How to Hire Subcontractors for Construction
Let's say you're a project manager for a larger general contractor in charge of 3-4 projects. Or perhaps you're a brand new GC starting a complicated new project. Either situation has one thing in common: you are wondering how to hire a subcontractor or a trade contractor.
Unless you're one of the smaller operations (think 1-2 man crews handling smaller renovations) you are going to have to hire a subcontractor at some point, it's just the nature of modern construction.
Now, many GCs and subs will work together for years all based off of establishing a previous relationship. If the sub continues to produce quality work then the GC will likely stick with them indefinitely. Conversely if the GC works to build a good relationship with their subs then they will, more often than not, keep working together. In that case, it's about the relationship.
However, sometimes subs retire. New GC firms are created or they expand. Either way, sometimes you have to hire a new subcontractor and for a new GC or one that's out of practice the process can be daunting. But hiring subs doesn't have to be a confusing or unpleasant experience. That's why we put together a list of questions to ask and boxes to check in your subcontractor prequalification process so you can be all prepared for that next job.
Why Hire Subcontractors?
Before you begin the process you might have a few basic questions you're asking yourself before you actually go about finding a subcontractor. Questions like: When do you need to hire a subcontractor? Do you even need a subcontractor in the first place?
While we need to say that there aren't any universal answers that will work for every GC in every situation, there are some guidelines that we've discovered:
- When to Hire: remember that subcontractors are specialists- and while you can find a subcontractor for just about every scope of work you could imagine on a construction project, there are a couple of common subcontractor areas you should be aware of. Of course, if you are a bigger GC odds are you do drywall or concrete yourself but otherwise, you likely hire subcontractors for everything else. However, even smaller GC firms will hire subcontractors for mechanical, electrical, plumbing, underground utilities, structural steel, or glazing. In other words, the scopes which require the most specialized time and attention.
- Do You Need One: more often than not, the answer is yes. According to Michael Stone, analyst and researcher at Construction Programs, adds "hiring subcontractors will often cost you less to get the job done than using crews that aren't trained for specialty work...the specialists know what materials they'll need before the job starts and so will be able to get the job done faster with less downtime to chase parts or materials." All of that specialty know-how and preparedness leads to real savings for you, savings which could even trickle up to the owner.
How to Hire Subcontractors
Below, you'll find an example subcontractor hiring process that takes you through, step by step, the major questions you'll need to ask to determine the subcontractor requirements as well as what to build into your subcontractor agreement you'll write up at the end.
Where to Find Subcontractors
GCs and PMs aren't looking on Angie's List or HomeAdvisor for subs. Instead, they go to sites like BuildingConnected, AGC, BIA, and various other trade organizations are usually the first place they look when they need to find a subcontractor. Normally a GC will put out an RFP (Request for Proposals) in a news publication or on the sites listed above, or they'll host a "meet the GC" event to get a feel for the local talent.
If you're a GC with an RFP out on these sites we recommend doing your due diligence: don't just snap up the first proposal that comes in. Instead, we recommend gathering at least three proposals so you can compare and contrast.
Subcontractor Prequalification Process
Once they've got an RFP out on some of the trade sites or newspapers, most GCs choose to have their subcontractors go through a prequalification process to ensure that any subcontractor they work with meets their standards and expectations.
However, these prequalification processes vary from GC to GC, though we have noticed there are a couple of almost universal forms and questions that GCs put in their prequalification process. So if you're looking to create a subcontractor prequalification process, or revamp your old one, take a look at these recommendations and see what you're missing.
Another note: most GCs choose to prequalify their subcontractors once a year, though sometimes if there is a new type of project or a particularly large one, they can choose to prequalify subcontractors on a per-project basis to make sure they meet the needs of that specific task.
Part of your prequalification process should definitely be complete disclosure of the size of the subcontractor who wants to work with you. This one is really up to the project that you're working on. If you're doing a residential kitchen remodel then typically hiring a smaller plumbing or electrical sub will do the job. However, if you are working on floor 20 of a new high rise that needs 8 bathrooms installed on every floor then you're better of looking for a sub that can match the speed and scale of your work. Overburdening a business that wasn't designed for the size of your job is a quick way to slow the entire process down. During this step you'll also want to check and make sure that they have all of their own equipment, and that it will be sufficient to tackle your job.
If you find you are doing the same type of job frequently you can probably skip this step, but if you have a lot of variances then you might want to consider switching to a per-project prequalification process to make sure you aren't over-staffing your subs.
Subcontractors with Experience
The whole point of hiring a subcontractor is to access their specialized knowledge. That means you want subs with at least a few years of experience in the field. The good news is that to even become a licensed subcontractor you had to go through a rigorous training process. Michael Stone puts it this way: "For specialties like plumbing and electrical, most apprenticeship programs are 3 or 4 years in length and when someone graduates from those programs, they know their trade inside and out. That makes them better equipped to deal with any situation, and it makes them faster at getting their particular discipline done."
So in your prequalification process, it's usually a good idea to ask for a portfolio of work.
Subcontractor Safety Records
All your potential subcontractors should submit safety records. You can ask for their EMR verification, OSHA records (particularly forms 300A and 300), as well as how much time they've lost due to accidents and injury in the past. You'll also want to ask about their main safety officer and get their credentials and history. While safety is always an issue on jobsites, building safety into the subcontractor hiring process reduces your risk and goes a long way to make sure your project stays on schedule.
Licensing for Subcontractors
Different states have different requirements when hiring a subcontractor, so make sure you check out what your state has to say. For example, some states require subcontractor licenses, while others don't. If you are going to work with subcontractors it's a better idea to do it legally as this, to some degree, ensures the quality of their work and protects you in case litigation should arise in the future.
Subcontractor Daily Reports for Accountability
The next step in your subcontractor hiring process should be a clear understanding of how the two of you are going to communicate throughout the remainder of the project. Between various RFIs, change orders, tasks, and punch lists communicating with subcontractors can be a huge time-suck for the GC or superintendent. That's why we recommend stating, up front, what the expectations are when it comes to daily reporting and time cards. Take John Albert, the founder of Unified Building Group, for example. "Our subcontractors now have a commitment that if they want to get paid they have to log in to Raken and use it 100%," Albert says, adding "even with the high level of work we do we've gotten great reactions to Raken. It's now a big part of every preconstruction kickoff we do." Albert and UBG build daily reporting right into their subcontractor agreements, and the result for that company has been more completed projects and won business.
1099 Subcontractor Forms
While most 1099 subcontractor agreements are tax documents filled out by workers, not the company, it's still something worth addressing in your subcontractor prequalification process. Basically, you need to have a written one every time you hire a subcontractor. You can find the 1099 subcontractor form on the IRS website, though that should only be a part of what your final agreement should look like. According to Mike Kappel of Patriot Software, "In a standard subcontractor agreement, include details about the fee structure, payment terms, and cancellation policy. Also, note any due dates for payments, and dates for the start and completion of the project." To that list, we would add the daily report requirement that Albert included, ensuring that you'll have clear communication and accountability for the length of the project.
The last form you'll need to consider is the W-9. While you aren't responsible for withholding payroll tax for your subcontractors (they're meant to handle that) having the subcontractor fill out a W-9 form just proves that they will handle all of the appropriate withholdings and taxes on their end, thereby clearing you of any problems if the IRS comes knocking. And besides, you'll need the W-9 to fill out your 1099 as well as your form 1096 when tax season comes around, which shows the IRS the money you paid to subcontractors.
Subcontractor Financial Statements
Many GCs ask the subcontractors who want to work for them for a few years of third-party prepared financial statements for the company. According to The Horton Group, This usually helps the GC know that the business they are dealing with is legitimate, what their working capital is, their debt to equity ratio, as well as accounts receivable and payable. Essentially you are looking at these numbers to make sure they are comparable with other subcontractors in the field, this will help ensure that you are working with an honest company that is going to be around for the length of your project.
While we're talking about finances, it's usually good to be upfront with retention. Most GCs will hold on to 10% of a subcontractor's pay until the end of the job or a year after the job ends to cover any unforeseen issues post-construction. It's a common practice but a good idea to communicate it early, along with the pay structure.
Subcontractor Insurance and Bonds
Finally, you need to request a reference letter from the subs bonding company as well as their insurance certificate with endorsements- this ensures you'll be covered should any unforeseen circumstances arise. While looking at the insurance you'll want to double check that their limits match the scope of your project.
Sample Subcontractor Hiring Process
So, to sum it up:
- Find a list of subs you'd consider working with.
- Organize your prequalification process to include the following:
- Make sure that they have the manpower and equipment to scale to your job.
- Check out their experience and past work.
- Examine their safety records.
- Check their license.
- Implement a daily reporting/accountability structure.
- Fill out W-9s and 1099s as part of your final agreement.
- Examine financial statements to make sure they are sound.
- Get copies of insurance and bonds.
Follow these steps and you'll find that hiring a subcontractor can be quick and easy, especially when you build in communication expectations right up front. Do that and you can know that you've done everything you can to foster a healthy professional relationship with the subs on your site.