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Construction Prequalification and Understanding Risk Management Today

Unsurprisingly, industry noise about the financial risk associated with subcontractor default is pretty loud. Yet, for as often as the problem is discussed, the solutions to prevent it simply are not. To those already in the know, it might seem obvious but many others remain unaware of their options when it comes to handling this sensitive topic. As a subcontractor or a GC, one of the most efficient solutions is prequalification. No matter which side of the fence you’re on, establishing a sense of confidence before the partnership even begins goes a long way to increase success. So what exactly is prequalification? Construction prequalification is the process by which subcontractors are screened and evaluated by general contractors for inclusion in bid requests for a project. It’s a much needed opportunity to reduce risk upfront, and it’s a growing necessity in the industry.

 

Previously, this process required subcontractors to manually submit forms and information to the same general contractors for each project. But the growing trend of ongoing qualification management programs among general contractors is a more proactive way to mitigate financial exposures and other risks – and frankly owners and developers are strongly encouraging this shift. Ultimately, this means that subcontractors are responsible for submitting more information to win work.

 

Here are a few big reasons why construction qualification programs are increasing in demand: 

Greater risk awareness: For owners and developers, prequalifying subcontractors creates an environment of transparent communications. Decisions can be made faster and with greater confidence. Additionally, a growing number of insurance companies are requiring that general contractors prequalify before approving and issuing bonds or sureties.

Legislative changes: Legislative changes all over the country have pushed owners to require prequalification programs for largely sought after public and government projects.

Past project failures: During the recession, many subcontractors felt forced to take work with low margins or to meet payroll obligations to stay afloat. This resulted in subcontractors taking on disproportionately large amounts of risk relative to their return. This increased their financial risk and caused many large project failures. These failures have since become hard earned lessons for owners, general contractors and insurance companies alike.

Prequalification Criteria

Because this shift will continue, making prequalification management programs more of a priority is going to be critical to job success. As the construction industry evolves, general contractors are no longer just builders, they’ve become risk managers with most of the actual labor subcontracted out. So what information do general contractors require from subcontractors to determine if they’re qualified for a project? It’s not uncommon to see the following documents required in a prequalification program:

  • Financials
  • Bond information
  • Insurance coverage, including providers and limits for various exposures
  • Certifications and licenses
  • Equipment
  • Project history
  • Leadership/ownership
  • Safety and other compliance reports
  • References
  • MBE/WBE status
  • Legal/pending litigation information

 

Armed with the information above, general contractors have the ability to better assess the possible risk associated with the overall success of a project based on who they choose as their partner. And it’s easy to see that given access to the full picture, general contractors are more likely to award bids to prequalified subcontractors.

The Future of Prequalification Programs

The majority of prequalification programs involve both general contractors and subcontractors manually gathering and distributing a broad range of information. The time and manpower these manual processes require prevent general contractors and subcontractors from moving forward with bids, and projects are often stalled. What’s more, gathering this information on its own simply isn’t enough. General contractors need to evaluate the numbers to truly understand the full scope of their exposure in working with a subcontractor across their enterprise. Increased pressure from owners, developers and insurance companies has created the need to implement well rounded prequalification programs using automated, cloud-based applications, such as Textura-Pre-Qualification Management™(PQM™).

These software solutions eliminate the tedious, manual process of prequalification by significantly reducing the amount of effort involved in the process. Developments in prequalification process automation and collaboration technology have enabled subcontractors and general contractors to come together in a collaborative approach by streamlining data collection, driving down costs and lowering risk.

As prequalification construction solutions become a necessity in this process shift, it becomes a question of when, not if, they will be the standard in the pre-construction world. That’s why we believe it’s important for you to understand how to navigate prequalification – because we know that one day it will become essential to your success.

 

Interested in learning more?

 

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