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Understanding Subcontracting:
A subcontractor is a person who is hired by a general contractor (or prime contractor, or main contractor) to perform a specific task as part of the overall project and is normally paid for services provided to the project by the originating general contractor. While the most common concept of a subcontractor is in building works and civil engineering, the range of opportunities for subcontractor is much wider and it is possible that the greatest number now operate in the information technology and information sectors of business.
The incentive to hire subcontractors is either to reduce costs or to mitigate project risks. In this way, the general contractor receives the same or better service than the general contractor could have provided by itself, at lower overall risk. Many subcontractors do work for the same companies rather than different ones. This allows subcontractors to further specialize their skills.
A subcontract is a procurement instrument that is used to acquire specific goods or services for a financed program or project. The subcontractor agrees to carry out the buyer's objectives as determined and specified in the contract.
There are two kinds of subcontracts:
1.Cost-reimbursable and 2. Fixed price
Cost-reimbursable subcontracts are used for large projects requiring variable degree of services or products to fulfill the Statement of Work.
Cost-reimbursable subcontracts are reimbursable up to the amount specified in the subcontract budget. Costs unrelated to the performance of the subcontract's specified statement of work are not reimbursable. The subcontractors submit invoices monthly for actual costs incurred.
Fixed price subcontracts are often used in cases where the products of the work are the central concern.
Fixed price subcontracts often involve an agreed upon payment schedule, corresponding to satisfactory completion of specified products or deliverables. The subcontractor is paid upon submission and approval of an invoice for the total amount of the subcontract following completion, or according to a predetermined payment schedule.
Agreement, purchase order, or any such legal instrument issued under a prime contract (by the prime contractor to a third party the subcontractor), calling for the performance of a defined piece of work or production and/or delivery of specified goods or services. Subcontracts contain special terms and conditions that are unique to the prime contract, and flow-down provisions that proceed from it
Subcontracts should be awarded only to responsible subcontractors who possess the ability to perform successfully under the terms and conditions of a proposed procurement.
Subcontracts contain schedules for specified deliverables; these are due dates by which particular tasks and/or products are to be completed, reviewed and approved by the contracting agency.
Subcontracts can be amended to modify the statement of work, amount of funding, or time frames. Subcontracts may be terminated for cause (usually poor performance or cuts in funding) or other reasons with notice given in a specified period of time.
The contracting agency, in conjunction with the subcontractor, has an active role in setting direction and key tasks, and for monitoring the process, products, and quality of the work performed.
Subcontracting Steps:
In order to subcontract with a vendor, one needs to:
1. Identify the type of subcontract to be used
2. Describe the product or service needed
3. Ask for proposals to do the job
4. Choose the "best" vendor from those submitting proposals, according to pre-established selection criteria.
Subcontractors, unlike main Contractors, enter into agreements with the main contractor, not with the customer. Subcontractors often specialize in one specific area of construction and try to network with contractors who negotiate for larger jobs that include this area of specialty. In this way, a successful subcontractor will always have work, thanks to their network of contractors.
Furthermore, subcontractors tend to specialize in one specific area, like earthwork, scaffolding, drywalling, tiling, insulation, Air-conditioning or a different trade. This makes subcontractors especially good at product and service delivery for their area of expertise. In contrast, a contractor, however, needs to see the bigger picture of a project, more than subcontractors do. This means understanding things like financials, profit/loss, cost of doing business, time invested in a project, managing expectations and inherent project risks, and also at the same time ensuring the customer is happy and managing myriad other potential concerns.
Subcontractors can be very effective workers, but contractors must be organized planners and effective managers. This is what entitles contractors to earn profits on the work of the subcontractors that they deal with.
As a contractor, it is important to make careful decisions when hiring a subcontractor. Subcontractors may abandon work or display unprofessional behavior while at work, and because they aren’t employees, contractor will have no way to discipline them if they create difficulties around the project. Firing a subcontractor could be seen as a break of contract, and in any case, and would leave the contractor needing to hire someone else to complete the work. A subcontractor still represents the contractors’ business while working on their customer’s property.
Subcontractors also are not responsible for the terms of the original work agreement between the contractor and client. For example, if a contractor agrees to finish some work within a specified timeline, he depends on his subcontractor, and if the subcontractor fails to finish the work in time, the contractor on the hook for it, not the subcontractor!
It is very important to hire subcontractors that are credible and trustworthy, and that have a reputation for both doing quality work and acting in good faith when it comes to their business. Subcontractors should be professional in both their business dealings with contractors and in their behavior in the work environment.
For a contractor, the scope of projects that he can choose to take on grows with the number of quality, professional subcontractors he has access to. Therefore, it makes sense to build your network of professional contacts as much as possible. Working with subcontractors presents a unique set of challenges but is a great way to increase your profits and create customer satisfaction as a contractor.
It is important to define expectations for subcontractors. However, micromanaging is a mistake. The last thing subcontractors want is to be told how to conduct their business. Also, micromanaging subcontractors squanders valuable resources, particularly contractor’s valuable time.
At the same time, a hands-off management style can be equally disastrous. Subcontractors need guidance. Communication is the biggest issue with subcontractors. Best way forward is to pull a group of subcontractors together, set the stage right up front and let them know what the expectations are. The goal should be to foster a cooperative, not an adversarial, relationship
When selecting and working with subcontractors, contractors generally insist that they exceed customer expectations. Some subcontractors will talk the talk but won’t walk the walk.
It is important to note that working with a subcontractor is no different than working with an employee or a client. Contractor needs to be open to problems and opportunities.
Although contracts are important for outlining the scope of a subcontractor’s work, contractors do rely too heavily on them. However, confusing legal terms sometimes scare subcontractors away. The Contractor should consider conveying important objectives and standards and soliciting feedback from subcontractors during informal preconstruction or weekly progress meetings.
Selecting a good subcontractor may seem easy but it’s not. It takes time to evaluate, compare and select good subcontractors. Contractors make their decisions based on their company’s priorities.
It is important that a subcontractor does 100 percent of the job. Some subcontractors will do 95 percent and leave your client unhappy. In such cases, the contractor would have problems. This is why most contractors consider references and reputation, flexible contract terms, resource scope, cultural match, location and additional value-added capability. Word-of-mouth often helps a contractor find subcontractors fulfilling at least some of these criteria
Price is important, but the location is sometimes even more crucial, both to the subcontractor and the contractor. The contractor wants the subcontractor to be located within a reasonable distance from the job site, and the subcontractor doesn’t want to travel that far, either. The closer the subcontractor to the job site, the better pricing a contractor will get.
Companies subcontract to reduce and control operating costs, improve company focus, gain access to specialized services, free up internal resources for other projects and share risks. Subcontractors are often chosen for their extensive knowledge or certification involving everything relating to the project.
Subcontracting also makes sense from a risk-sharing standpoint. Contractor may have the resources for a project in-house, but if those resources are committed elsewhere, the contractor might subcontract out other things. “If it’s a large project, the contractor might subcontract the lower margin work out because he wants his crew working on the higher margin detail work that’s going to reflect most heavily on the finished project
Contractors generally view relationships with subcontractors differently. It’s about establishing networks and relationships among the most clever, best subcontractors in their fields. Sharing information with and learning from ambitious subcontractors, and then use these to keep pace with change, to innovate, and to pursue efficiencies.
Contractors prefer subcontractors who promptly respond to job requests, send professional proposals in a timely fashion and attend meetings. That gives the contractor the necessary turnaround time to submit bids for the total bid package.
Likewise, for a healthy and long term relationship, contractors should pay their subcontractors in a timely manner. Subcontractors who get nickeled-and-dimed don’t like working for those contractors and generally fall short of their best performance. It’s to everyone’s advantage that a smarter approach is to reward for performance.
Timing and scheduling are critical. The art of subcontracting is also art of timing and scheduling. It can also be subcontracting’s toughest aspect. It’s not uncommon to underestimate the time necessary to complete a job or fail to take into consideration outside factors. Communicating before, during and after a job always helps. The premier contractors are always trying to get a commitment from subcontractors that their firm is among the subcontractors’ top priorities. Scheduling will either make or break relationships with subcontractors.
Contracts should promote efficient cooperation to accomplish the objectives of both parties, not entrap the unwary. Subcontractors must watch for carelessly worded language and ambiguities in contracts. They also must understand clauses that give companies the right to withhold a specified percentage of progress payments as a way to ensure the work will be completed. They must watch for clauses that allow for avoidance of (or compensation for) interference, specify insurance requirements and address damages incurred by either party. They also must ensure whether the contract addresses submittals, changes, site inspections, notices, claims and disputes? Also whether the contract language adequately deal with payments, performance time, scheduling and waivers?
