Keys to Effectively Managing Subcontractors

Michael Lewis is a retired business executive who writes about careers and tips related to personal finance topics on the Money Crashers blog.
 

From time to time, many workers use or contract "substitutes" to perform tasks that they cannot or prefer to not do for a variety of reasons. These subcontractors are ubiquitous, and can be found in the home, the workplace, even schools. The majority of subcontracting arrangements are casual, simple verbal understandings where duties, terms of agreement, and outcomes are easily understood and accepted by both parties for jobs such as yard maintenance, housecleaning, or babysitting.
 

Some arrangements are more formal and complex, often involving a number of people performing a service over a period that may extend for weeks, months, or even years, and have detailed expectations about work procedures, the final deliverables, and payment for the services being performed.
 

Negotiations between contractor and subcontractors to arrive at an agreement may be:
 

• Competitive when several subcontractors are vying for the work
   
• Bureaucratic with defined procedures for bid document preparation, submission, and selection
   
• Public so that all parties are aware of the process and selection of winning subcontract bid
   
• Formal, with detailed contracts of "legalese" and detailed definitions of words and terms which could be misinterpreted, including a sample subcontractor agreement intended to be executed when the contract is let
   

Whether you are contracting with a local arborist to trim your trees, or an executive hiring a firm to deliver a multifaceted software system to run your business, knowing how to manage a contractor/subcontractor relationship is essential if you want a satisfactory outcome.

Defining the "Scope" of the Project
 

The single greatest cause of difficulties with a subcontractor is the failure of the person hiring the subcontractor - the contractor - to adequately and accurately define the scope of work and ensure that both parties understand and agree on that definition. Vague descriptions of the final deliverables, uncertain deadlines, missing instructions, a lack of procedures which the contractor is expected to be follow, or a failure to ensure that both parties agree on such details - ideally documented in a formal legal contract between the two parties - invariably leads to project delays, added expense, and unmet expectations. On the other hand, the effort to develop a well-defined, thorough scope of work will pay dividends in the quality, cost, and satisfaction of the final results.
 

A good scope of work definition contains the following elements:
 

• Project Responsibilities. A brief description of the project objectives ensures that both parties understand the kind of tasks to be performed, the respective responsibilities of the contractor and the subcontractor, and the conditions under which the subcontractor is expected to work.
   
• Project Deliverables. Any technical specifications, the flexibility that the subcontractor might have meeting those specifications, and the acceptance criteria that will be used to approve final results should be described.
   
• Project Costs. The scheme of payment, as well as timing and conditions of payments, should be meticulously described to avoid subsequent disagreements.
   
• Project Schedule. Required milestones that the subcontractor is expected to meet, schedule events to be accommodated, and the method and forms by which progress is to be reported (or any other reports required by the contractor) should be included.

Determining the Most Efficient Payment Scheme
 

The person responsible for hiring subcontractors often fails to realize that the interests of the two parties are not naturally nor perfectly aligned. A subcontractor is not an employee, but a separate business whose primary interest is to make a profit for the work performed regardless of the payment scheme employed by the contractor.
 

At the election of the contractor, payment for subcontracted work may be calculated in one of several ways:
 

• Fixed Price. This is the simplest of payment method whereby the subcontractor receives a predetermined price for performing the work outlined in the contract. If the subcontractor's costs exceed the fixed price, the subcontractor bears the loss. If the subcontractor is able to deliver the final product or services for less than he or she anticipated when making the bid, extra profits are earned. As long as the scope of work does not change, the contractor doesn't have to worry about unanticipated costs.
   
• Time and Materials. The subcontractor is paid a fixed hourly rate for each hour expended on the project, plus the actual cost of any subcontractor-purchased materials, usually with an added defined mark-up, required to complete the project. Time and materials contracts are useful when the final deliverable is uncertain or conditions that may affect the performance of the contract are unknown. The subcontractor is guaranteed to make a profit, assuming the hourly rate includes a profit factor, but the total profits are unknown until the contract is complete. The contractor, however, must exercise greater oversight to ensure that project costs do not exceed budget.
   
• Time and Materials Not to Exceed a Fixed Price. This is a combination of the fixed price and time and materials concepts. Essentially, the payment process functions similarly to a time and materials contract, except that the subcontractor cannot exceed a a maximum total price. This method of payment benefits contractors almost exclusively.
   

Contractors should be aware that even when contract payment is based upon time and materials (rather than a fixed price for the final deliverable), the subcontractor will review his or her resources, seeking to identify all of the expected costs likely to be incurred to complete the project, and will include a profit margin in the final bid. Having a detailed contract with an adequately defined scope of work properly executed between the two parties eliminates unnecessary angst for the contractor.

Finding, Evaluating, and Selecting the Best Subcontractors
 

Finding subcontractors can be as easy as reading the morning newspaper, scanning the local Yellow Pages, or searching the Internet using terms describing your need. Many subcontractors participate in industry groups that are happy to provide contact information for their members. For example, the construction trade has a national and multiple state associations; the National Association of Personal Financial Advisors can help you find a competent financial consultant; and the American Society of Journalists and Authors can help you find a writer to punch up your website. Solicitation of subcontractors may be private through direct contact, or public through advertising on public media.
 

Subcontractors are available in virtually every industry and are capable of performing most tasks, including cleaning a house, designing and programming an elaborate computer system, or ghostwriting a biography. Some subs are self-employed individuals working out of their homes, while others are multinational corporations providing worldwide services. Whatever their expertise, size, or capability, they share a common experience: the degree of satisfaction experienced by their clients. The single best way to determine whether a subcontractor is likely to meet your requirements is to talk to those customers with whom the sub has previously worked. If they had a good experience, they will be glad to tell you; if they had a horrible experience, they can't wait to tell you.
 

Organizations such as the local chambers of commerce and the Better Business Bureau maintain files of consumer complaints for most businesses, while private companies like Angie's List, SevaCall, and HomeAdvisor provide customer reviews for subcontractors who serve homeowners.
 

Whether you are an individual hiring a sub for a single repair job or a major organization engaging a national subcontractor, reviewing your potential subcontractor's insurance coverage is essential. Many states require subcontractors to maintain a minimum amount of liability coverage in order to receive and keep a business license. Legally, a subcontractor acts as your agent, therefore making you responsible for damages or penalties that may arise during or as a result of their work, sometimes for injuries to the subcontractor's employees while working on your job. Be sure to review the insurance coverage for any subcontractor who you are considering hiring - the money you save is likely to be your own.

Using a Written Contract
 

A properly written contract between contractor and subcontractor protects both parties, ensuring that each will adhere to the provisions within the contract or face legal action. Essentially, a contract describes what the work involves, the specific outcomes expected, and the legal and financial responsibilities of both parties - essential if anything goes wrong during the course of the work.
 

While the use of an attorney is always recommended when a project is complex, costly, lengthy, or includes unknown or significant risks, many contractors rely on pre-written, standard contracts applicable in most situations. Samples of subcontract agreements, including examples of language used to describe different scopes of work for a variety of different projects, are generally available on the Internet.
 

Contractors are well advised to include provisions about project delays or unforeseen obstacles during a project, with language expressly defining how such problems will be handled as part of the scope of work. In particular, it is important to fully identify any issues or incidents that might affect payment of subcontractors and how payment will be affected. Failure to do so will inevitably lead to conflict between contractor and subcontractor, as well as efforts by the latter to extract additional compensation from the contractor.

Dealing With the Inevitable Change Order
 

Contract amendments are a usual occurrence during the progress of a project. In some cases, the contractor decides to add, subtract, or modify one or more of the project deliverables; in other cases, circumstances arise that mandate that a deliverable be altered. In either case, a subcontractor's work is usually affected and a change order must be issued.
 

Change orders are so common that many subcontractors bid jobs at break-even prices, knowing that numerous change orders over the progress of the project will provide additional profit opportunity. For example, an electrician might contract to provide all wiring and electrical work detailed on the blueprint of new home for $2,000. Additional outlets (not included on the original blueprint) might be billed at $65 each, even though the actual cost for incremental labor and materials is less than $10 per outlet.
 

Contractors working with subcontractors need to establish policies and procedures to deal with order changes as part of the initial contract between the two parties. Usually, such policies require the written approval of the contractor before a deviation in deliverables (a change in the scope of work) is accepted and amends the payment due to the subcontractor.
 

Since work might be halted while approval is sought, subcontractors typically require a minimal delay before asking for and receiving the contractor's approval for the change. To a subcontractor, time is money, and his or her bills continue whether work is proceeding or simply on hold while waiting for approval. Whatever the final disposition of a change order request, the event leading to the request, the request, and the final decision should be documented and maintained in project records to eliminate acrimonious negotiations at the end of the project leading to final payment.

Final Thoughts
 

Working with subcontractors is standard business practice in most industries. The practice has many advantages for a contractor including the luxury of having extra capacity or valuable expertise when you need it without everyday expense. Many companies and individuals develop and maintain subcontractor relations that last years, even generations, to the benefit of all parties. If you anticipate working with subcontractors, always remember: Subcontractors can choose where they work, whom they work for and for how long - and so can you.
 

Can you suggest any addition tips to working with subcontractors?

(Image courtesy of Ambro / freedigitalphotos.net)