There’s a common misconception in the construction industry that the entire purpose of prequalification is to avoid subcontractor default. Though subcontractor default can have devastating consequences and is certainly something to mitigate against, thorough prequalification accomplishes so much more than just that. With the right prequalification process, GCs can protect themselves against a wide range of risks, including those much more commonly faced on the job site.
Take project delays, which are all too familiar for the majority of GCs. According to McKinsey, large projects across asset classes typically take 20 percent longer to finish than scheduled. When done properly, continuous prequalification can help prevent delays, incidents, and complications — keeping projects on time and under budget.
1. Financial health can be a predictor of work quality
According to some studies, over half of construction defects can be attributed to human error. A subcontractor’s financial statements don’t just let you know if they have enough capital or liquidity to complete the project; they also indicate whether a subcontractor may have a higher risk of quality issues on the job.
If a subcontractor is currently strapped for cash, they’ll look to do things as cheaply as possible, relying on less qualified labor, inadequate staffing, or poor supervision. These attributes are often cited as signs of subcontractor distress that can be caught on the job site — but continuous prequalification works as a type of preventative care, helping you avoid quality issues long before groundbreak. When you continually collect this information, you’ll have greater insight into a subcontractor’s capabilities at any given point in time.
2. Backlog can affect timeliness
General contractors know that overworked subcontractors can default. Checking their backlog prevents a GC from working with a sub that’s stretched too thin across many projects, which also indicates whether or not they’ll be able to complete the work on schedule and without incident.
Even if they aren’t likely to default, an overextended sub taking on many projects at once may struggle to scale their operations in order to meet the needs of their growth. This could lead to slippage in company standards (from newly untrained supervision), or an inability to deploy capital effectively to keep up with many projects happening simultaneously.
When teams are under the gun and feel the pressure, they tend to make mistakes and cut corners to keep up — a slippery slope that leads to both delays and safety issues on the job site.
3. Safety history tells an important story
The construction industry is well-known for being one of the most dangerous fields to work in: out of every 5,000 private-industry worker fatalities, 20 percent are in construction. Subcontractors that have a history of strong safety performance (i.e. healthy EMR, Recordable Incident Rate, and Days Away / Restricted Transfer Rate) are far less likely to have an incident on their next project.
In addition to the potential harm to workers, a serious accident can cause work to be stopped or delayed and lead to a decrease in productivity due to low morale among your workers. This can put your project, and your company, in huge financial risk due to all the costs associated with the time lost from dealing with an accident.
4. Context = everything
Looking at financial, safety, backlog, insurance, and other subcontractor information through the lens of default prevention can be dangerous. GCs should stop looking for subs that can simply complete the work on paper. Instead, all of this data should be evaluated to understand:
• Which of these bidders is going to perform the best on the job site?
• Which of these subs will dedicate the time, energy, resources, and expertise necessary to complete the project with the least amount of interruptions?
• Which of these subs has the prior project experience applicable to this new job?
Subcontractor selection should go beyond meeting bare minimum requirements and instead focus on choosing the right subcontractor for any given circumstances.
Of course, there’s a caveat to all of this: a continuous subcontractor prequalification process can help GCs avoid more than just subcontractor default, but that isn’t true for all prequalification software, and it’s definitely not always true for homegrown systems.
TradeTapp’s automated risk analysis, mitigation recommendations, and subcontractor benchmarks greatly improve the prequalification process and help GCs protect themselves against a wider range of risk. To stay competitive in today’s construction environment, it’s important to look at the big picture: how can you avoid risk at every turn and ensure your projects are profitable? The answer is continuous prequalification through TradeTapp.