Having a poor performing subcontractor can upset the entire project, resulting in: increased costs, increased risk of accidents, poor finished product and not meeting construction schedules. All of these outcomes impact the reputation of all contractors on the project, most notably the general contractor.
Hiring a contractor is the most important step in the process of risk management, since getting a low performing contractor may take some time to remove, extend the length of the project and can cost thousands of extra dollars. Does the general contractor require subcontractors to complete an application? This can be a great way to get information and complete some initial prequalification’s based on their experience and the needs of the project. Also, are references provided? If so, the general contractor should take advantage of them and make inquiries on the subcontractor’s past work. If references are not provided, the general contractor should ask for them.
As an insurance company, we have often suggested that general contractors use written contracts that contain appropriate Hold Harmless and Indemnity Agreements to help protect themselves against these potential problems. The use of written contracts is an important component to help control exposures that can arise from utilizing subcontractors, particularly when the expectations are clearly defined in the agreement and go beyond the simple transfer of risk.
Including language in the contract that stipulates consequences should the contract not be followed as dictated can also help maintain a safe atmosphere throughout the project. For example, in some jurisdictions, language can be inserted that will impose monetary penalties on subcontractors that fail to follow recognized standards. These monies can then be charged back to the project to assist with clean up or other activities that need to be performed to correct inadequate work. The contract should also require that all accidents be reported, in writing, to the general contractor as soon as possible.
The transfer of risk language (e.g. hold harmless, indemnity and insurance procurement provisions) is very important if it is to be an enforceable agreement by a court of law and should be drafted or reviewed by an attorney familiar with the laws of the jurisdiction where the work is to be performed. The attorney can counsel the general contractor how to use a contract as a tool to help maintain a safe and productive work environment on the project site as well as to protect the general contractor’s interests.
Commons Losses That Can Arise from Under Performing Subcontractors
Two of the most common causes of loss that can arise from subcontractors during a project are third-party-over suits and construction defect claims. A third-party-over suit can arise when a sub-subcontractor or an employee of a subcontractor is injured on the job site. Since the worker would typically receive benefits under workers’ compensation coverage from their employer and therefore cannot sue the employer, they may file suit against the general contractor and/or owner. These suits typically allege that a failure to supervise or adequately control the general worksite was the cause of the injury. A construction defect suit may come about because of poor workmanship or failure to install per code. Since the owner has no direct relationship with the subcontractor, they may turn to the general contractor for a remedy.
A general contractor can take steps to help prevent these potential causes of loss by:
- Holding a meeting with all contractors prior to the start of work. At this meeting, it should be made clear that all accidents are to be promptly investigated with written reports filed with the general contractor. If a subcontractor does not supply accident reports to the general contractor and later a suit is filed (sometimes two years later), getting the details can be extremely difficult.
- Setting up a communication system so that all contractors are informed routinely of what is important. This is normally done through weekly coordination meetings where all the subcontractors take part. Schedules are reviewed and safety concerns should be voiced and addressed.
- Performing site inspections and keeping a written log. Using a written checklist usually helps people focus on the right items and not get caught up in immediate issues that take away from a good inspection. At times, the inspection should be for the sole purpose of safety and other times it should focus on the quality of work being performed. Inspection records should be maintained at least as long as the statute of repose within the jurisdiction in which the work is being performed.
- Enforcing rules/laws on the job site. Some contractors rely on the theory that, if they direct the activities of their subcontractors, they will become more liable. However, if they already have an agreement that requires them to follow OSHA regulations, but they do not enforce it, their liability is only heightened. Of course, it is always recommended that general contractors consult with an attorney as well to assess potential liability exposures based on the specific work involved.
As an insurance advisor, it is important to reinforce the importance of thorough subcontractor screening and the use of good contracts to help prevent and provide defense for general contractors in the event of a claim. Acadia Insurance’s loss control representatives can help ensure there is a strong risk management program in place. If you would like more information about subcontractor risk management, contact an Acadia Insurance loss control representative.
Acadia Insurance is pleased to share this material with its customers. Please note, however, that nothing in this document should be construed as legal advice or the provision of professional consulting services. This material is for general informational purposes only, and while reasonable care has been utilized in compiling this information, no warranty or representation is made as to accuracy or completeness. Distribution of this information does not constitute an assumption by us of your obligations to provide a safe workplace. Maintaining a safe workplace in accordance with all laws is your responsibility. We make no representation or warranty that our activities or recommendations will place you in compliance with law, relieve you of potential liability or ensure your premises or operations are