What Subcontractors Hide from General Contractors - and Why

In the previous post of this series, A General Contractor’s Hidden Risk: Lower-tier Subs and Vendors we discussed where lower-tier subs show up, why they are risky, and briefly discussed areas to reduct that risk.

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In this post, we will be looking at lower-tiers from a subcontractor's point of view so that you can understand how to reduce the risk on your project.

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Why do subcontractors sub out their work to second-tier contractors?

While there are several factors that play into a subcontractor’s decision to hire out their work, two of the most common reasons are when subcontractors run into a capacity/workload issue or an expertise/specialization issue. 

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Capacity and Workload

Construction projects can be unpredictable, with workloads fluctuating throughout the project's duration. Subcontractors might secure multiple contracts simultaneously, and unexpected delays or changes in one project could create a bottleneck. In such cases, subcontractors may opt to sub out a portion of their work to a second-tier subcontractor to manage their workload better and meet project deadlines without compromising on quality.

Expertise and Specialization

Construction projects can be multifaceted, demanding a diverse set of skills and knowledge. Subcontractors may possess a particular skill set that qualifies them for a specific task, but when a project requires an even more specialized touch, they might seek the services of another subcontractor who has honed their craft in that particular niche.

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Other reasons to utilize lower-tier subcontractors

Resource Management: In need of additional workforce or specialized tools/equipment

Geographical Reach: Projects occurs outside primary area of operation

Risk Mitigation: Distribute overall risks to protect against potential pitfalls 

Enhanced Efficiency: Delegate to play toward individual team member’s strengths 

Upfront Costs and Payment Terms: Divide upfront costs among lower-tier subcontractors to avoid cash flow strain

Balancing Income and Expenses: Ensuring a resource-intensive project phase does not cause a cash flow gap

Minimizing Financial Risk: Protect against unexpected delays or unforeseen issues during a project

Maintaining Operations: Avoid overextending resources that can produce an operations delay or shutdown

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At what point do prime subcontractors decide if they are going to sub out work to lower-tier subcontractors?

The decision for prime subcontractors to sub out work to lower-tier subcontractors is typically made during the pre-construction and early project planning phases. However, the specific timing can vary based on project size, complexity, contractual agreements, and the subcontractor's business practices. 

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Here are some key points in the project lifecycle when prime subcontractors might decide to involve lower-tier subcontractors:

1. Bidding and Proposal Phase: During the bidding process, prime subcontractors may assess the project's scope and requirements. If certain aspects of the project fall outside their core expertise or capacity, they might identify the need to sub out specific tasks.
2. Project Award and Pre-Construction Phase: Once a prime subcontractor is awarded the contract, they delve deeper into project planning. If the prime subcontractor recognizes the need for specialized skills, additional resources, or certain equipment that they don't possess, they can start seeking suitable lower-tier subcontractors at this stage.
3. Resource Assessment and Capacity Analysis Phase: Prime subcontractors assess their own resources, workforce, equipment, and capabilities. If they find that the project's demands exceed their current capacity, they might consider subbing out portions of the work to lower-tier subcontractors with the required expertise and resources.
4. Throughout the Project: Depending on the project's progress, unforeseen challenges, or changes in scope, the prime subcontractor might make decisions to involve additional lower-tier subcontractors or adjust existing arrangements.

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Ultimately, the decision to involve lower-tier subcontractors is influenced by a combination of the prime subcontractor's own capabilities, project requirements, timelines, budget considerations, and the desire to ensure a smooth and efficient project completion.

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When do lower-tiers expose prime subcontractors and general contractors to risk?

As a subcontractor, the use of lower-tier subcontractors is inevitable. While the use of lower-tiers has its benefits and can lead to efficient project completion and satisfied customers, it can just as easily lead to the opposite.

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Here are common risks subcontractors run by using lower-tier subcontractors:

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Relationship Strain

Due to the nature of the subcontractor to lower-tier subcontractor payment system, delayed payments are common. This can strain the relationship between prime subcontractors and their subs/suppliers leading to reduced trust, reluctance to work together in the future, or even legal disputes.

Legal and Contractual Consequences

Failure to adhere to the terms outlined in contracts with lower-tier subcontractors and suppliers can result in legal action. Prime subcontractors could face claims for breach of contract or non-payment, which can lead to legal expenses, penalties, and damaged reputation.

Project Delays

Disgruntled lower-tier subcontractors or suppliers might slow down their work, impacting the overall progress of the project. Delays can cascade through the project timeline, potentially leading to cost overruns and client dissatisfaction.

Quality Issues

Lower-tier subcontractors might cut corners or compromise on the quality of their work to manage costs. This can impact the overall quality of the project and lead to rework.

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Gaining visibility into lower-tier subcontractor risk

Nine times out of ten the risk subcontractors take on from lower-tier subcontractors can be traced back to the same type of issue: A money issue. 

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Whether it be cash flow issues on the job or payment processes after the job, money is the leading factor when it comes to subcontractors, lower-tier subcontractor tension and potential risks. 

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Sign up for our webinar on August 30th at 2pm to discuss the risks of lower-tier subcontractor’s and the best practices for mitigating them.

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At Flashtract, we are here to help. While manual payment and compliance review processes expose you to risk, Flashtract helps subcontractors reduce legal and financial risk while monitoring for additional revenue opportunities within your existing workflows.

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