I just read a blog post in ENR based on a chat with CFMA Vice-Chairman Steve Tenney; the topic was Subcontractor Risk Control ENR Link. I feel a little bit like Steve’s long lost brother. At Cafco, where I’ve worked for more than 20 years, we employ the same sophisticated (not!) Subcontractor Risk Program that Steve references in the blog. We use a small, select group of subcontractors, many of whom we have ‘grown up with’. We know them extremely well, know the PMs, foremen, and mechanics very well. The relationship that our field staff has with their field personnel is probably the best ‘qualifying ‘that we can do.
We’ve all received that phone call (some have probably just happened during tax season); “Hey Joe, any chance you can get me some quick $$ this week? “ The reasons/excuses usually sound like:
- I just had to write a big tax check
- I just need $25,000 to meet this week’s payroll
- I need to send in a deposit on the equipment/materials for this project
- Another GC/Developer promised me a check, but I haven’t got it yet
Of the four which one are you most comfortable with? On the surface, the tax ‘problem’ is a ‘good problem, right? I mean you don’t pay taxes if you don’t make a profit…but where did that profit go to, if it’s not available to meet the tax obligation? How about having trouble with this week’s payroll? What about next week? I can live with the deposit request provided I can get some assurances that the cash goes where it’s supposed to go, but the other GC promise is a big red flag! Your inability to get paid on a project shouldn’t become my problem.
Sure, you can mitigate subcontractor risk by reviewing their financials. You can also require bonds (don’t forget you or your client is paying for that assurance), hold even MORE retainage, and I’m sure there are a few other ways to mitigate subcontractor failure.
For my company, and it sounds like for Steve’s as well, we use a constant measuring stick, instead of a ‘point in time’ risk assessment. Our field personnel are working with these subcontractors on a daily basis. They have coffee breaks with them, eat lunch and probably even have an adult beverage or two on occasion. The technical competency is very rarely a question, so by knowing are construction partners well, all of us in the company are participating in our company’s risk management strategy.
No risk management or prequalification program is perfect. As a subcontractor, it’s arguably worse, or harder to manage. Subcontractors are one more step removed from the source of the money, and it’s far more important to be doing business with a partner who pays on time than one who stretches the terms for their own convenience.
So I say that the best risk management program really starts with a solid relationship management strategy. If your culture is one based on adversarial relationships between GC and Subcontractor, I can guarantee that someone is going to get ‘hurt’. Construction is a tough, physical, small margin of error type of game, and you want your teammates working with you, not against you.
Who’s team are you on?