Subcontractor underperformance happens within the construction industry, as I am sure it does across all industries. However, in our industry, managers and surveyors are often relying on the expertise of the subcontractors they employ to carry out trades and works they themselves cannot undertake. Trusting that expertise is a vital part of delivering multifaceted projects on time and budget.
When a subcontractor underperforms, it can have dire consequences for the project and those involved, from operatives all the way to stakeholders. This is why any potential shortcomings must be spotted through early warning signs and prevented where possible. Any failures should be addressed and resolved at the earliest possible juncture.
Due to the nature of subcontracting, this can happen more often than it does with company operatives. This can be down to subcontractors not having the resources or capital of a larger firm. It could also be down to a certain level of anonymity on larger scale developments – the Principal Contractor’s name is the one of the hoardings, and they will ultimately bear the responsibility.
In this article, we will look at how to manage and improve the performance of subcontractors who are not delivering what is expected of them.
What does underperformance look like?
A clear definition of underperformance in a real-world scenario does not exist. Underperformance can manifest itself in many ways, and ultimately it will look different to everyone depending on their own standards and expectations.
It’s vital to outline and agree the expectations for all parties before any ground is broken. Once these expectations have been agreed and circulated to all relevant personnel, they will be set out formally in a contract or works order of some kind. If this is in place from the start, you’ll alleviate any ambiguity further down the line and support the regulation of both parties having clear and defined parameters about their responsibilities and accountabilities. It will also be key in the settling of any contractual disputes between a client and a subcontractor.
Standardised expectations are key to set the benchmarks by which all relevant parties will be judged upon. It’s essential to remember this is not only from a contractual point of view, but from a morality and ethics standpoint as well.
You should consider implementing practical systems by which the progress can be tracked against the predetermined targets. KPIs (Key Performance Indicators) are a way to track subcontractor performance and these can be defined based on the trade and the project at hand
It’s crucial to attain early adoption of the system from the subcontractor. Trying to retrospectively outline where failings occurred and who was the responsible party is open to interpretation. It’s a drain on resource and counterproductive with regards the economic impact and time lost due to underperformance.
KPIs can be as simple as measuring the number of units completed against a programme. For example, you could track a joinery subcontractor by the number of new Doorsets they install per day, (this is how price work is managed). However, just targeting subcontractors on quantity is likely to cost you dearly on the quality aspect of works. Again, these KPIs need to be clearly outlined to any subcontractor and agreed by them before work starts. The ramifications of missing these targets should be made clear to the subcontractor, both in relation to the overall project and to their part within it. If the ramification is a financial penalty or one that involves disciplinary action/removal from site, it should be clearly outlined in any policies or appendices to the Contract/Works Order.
The quality required for the formal completion of any works should also be made clear to the subcontractor. For example, the target may be 5 no. doorsets per day, but these have to be inspected, approved and signed off by a 3rd party accredited or qualified person and certified before they are included in any KPIs or Applications for Payments. This should be agreed as early as the Tender Stage, a timely reminder during Pre-Start Meetings and Site Inductions is never a bad idea though!
This sets expectations to all for the quantity and quality aspect of the works.
It’s also critical to make sure that you have the paperwork from the subcontractor outlining how they intend to deliver this:
- Delivery Plans/Strategies
- Health and Safety Paperwork
- Data Sheets
- Supply Chain etc.
All this is part of the build up of the subcontractor and their business. It’s all key to their performance and viability, and any shortcomings in these documents and processes can lead to failings during a project. Ascertain this at Tender Stage, formalise it in the Contract, and then setup processes and plans to track progress.
What does the contract say about underperformance?
Performance is not limited to work on site, it’s broader in construction and refers to the ability of a contractor or subcontractor being able to fulfil any and all of their contractual obligations. This includes their financial commitments, as if a subcontractor is unable to manage their cashflow, or pay their bills, they may well become insolvent or bankrupt and be unable to complete works, which will have an adverse effect on you and your ability to move the project forward.
Most forms of construction contract will allow for the provision of a performance bond. These are becoming more common in the construction industry to insure clients against the risk of contractors failing to fulfil their contractual terms. Principal Contractors can also use this method when employing subcontractors. This will depend on the perceived financial strength of a subcontractor and how their cashflow and credit check reports come back to the Principal Contractor during the award phase. The major reason these bonds would be taken out is to protect the PC against the potential insolvency of a subcontractor. If this does occur, the bond will provide compensation guaranteed by a third party, which should enable the PC to continue their role in fulfilling the contractual obligations to the Client/End User.
These bonds are typically set at around 10% of the Contract Value – meaning any difficulties arising from the non-performance of the contractor can be covered with the resources made available in order to find another contractor to complete the works etc.
On Demand and Conditional are the two types of Performance Bond available to contractors and clients. Conditional bonds require evidence provided by the claimant that the subcontractor has underperformed and not fulfilled their duties and contractual obligations, and therefore consequential losses are in play.
These bonds and their requirement must form part of the contract terms. They must be set out in the tender documents and the length that the PC or Client stipulates the bond stays in place, usually until the end of any defects liability period, once Final Certificate has been issued, and retentions released.
What are the warning signs?
Warning signs can be varied, and some are more likely to manifest earlier than others. One major tool in spotting a sign of underperformance is the programme of works. The subcontractor should be able to give regular updates of completed works against the agreed schedule and be able to showcase the evidence of completed works in line with those set dates.
This can be through one of the numerous pieces of software designed for recording works in the construction industry; in the Passive Fire Protection sector we use software such as Hilti Document Manager, Boris, and Bolster. All of these can be remotely checked on a daily basis, (in real time if required), which allows the PC and Client to check the subcontractor’s works are on time and in line with the schedule.
Desktop reviews and regular checks of works completed against the programme will form part of the Quality Control and Assurance process as well. If the subcontractor is recording their works, sending reports for review, providing evidence that quantities required by the programme are met as well as the quality required by the project brief, then all is well. If any one of these items or processes falls down or fails, underperformance becomes apparent and escalation will be required.
This can accompany the usual daily, weekly, or monthly site walks and inspections and allows for a more robust tracking of progress and performance.
What are the best methods to motivate the subcontractor? What are the carrots? What are the sticks?
As with most performance-based industries and tasks, motivating subcontractors on construction projects is commonly managed using the ‘Carrot and Stick’ methodology.
In my experience, the construction industry offers a large variety of both, some examples of these are outlined below:
- Financial Incentives – for finishing a project on time and on budget (usually increases incrementally if the job is completed before schedule and/or under the contract value).
- Placement on Approved Subcontractor List – being added to a list of subcontractors who will be used again on future projects, thus creating work for themselves by performing well.
- Training and Certification – offering training courses, CPD, the chance to obtain certification, subcontractors can be rewarded by a client who invests in them – usually on long term projects, or projects where future phases are available. For example. Fire Door maintenance, where a joinery subcontractor provides a desirable performance, there is a chance training will be provided so they can be offered the yearly maintenance contract.
- Financial Penalties – for finishing a project behind schedule or over budget, there will usually be a deduction on invoices, or a contra-charge levied at the subcontractor (as long as it is outlined in the Contract of course).
- Yellow/Red Cards and removal from site, meaning the termination of the project and any potential future earnings/profits from it.
- Future works are unlikely to be awarded due to damaged reputation and relationships with clients. This can also mean that the future works end up awarded to a competitor and causes further issues with the subcontractor’s standing in the industry.
- If the subcontractor has underperformed to such a level where works have become substandard or dangerous, they could be reported to their accrediting bodies and lose their certification.
These examples are far from exhaustive, but give a basic idea of the positive and negative connotations of what is likely to happen when a subcontractor performs or underperforms.
Are there scenarios where underperformance is somewhat inevitable?
Prior planning prevents poor performance. Scenarios where underperformance is somewhat inevitable can occur when we fail to prepare.
For example, if the wrong subcontractor has been awarded a job, trying to save costs by asking the drylining subcontractors to also hang the doors instead of bringing in an additional joinery subcontractor will lead to inevitable underperformance. This is wholly avoidable with the correct tender and contract award processes.
Other scenarios include selecting the correct subcontractor for the job but giving them incorrect information or unrealistic expectations and targets. All information should be provided and agreed as deemed acceptable before works start. All targets must be reasonably practicable, they must be achievable and they must be agreed by everyone involved. If the project starts on solid and firm foundation, underperformance should not occur, and if it does, it’s by choice, and that is when you reach for the stick!
Image credit: iStock.com/RichVintage
About Callum Brown
Callum is a Contracts Manager in the Passive Fire Protection Industry, with previous experience as a Quantity Surveyor and Operations Manager in Fire Protection, Construction, and Plumbing & Heating.