Those of us in the construction industry know that risk is a part of doing business. With so many moving parts on a construction site, financial considerations, and a looming timeline, there is always potential for something to not go as planned. It’s how that risk is managed that defines contractors.
One the risk factors that is particularly difficult to deal with is the risk of subcontractor default. Subcontractors sometimes don’t have the financial backing that other construction business entities have so they are more prone to financial difficulties. This is a significant problem within the construction industry and is considered one of the three biggest risk factors along with the skilled labor shortage and onerous contract language, according to the Associated General Contractors of America.
In this two-part series, we will discuss some of the ways in which contractors and construction companies can minimize the risk of subcontractor default. If you like, you may skip ahead to part two of this series.
The Selection Process
Many potential issues can be dealt with before they start by having a clearly defined selection process for subcontractors. Set pre-bid requirements that determine if subcontractors can perform the tasks that are being asked of them from a physical and financial standpoint. This may eliminate a number of subcontractors right away. With just a group of candidates that fit the basics qualifications, you can use other determining factors like reputation and skill level to make decisions.
Focus on the Contract
As with any aspect of construction, the contract is critical. With the help of a Lakeland construction attorney, you can put provisions in the contract that protect you in the event that a subcontractor does not perform some aspect of the work.
Subcontractor Default Insurance or Performance Bond
Another method for protecting yourself from subcontractor default is the use of a performance bond or subcontractor default insurance. With a subcontractor performance bond, a surety pre-qualifies the subcontractor and pays to have construction work completed should that subcontractor default. With subcontractor default insurance, a contractor files a claim if the subcontractor defaults. A Lakeland construction lawyer can help you navigate both options and make the best choice to protect your business.
Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.