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Subcontractor Compliance

Tuesday - 11/04/2017 13:28
Paperwork. It’s a word I hate and if you look at my desk on some days (ok, most days) you’d see why. But my idea of paperwork just doesn’t hold a candle to what a construction company must deal with every day.
Subcontractor Compliance
One key cause of that paperwork is subcontractor compliance. I recently collaborated, to explore practical ways to reduce subcontractor compliance risk. Starting with this post, I will share that information with you in a multi-part blog series.

It’s easy to see why compliance can sometimes take the back seat.  A contractor’s first priority is to start the job and keep it moving, not worry about whether subs have valid workers’ compensation or liability insurance.

But the rules and regulations are becoming stricter and the financial impact greater for contractors who don’t pay enough attention to subcontractor compliance issues and processes. Consider these factors:

    Government compliance audits in the construction industry are on the rise.

    Auditors now have online access to resources such as the State License Board to determine if subs are properly licensed and insured, catching violations more easily.

    Insurance companies don’t want to pay any more than they have to on claims and are tightening their rules to reduce their own risk.

    Surety agents are looking beyond financials to consider and analyze how well you run your construction business, including how you manage subcontractors and suppliers.

Ignoring the importance of compliance is like driving without a seat belt. Odds are, it isn’t going to make any difference, except for that one time when it does.

I provided four reasons why it’s more important than ever for construction companies to pay attention to subcontractor compliance.  An important first step in assuring compliance is the prequalification of subcontractors.

It also helps evaluate potential subs to ensure they can perform at a level that meets your expectations and reduces the risk of situations that can lead to compliance investigations.

Prequalification can be handled in a number of different ways, including using a prequalification questionnaire, a request for qualifications, or a qualifications statement. No matter which process you use, keep these seven factors in mind:

    Experience: Make sure the subcontractor has the right experience, including volume of work and average job size. Will your jobs be a stretch or a step down for a contractor who just wants to keep a crew busy? Matching the sub’s capabilities to your requirements will help assure your jobs get the resources and attention they deserve.

    Accountability: Understand the subcontractor’s supervisory structure. Find out who runs the business and who manages the workers on the job site. Verify that the sub’s structure supports your needs for prompt decision making, compliance, and issue resolution.

    Business Management: Assure that it is a well-run business. Depending on the job size, consider requesting an audited or reviewed financial statement and look it over carefully for any warning signs. Confirm that the subcontractor has the appropriate bonding capacity and insurance (for certain size jobs, bonding requirements may include performance bonds). Ask whether it has ever declared bankruptcy or worked under a company that has declared bankruptcy.

    Litigation: Check whether the subcontractor has a history of litigation, claims, or conflict resolution. This step is critical to reducing your risk from a compliance perspective.
    Processes: Ask how the sub handles labor time capture and reporting (for certified payroll) as well as other processes that will affect its compliance in areas that put you at risk.

    Safety:  Look into the company’s safety record. What type of safety training programs does it have in place? Has it received any safety awards?

    Reputation: Do a simple Google search to uncover feedback on the company, keeping in mind the credibility of the sources. While an Internet search may provide useful information, don’t forget to also ask for tried-and-true references from other contractors, material suppliers, and banks.

Prequalification doesn’t eliminate the need to regularly monitor subcontractor compliance during the course of the job, but it’s a proactive way to assure that the subcontractors you use are also compliance minded.

Next week, in Part 3 of this multi-part blog series on subcontractor compliance, we’ll cover three key areas of compliance: uninsured workers, lien waiver requirements, and certified payroll.

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