General Contractor Cost Considerations

By: Chris Daues, RubinBrown LLP

Payments to subcontractors typically makes up 65% to 85% of a general contractor’s (GC) total expense. While this percentage will fluctuate depending on the amount of work the GC self performs, it will always be a significant cost.

It is vital to allocate special attention and design specific controls to manage subcontractor expense. Four important controls to have in place are as follows:

1.    Pre-qualify your subcontractor’s financial stability and credit worthiness before they start any work.

  • Obtain their latest audited or reviewed financial statements
  • Ask for references and follow through with phone calls
  • Request a certificate of insurance
  • Request a surety capacity rating
  • Request a credit report

2.    If working with sub-contracts in excess of $250,000 or with unfamiliar subcontractors, the GC should give serious consideration to a surety bond requirement. A good subcontractor should have no problem furnishing a surety bond.

  • Examine the bond to ensure it is authentic
  • Complete some due diligence to ensure the bonding agent is reputable

3.    Design and implement an internal competitive bid policy for selecting a subcontractor. We recommend that this policy stipulate that at least three bids or quotes be obtained for each line of work where a subcontractor is needed. If the low bidder is not awarded the job or if three bids were not obtained, the reason should be documented in the job file and reviewed by management.

4.    Obtain a list of the subcontractor’s major material suppliers and request lien waivers. The GC should verify that the subcontractor is paying its vendors on a monthly basis while the job is in progress.

In summary, managing a GC’s most significant expense can have a direct impact on profitability. By implementing tight controls, a GC may be able to “move the needle” on profitability in a competitive market.

Contact:  Chris Daues, Manager
RubinBrown LLP

Click below for BuildMO Newsletter Archive