Ultimate Account Blog

Mitigating the Risks of Hiring Subcontractors

mitigating risk, subcontractor, hiring

 

When your home is in need of a major project, say plumbing or electrical work or remodeling, you will often seek out a qualified company or individual to do the project or to help you with it. Many homeowners will seek quotes from multiple service providers, do research, seek referrals, and make a final determination on who performs the work based on the results. In other words you are mitigating your risk against poor workmanship or a poorly managed business.

Business owners need to have an even greater amount of diligence when selecting subcontractors. The construction industry is perhaps the most common user of subcontractors. In large construction projects, the failure of a sub not only affects the reputation of the general contractor but adds to the liability of the project if it can no longer be done on time. If a subcontractor’s business goes under, then an alternative means of finishing the project must be secured, often on very short notice.

General contractors can, and often do, require their major subcontractors to obtain performance bonds, which are essentially insurance policies that the job the subcontractor has agreed to do will get done.

Companies other than general building contractors, however, do not have an industry equivalent to performance bonds in order to make sure that their subcontractors complete their duties. Here are a few things for all companies to consider when hiring a subcontractor like a courier, transcription, or cleaning service.

Reputation – What is the quality of character of the potential subcontractor? Do they have a good reputation in the industry and within the community? If not, it is probably not a wise choice to go with them.

Background check – If the subcontractor is an individual sole proprietor, performing a background check on that person is a wise idea, especially if they are going to be handling money or be exposed to confidential information.

References – Hearing from others that have had work done by the subcontractor is an important part of due diligence. The subcontractor is probably going to provide the names, so there is, by nature, a measure of inherent bias because they are not going to suggest references who were unhappy with their performance. When checking references, then, a business owner must ask more detailed and open-ended questions to the reference about their experience with the subcontractor.

Financials – If the subcontractor is a larger organization, they may have financial statements available for review. If their financials are weak, there is risk of the business ceasing operations, which would be a problem in a potential long-term engagement.

Controls – Having a conversation with the owner or manager of the prospective subcontractor about controls in place at the subcontractor’s business is also a wise idea. For instance, what is their screening process for employees? Are their employees bonded? How are their workers trained and monitored? Do they know what to do ethically if they come across sensitive information?

Some of these matters may seem like a lot of work, but any negative impact on your business has the possibility of creating a negative impact on your customers. Spending the time to make sure that you have the best subcontractors for your situation will avoid pitfalls down the road.

 

By Dan Massey, CPA, Manager

DanMassey

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