Hiring a new subcontractor can be the beginning of a mutually beneficial professional relationship. But if you approach the process without due diligence or clear expectations, you could just as likely start a disastrous chain of events: poor-quality workmanship, unsafe conditions, and expensive liability claims.

Ed Protzman and Joe Blatter, Senior Risk Management Consultants at Builders Mutual, discuss how to select the right subcontractors for your job and avoid some potential pitfalls.

Ensure your qualifications are met

Subcontractors are a crucial component of getting a job done on time and on budget. From masonry to electrical, their specialized skills and knowledge help fill the gaps in your project plan. But how can you know if a particular sub is up to the task?

  • Get recommendations. You’ve undoubtedly made connections with other local contractors. Now is the time to use them. Follow up with project owners in addition to general contractors, since a final customer’s satisfaction is ultimately what’s most important. Ask which subcontractors they’ve worked with in the past and which ones they’d hire again. Once you have some recommended subs, ask for references – and don’t forget to check them.
  • Check for relevant experience. Subcontractors should provide you with a list of their services. Check to see if they have any industry-specific training or certifications. What’s more, ask if they’ve done projects in your contract or bid range. You don’t want to trust highly technical work on a multi-million-dollar project to a sub who has only worked on smaller or less complicated projects.
  • See their work. Many subcontractors today have an online presence to showcase their trade. Check out their websites and/or Facebook pages to review their capabilities and past projects. Make sure they do everything they claim on their site. Sometimes, they will list services they’ve never performed, performed infrequently, or hope to enter into. Ask: Is this the type of work that they do best or what they’re hoping to get into?

Safety without compromise

Just as safety is a top priority on the job-site, it should also be a major factor during the hiring process. How can you know a sub will protect their workers and your bottom line?

  • Research their records. The best way to predict a sub’s safety performance? Look at their history.
    • Review their Occupational Safety and Hazard Administration’s (OSHA) inspection records to see if they received a citation in the past.  (www.osha.gov/ords/imis/establishment.html)
    • Check out their industry certifications as well to see if they’re a member of any local or national industry associations, indicating they opt to follow best practices.
    • Find out their Experience Modification Rate, also known as their EMR or mod factor, generated by the National Council on Compensation Insurance, Inc (NCCI). Generally, based on the analysis of the latest available three years of actual payroll and loss data of the individual employer, this data is compared to similarly grouped employers to calculate the mod factor. In most instances an employer with better-than-average loss experience receives a credit (-1.00), with worse-than-average experience receiving a debit (+1.00.)
  • Study their safety “system.” Although an EMR may indicate a safe operation, safe workers are a byproduct of a complete safety culture. Ask to see a sub’s safety protocols and whether they cover all of the work they perform. Do they employ (or at least designate) a safety manager? Is specific personal protective equipment clearly required? A comprehensive safety program should also have a clearly defined disciplinary process in case safety protocols are disregarded.
  • Follow up. When it comes to safety, you can’t simply take someone’s word. Conduct daily or weekly job-site visits to see whether subcontracted workers are meeting their (and your) safety standards. Pro tip: Occasionally mix in an unscheduled visit to monitor how they follow safety protocols when they’re not expecting you.

Contracts are your best defense

Handshakes are between friends. In today’s society, contractors and subcontractors require contracts. That’s what will protect you in case of a lawsuit or liability claims. What should an effective sub contract do?

  • Clarify the relationship. In addition to spelling out the terms and conditions of the sub’s work, including project scope, pricing, and timelines. A contract should clearly state if the sub is permitted or intends to also use subcontractors. If additional subs will be on your project, you need to have certainty that your insurance coverage and risk transfer requirements are passed down to the lower-tier subs. Also, if your primary subcontractor is outsourcing work to others, you should question or clarify the value that the primary sub is providing.
  • Include insurance requirements. Sometimes, general contractors will simply use a work order to “hire” a sub. However, these documents don’t include insurance requirements, putting the contractor at risk if the project goes awry. Contracts should specify what types of insurance are required, including minimum limits. As a rule of thumb, a subcontractor’s insurance coverage limits should be equal to, or greater than, your coverage limits. Also, include an Additional Insured clause with a 30 day-notice if the sub cancels or loses their insurance coverage. This notice is used to alert the upper-level contractor that they need to obtain a new certificate of insurance (COI) from their subcontractor. Finally, consider or make sure your contract includes hold harmless language or agreements, used as a release of liability that protects you from injury or property damage caused by your sub.
  • Review with a professional. Consult an attorney to review your subcontractor contracts prior to use, especially if you have business in multiple jurisdictions. What’s legal in one place may not fly in others.
  • Walk if they balk. Subcontractors who balk at the terms and conditions of your contract tend not to have a deep understanding of the hazards inherent in your work. Risk management savvy subs know that contracts are standard.

Insurance coverage you can count on

If your sub doesn’t have the right kinds or amounts/coverage limits of insurance, then any liability flows up to you, putting your business at risk. What should you know about your sub’s insurance coverage?

  • Cover your bases. Your subcontractors should have their own workers’ compensation coverage for all their employees, along with general liability including completed operations coverage. They should provide a COI as proof of insurance. If you have an uninsured sub at the time of your audit, their payroll be included as payroll under your operation. This will increase your insurance costs. Also, in your contract, make sure their insurance status is indicated with a form number.
  • Set your limits. You need coverage that’s right for your job. That’s often not the minimum liability limits that some subs carry. Make sure they have coverage that matches yours – if not more.
  • Be wary of one-person crews. It’s true that in some regions, a one-person contracting operation isn’t required to carry workers’ comp. coverage.  However, if that one-person crew grows to even two people – let’s say, they hire a part-time helper – that exception disappears. And if they don’t have, or purchase workers’ comp, those subs become employees of yours – which can affect not just your liability but also your premium.

Figuring out if you’re well protected can be complex. Builders Mutual can help. Our risk management consultants can review certificates of insurance and offer their consultative perspective on your risk management approach. We also offer subcontractor agreement templates, for information and education purposes, on our website. Of course, for more precise advice around coverage limits or specific contract language, you will want to consult your insurance agent or an attorney.

Whenever you work with a subcontractor to complete a project, know that their work, and safety practices reflect on you. That’s why you need to have the proper vetting processes and contractual/insurance requirements in place to hire the right subcontractor to meet your needs as well as those of your clients.

Contact your risk management consultant today about establishing safe, productive relationships with your subcontractors.