It’s not uncommon to hear about contractors getting ripped off by subcontractors, but it goes the other way too. In fact, once subcontractors navigate the muddy waters of contract clauses and insurance requirements that are stacked against them, they still sometimes find themselves filing liens and going to court to get paid.
This happens more often in cases where subcontractors don’t do their due diligence when vetting general contractors and construction management firms.
A Recipe for Losing Trust
Not knowing who you’re doing business with is one sure way to get burned, but sometimes, even if you know the person or company, you can still end up on the short end. Greg Novak remembers feeling as if he couldn’t trust anyone after a lifelong contractor friend not only didn’t pay him for work he’d done, but also complicated his chances of placing a lien.
Novak had known Charles M. Stallman since childhood and had done business with him many times. But in 2015, Stallman didn’t pay Novak for work he did as a subcontractor. The news also reported Stallman forged lien waiver documents making clients think Novak and other subcontractors had been paid. Novak said he eventually got back 20 cents on the dollar from Stallman’s ex-wife.
Construction projects have a lot of risk and when things go south the subcontractors stand at the end of the receiving line.
There’s no sure way to know a contractor won’t stiff you; after all, construction projects have a lot of risk and when things go south the subcontractors stand at the end of the receiving line.
But, you can follow some steps that will help reduce the chances you’ll be spending time in court, instead of on the golf course.
It’s Just Business
General contractors and construction management firms routinely provide their business information to owners and developers. So, it should be simple for them to do the same for you. GCs and CMs want to know your safety, quality, insurance, financial, and legal information, so ask them for the same. Pay particular attention to:
- Signs of cash flow problems like excessive receivables over 90 days old and excessive short term debt (cash flow statement)
- Early billings on projects that aren’t shown as cash or receivables (balance sheet)
- A high workers’ compensation experience modifier (greater than 1.0)
- Disputes related to quality
- A history of legal issues and lawsuits
Job History Tells a Deeper Story
A contractor’s job history and current slate of jobs also tell you a lot. For example, a contractor that ran a series of medium-sized commercial jobs, and then suddenly started to focus on single family residential, raises some questions. What are the reasons for the change? If the contractor was changing the focus of his business, that’s one thing, but if he was failing to win commercial bids, that suggests a wide range of potential problems.
Looking at the current slate of jobs and the list of upcoming jobs helps you understand the GC’s or CM’s longer term viability. But, it can also foretell problems.
Too much work in the pipeline, or too many jobs coming up at once can signal an overreach. A major cause of contractor business failures is unrealistic growth. If a contractor is moving into projects that are significantly larger than they previously handled, or are moving into new geographies, there’s also a bigger chance of problems arising on those projects, or with the business itself.
Subcontractors must work with people in key contractor and construction management positions. Traditionally, those are superintendents and project managers. And subcontractors also must work with managers and foremen employed by other subs. Superintendents, project managers, and foremen who are not fully qualified for their roles can create a lot of headaches for subcontractors.
When the same people don’t have mature leadership, management, and communications skills, things can get even worse. As a subcontractor, you can serve yourself well by knowing all you can about the people who work with, and for a GC or a CM. It’s one thing to work with a superintendent who is new and inexperienced but willing to listen and learn, and quite another to work with one having the same skill level who thinks they already know it all.
Ff the GC or CM has inexperienced subcontractors across the job records, that could spell trouble for you in scheduling and completing activities on time.
You probably wouldn’t discount a GC or CM because of one or two people, but if the company seems to have more than its fair share of novices, that could foretell issues with schedules, quality, and safety. Similarly, if the GC or CM has inexperienced subcontractors across the job records, that could spell trouble for you in scheduling and completing activities on time.
Make it a Slow But Steady Process
You should look at contractor qualifying and vetting as a long term project. Trying to do it when a bid is due probably won’t allow more than a cursory review. So, the idea is to keep the contractors you like working with, and find more like them. Start by talking to others you trust. Follow construction news related to your specialty, and take some time each week to find potential GC or CM candidates who you’d like to work with. This could be based on the types of projects they do, their company size, or other aspects that make them a good match for your business.
At this stage you won’t have access to much of the financial and insurance information you’d like to review, but, there is a wealth of information in the public record. Ask questions of suppliers, other subcontractors, and even owners and developers.
By doing preliminary research you can learn enough about the GCs and CMs you are interested in working with and know whether you want to pursue a business relationship.
Finding your dream GC is as much about guiding your business as following your business plan.
Finding your dream GC is as much about guiding your business as following your business plan. In fact, making GC vetting a part of your business plan, makes dream GCs part of your dream business.