. In the case for American Asphalt & Concrete, Inc, one of their subs left a review that they’re a “great paying customer.” Likewise, one of Orlando Contracting Tahoe’s subs says the company makes “accurate and on time payments.”
As with every step in the prequalification process, take individual reviews and other data points with a grain of salt. While client reviews can help round out the picture of a GC’s payment practices, they’re less reliable when there’s a limited number. A subcontractor who’s close friends with the GC may be the one behind a glowing review. And one with a personal bone to pick may be behind a bad rating.
4. Payment process
If you’d like to know more about how a GC makes payments, just ask. A contractor who requires subs & suppliers to send preliminary notices, collects conditional lien waivers, and documents progress thoroughly is on top of their game. Most General Contractors have systems they follow and specific documents that they use. They’re more than likely to be happy to show you. You’ll be able to judge for yourself how organized and efficient their process is.
These documents will also provide you with some insight into how well you’ll work together. If this particular GC hasn’t updated their practices since the ’70s, that might be a red flag. This could mean their trusty, old-fashioned system may be inefficient and slow. A contractor with updated processes, technology, and documents will be easier to incorporate into your business plan or project. This leads to a more seamless payment process.
5. Dig into their subcontracts
One of the best insights you can have into a GC’s style and reputation is to look at the construction contracts they use. Ask them to provide a subcontract from a previous job for you to review. Look out for contract clauses that are telltale signs of trouble while you review it. Any predatory language, unfair payment terms, or unrealistic expectations are signs that your project could go south in a hurry.
Construction contracts that set a contentious tone will more than likely continue to be challenging throughout the life of the project. The contract stage is the time for both a General Contractor and a sub to put their best foot forward and strike a fair deal that benefits both parties. Any red flags in a contract’s language should carry a lot of weight in deciding whether or not to work with that General Contractor.
Should a red flag disqualify a GC?
Prequalifying a General Contractor will likely turn up at least a few red flags – that’s perfectly normal. If a GC’s in business long enough, they’re bound to have a hiccup along the way. The construction business is a difficult one and it’s hard to please everyone. Also, projects rarely go off without a hitch.
A red flag or two in a General Contractor’s history may not be something to immediately disqualify them. If every contractor with a payment issue to their name was barred from submitting bids, there’d be very few projects even getting off of the ground.
Even if there are several red flags, it’s worth considering why. For instance, if a contractor has several liens in their history but they’re all attached to one job, there may be a good reason. Perhaps the owner, lender, or insurance company stopped paying. Maybe the project shut down due to unforeseen circumstances. These are both situations outside of the General Contractor’s control. A few red flags doesn’t necessarily mean that they aren’t trustworthy.
After Prequalifying the GC: Reduce the risk of payment problems
The risk needs to be worth the reward. Jumping into a contract with a GC with a history riddled with project mismanagement or payment problems is ill-advised. However, there are a few ways that you can protect yourself and lessen your risk of payment issues.
Safeguarding for owners
For owners, there are two ways to minimize your risk on a so-so contractor. For one, you can require the GC to secure a payment and/or performance bond. Payment bonds protect the owner from claims against their property. Subs can levy a claim against the bond for non-payment instead of filing a lien against the property. A performance bond protects property owners against poor workmanship or incompetence.
Owners should know that both of these bonds will push the contract price up. It’s important to weigh the risk against the reward. However, if a GC doesn’t pass the prequalifying test with flying colors, their unwillingness or inability to secure these bonds might be a final straw.
Protection for subcontractors
Even the best General Contractor can’t prevent payment problems on every project. Subcontractors will always carry risk of non-payment, even if they’ve worked with a GC for years.
The best way for subcontractors to protect themselves against payment concerns is to follow a strict mechanics lien policy. That doesn’t mean that they should file mechanics liens on every project; far from it! Following the steps in the lien process can actually greatly reduce the need for a mechanics lien claim.
Start by sending a preliminary notice on all your jobs, even if it’s not required in your state. It helps to introduce your company to the paying parties so they know you exist and expect payment. Document all your payment apps and send reminders when they miss their due dates. If the reminders go unanswered, send a notice of intent to lien.
These steps help to avoid filing a mechanics lien and help to speed up the payment process. They also safeguard your right to file a lien if you need to. If the same red flags that you took a risk on start showing up on your job, you can file a mechanics lien to get paid the money contractually owed to you.