4 Opportunities to Improve a Contractor's Prequalification & Subcontractor Selection Process

Subcontractor Default Insurance (SDI) is a policy that protects general contractors and construction managers from the loss associated with a defaulted subcontractor. Contractors take on a substantial amount of risk when employing subcontractors for large construction projects. General contractors must do an excellent job of mitigating that risk by selecting and managing their subs carefully, so they may avoid running into any significant problems in the future, such as a default; this is what makes the prequalification process vitally important. In a recent interview with Jeff Nolan, Risk Engineer at Cove Programs, he gives us four steps to improving a contractor’s prequalification and subcontractor selection process:  

1. Don’t do Prequal in a Silo or Vacuum

2. Develop a Risk Mitigation Process

3. Consistently Apply the Developed Processes 

4. Capture the Lessons Learned 

Don’t do Prequal in a Silo or Vacuum

           According to Jeff Nolan, the “goal of prequal is to ensure that the subs being considered for the subcontract award are capable of successfully performing the subcontract.” The general contractor must evaluate a subcontractor’s financial stability as well as their operational capacity. If a contractor goes through the prequalification process in a silo, they fail to take advantage of the feedback loop; significant information on a subcontractor’s previous experiences gets shared with people who are interested in knowing. A GC will learn more about subcontractors if they communicate with other contractors and project personnel on how a sub performed on previous projects. The prequalification process should be more than just checking boxes. It should be an extensive evaluation process where general contractors communicate important information about a subcontractor to the entire project team. The more engaged and synergetic a GC is during the prequalification process, the more likely they are to select a successful subcontractor, allowing for better performance on the overall construction project. 

Develop a Risk Mitigation Process

           Once a GC builds strong communication with the project team during the prequalification process, they should then develop a risk mitigation plan that is more elaborate than a simple checklist. In our sit down with Jeff, he states that “being targeted and relevant is a critical part of the risk mitigation plan.” When a general contractor selects or is about to select a subcontractor for the project, they should evaluate and pay close attention to the items that could potentially create risk. For example, a GC might choose a sub whose operational capacity does not quite match the construction project size. The general contractor should identify this issue and figure out what they will do to mitigate this risk. Then, they should target this concern in the risk mitigation plan and formally document / communicate it to the people who can act on the proposed solutions. By doing so, the GC will monitor the risk and be prepared to act quickly and decisively should the sub begin to fail, potentially saving them from an SDI Claim. 

Consistently Apply the Developed Processes 

           One of the biggest lessons learned from SDI claims is that the inconsistent application of processes is a common factor in many subcontractor defaults. If a general contractor is not consistent with their qualification and risk mitigation processes, they are bound to overlook important information. They must identify and address risks each time they are awarding a subcontract. In our interview with Jeff, he says that it is key for the general contractors to have a “clear understanding of what happens when things are outside of limits and how they will be addressed.” A GC is more likely to overlook potential problems with the sub if they are not consistent with their risk mitigation plan. 

Capture the Lessons Learned

           The fourth step to improving a contractor’s prequalification and subcontractor selection process is to capture the lessons learned. It is beneficial to take note of the lessons learned from any subcontract defaults, regardless of whether the default results in an SDI claim. By doing so, a GC will evaluate the process as a whole and determine what is driving optimal results. Documentation of the lessons learned will also help general contractors improve their risk mitigation practice and add quality information to the feedback loop for future projects. 

A contractor is more likely to see success on a construction project if they go through the prequalification and subcontractor selection process with a thorough and proactive mindset. By avoiding silos while doing prequal, developing a consistent risk mitigation plan, consistently applying that plan to all prequalification evaluations, and capturing the lessons learned, GC’s are better positioned to see improvement in their subcontractor performance and avoid subcontract defaults. To learn more, listen to our podcast with Jeff Nolan, 4 Opportunities to Improve a Contractor’s Prequalification & Subcontractor Selection Process.

Links:

Connect with Jeff on LinkedIn
Follow Cove Programs on LinkedIn
Visit Cove Programs on the web here 
Email Jeff at jeff.nolan@coveprograms.com
Connect with Peter Duggan 
Connect with Mike Diercksen