General contractors know one of the key functions to your success is the relationships you build and maintain with your subcontractors. No matter how well your inner workings or project managers do their job, subcontractors can make or break a project. Tim O’Brien of O’Brien Construction in Troy, Michigan has said, “When it comes to day-to-day progress of a project, few parties play a larger role than subcontractors.” Surprisingly though, few general contractors have processes to help with subcontractor relationship management.
You still may ask, why is it important to have strong relationships with my subcontractors? How can putting forth the time and effort to maintain these relationships help me in return?
Quality of Work
Many general contractors make the mistake of tossing out subcontractors after every job and start from scratch looking for new ones when the next project begins. They don’t realize that keeping an ongoing relationship with their subcontracting partners can greatly improve the quality of the jobs they do while also saving time and money.
No two subcontractors are made the same, they all have unique talents and capabilities within the industry. You may have already spent years sifting through and working with many subcontractors, so you know what they specialize in and what they are not as equipped to deal with. For example, you could have two roofers that on paper do the same job but you have found one is better at asphalt shingles while the other is better at industrial metal roofing. If you maintain these relationships with a larger pool of subcontractors you will start to find better fits for your jobs and in return, a better-finished product.
When you begin to build a relationship and work repeatedly with the same subcontractors a mutual trust will naturally cultivate. With this trust, you save a lot of time. You already know who you need for a job so the time spent searching for a subcontractor in the bidding phase can be cut down. Also if you know you can trust the subcontractor, your project managers won’t have to micromanage the job site as much, and they will have more time to focus on the quality of existing work and winning new work. On the other side, subcontractors who trust you to pay them on time and communicate clear expectations will prioritize your projects over your competitors. Not only will the quality of the job be better, but it will also be less time consuming and less stressful.
As you grow stronger relationships, the quality of your projects will increase resulting in a higher reputation within the industry. With a higher reputation, more developers will begin to seek your company out for jobs. With increased job offers you can begin to be more selective in the jobs you choose, taking higher-paying offers that you know you have the right subcontractor partners to complete. This increase in job security will allow for a more stress-free work environment where you and your subcontractors know there is always a job on the horizon.
Not only will better subcontractor relationships lead to more jobs, but it will also lead to more subcontractors wanting to work with you. As you treat subcontractors with respect and maintain a professional relationship your reputation will also rise amongst the subcontractor community. If you, as a general contractor, are more recognizable it will be easier to search for needed specialized subcontractors while putting together a project.
Better Bidding Process
Having a good reputation and relationship with your subcontractors is one of the best ways to receive lower bids during your bidding process. As your reputation grows, you can create more leverage for yourself in the bidding process when you provide more than just monetary value. This non-monetary value can be anything from good communication, to on-time payments. Subcontractors know which contractors have a good reputation and over 70% of subcontractors submit bids 1% to 5% lower to contractors that are easy to work with and pay on time. Having a history with your bidders helps you determine the best pricing and allows for a more confident decision. You will know what finances they have to work with and can better communicate what is needed from each other if you already have an established relationship. Simply practicing better subcontractor relationship management skills can save you time and money in the future.
Subcontractor Relationship Management
But what are these skills? How can we improve our subcontractor relationships today and are there any systems to help us? There are three main ways you can instantly improve your relationships with your subcontractors: communication, choosing the right trade partners, and improving your payment process.
1.) Construction Project Communication
Two-way communication is important in almost every type of business and relationship; it is vital as a general contractor. A study at The University of Texas at Austin on improving construction communications showed that good communication was often mentioned as a key factor for a successful project. In fact, common complaints about bad projects were, “I couldn’t find anyone to answer my questions,” and “crews became frustrated while waiting on information.” Both of these complaints can be solved with better communication through the work chain.
Better communication has much to do with breaking barriers. A type of communication barrier we often see in construction is an organizational barrier, simply put, omitting someone from the communication chain or sending incomplete or irrelevant information.
As a contractor, you have to take the initiative of breaking these organizational barriers when working with your subcontractor partners. One key way to overcome these barriers is transparency. An example of practicing transparency can be seen during the RFI (request for information) and RFP (request for proposal) phases of the bid process. Be as clear and open about what you expect from your subcontractors and their craftsman. At the same time, the communication needs to be two-way to be as effective as possible. The receiver of information (such as subcontractors) needs to give some sort of feedback so the sender (general contractors) knows the information was correctly received. To achieve this effectively there needs to be an open line of communication, whether through subcontractor relationship management software or face-to-face meetings whenever possible.
2.) Choosing The Right Trade Partner
Selecting the best subcontractor for each job is a great way to avoid having a bad experience with a sub and ruining a potential or past relationship. You need to do your research. As mentioned before, no two subcontractors are the same, even if they are working in the same trade. They may have different specialties within their field or different financial needs because they might have different payment terms with their material providers. Loyalty is a good thing, but blind loyalty can be destructive, you can’t always pick the same contractors. Keeping the bidding process competitive can be hard for long-term subcontracting partners to process, but it is necessary.
You should always choose your long-term subcontracting partners when the job and the financial fit is right, but you have to know when to say no. In the situation where you put out an RFP and one of your loyal subs isn’t fit for the job but they still bid for it, you need to have an open dialogue on why you are not accepting the bid. Effectively communicating that you still want to work with them in the future and that the specific job might not have been the best for you and the sub to work on together can go a long way.
3.) Construction Payment Management
Getting your payments right and on time is one of the most crucial aspects of subcontractor relationship management. Chuck Taylor, director of operations at Eaglewood Construction says, “being able to pay subcontractors as quickly as possible helps build long-term relationships. Subcontractors will gravitate towards better-paying (contractors).” Taylor even said they have lost subcontractors in the past from slow pay or drawing out closeouts, this is a very common problem in the industry, yet it’s avoidable. Notice how he didn’t say higher-paying, he simply said better (faster) paying contractors.
Not getting your payments out on time is a quick way to lose the trust of your subcontractors. Today, subs have tight profit margins, a 20% progress payment this period could be what they need to order the rest of their supplies from their material suppliers to complete the job; you are hurting yourself by not processing that payment through on time. Rabbet and Procore studies found that 60% of subcontractors have not accepted bids because the general contractor had a reputation for slow payments.
Typical retainage on payments is around 10% although it has shown to be more beneficial to general contractors such as Taylor to hold as little as possible. Holding less retainage helps build a productive long-term relationship with subcontractors where they begin to prioritize your work. There are still circumstances when you need to hold retainage, such as when certain legal documents haven’t been submitted. This is why there has been a shift towards variable retainage, the gradual decrease in retainage as the project gets closer to completion. This helps relieve financial strains on the subcontractor while still allowing the general contractor to hold some retainage to ensure proper project closeout. We have seen having a good relationship with your subcontractors can greatly increase your day-to-day functions as a general contractor, and doing your payments correctly is one of the best ways to build this relationship. Subcontractors know which contractors pay on time and which ones do not, staying ahead of your competition is key. So, you need to invest in better options for your billing, payment, and communication processes.
THE PROBLEM LIES WITH THE CURRENT BILLING AND PAYMENT SYSTEM. It is a headache. Getting all the payment applications (pay apps) approved multiple times throughout the chain, on top of hours of meticulous paperwork is time-consuming and has a high probability of error. With the current system that most contractors and subcontractors use to track billing and payments, the time it takes and the risk introduced is holding your company back. However, if you take the time to invest in getting your systems and processes in place today, you can create a highly repeatable and scalable business model. New technologies are making billing systems more efficient and easier than ever before.
Flashtract’s Construction Billing and Payment Tools
Your subcontractor relationship management may seem like a huge, never-ending, task but with the subcontractor relationship software – you can manage all of it in one place. With Flashtract you can effectively review and track past payments and job progress to analyze how efficient and cooperative your subcontractors were. This will give you more information to choose the right partners in future bidding processes. Flashtract offers a central direct line of communication between all parties through email, phone, text, or in-app. You can require certain documents to be submitted on every payment application so that there are never any errors or incomplete paperwork.
Flashtract is a construction billing software that allows you to submit, collect, and track payment applications all in one location. You can electronically sign billing documents in seconds saving your company time to focus on bringing value to your clients. Anyone from developers to material providers can submit payment applications and invoices for approval and Flashtract will automatically generate lien waivers and other supporting documents. Flashtract mitigates the risk for calculation errors while increasing the accuracy on submitted payment applications, saving your company time and money, so you can focus on building not billing.
If you would like to find out more about how Flashtract can streamline your construction billing process please visit our site or get in contact with us.