Term Paper: Subcontracting Problem

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Business

Construction Subcontractors: Problems and Possible Solutions

In recent years, the construction industry has grown more complex.

Major projects are typically handled by a main contractor who then subcontracts out the work for each individual aspect of the job.

Much of this growing complexity can be attributed to the scale and technical expertise required in today's construction projects. An entire public housing development might be commissioned by a public authority. An office park might be built by a real estate developer. Houses, apartment buildings, and office towers require the use of sophisticated materials, and must be equipped to handle innovations in computing and communication. Building codes have become stricter than ever as governments become concerned with safeguarding the environment and protecting individual human beings from the ravages of fire, earthquake, flood, or other disasters. Security, too, can be an important consideration in a post 9-11 world, with contractors asked to provide facilities that are safe from attack, or are merely secure from intruders. The materials and techniques demanded by these new enterprises are frequently extremely costly. A welter of government regulations only adds to the expense, and to the difficulty of determining whether projects are being carried out correctly. Experts are needed at almost every level of development. Merely winning a contract involves a complex and often expensive bidding process. Pre-contractual, contractual, and post-contractual obligations must be met in a timely and cost-effective manner. The various subcontractors must be selected from among a vast pool of potentially qualified companies. Potential subcontractors' strengths and weaknesses must be assessed, their assets and liabilities taken into account: past performance record, ability to handle the particular job at this point in time, ability to provide effective design (and possibly re-design) skills, credit worthiness, and their ability to work efficiently and effectively with other subcontractors and with the main contractor. Poor performance by subcontractors, or an inability on the part of the main contractor to effectively communicate with the subcontractors, or to provide proper funding and resources, can lead to cost overruns, poor workmanship, unnecessary re-designs, and litigation. The relationship between main contractor and subcontractor is one of the most significant issues facing the modern construction industry.

Can the Subcontractor Handle the Job?

A first consideration involves the ability of potential subcontractors to handle the job for which they are applying. Handling the job means not only being able to perform the specific work required, but also whether the company is capable of handling the given project in addition to whatever other work it may be performing at the time, and whether its will be able to complete the work on schedule, in line with projected costs, and according to specifications. The selection of subcontractors within the construction industry is often highly personal. (Applebaum, 1999, p. 23) Main contractors feel that if the subcontractor is a known quantity - if the subcontractor possesses a good reputation - the subcontractor can be trusted to perform the work in an efficient and cost-effective manner. Presumably as well, a subcontractor with a good reputation is also one with whom it is possible to have a good working relationship i.e. one in which there will be ease of communication, ease of understanding, and so forth:

Employers, for their part, as they obtain new contracts, are seeking to assemble a workforce and set of subcontractors to enable them to build their projects. Most of the negotiations involved in the hiring process are based on personal relationships. (Applebaum, 1999, p. 23)

Subcontractor workloads directly affect the ability of the subcontractor to perform the necessary work. Subcontractors with too much work for the size of their organization are likely to suffer from a variety of problems, including, but not limited to, financial difficulties, such as cash flow and line of credit problems. (Dulung & Pheng, 2005) Problems in these areas can work to the detriment of the main contractor, interfering with the entire job and resulting in costly delays, poor workmanship, or other serious problems.

Design and Re-Design

Large scale construction problems frequently call for a considerable amount of active design and re-design work. The main contractor may subcontract out various facets of the architectural and engineering aspects of the project that directly relate to the actual construct phase. (Bosch & Philips, 2002, p. 8) Again, this is a highly technical process, requiring extensive knowledge of a broad range of materials. New materials, some stronger, some less expensive, but all better adapted to the needs of today's construction market, are being brought into use on a regular basis. The main contractor must possess the ability and flexibility to select subcontractors who are familiar with all of these options. These options may change during the course of the project, thus demanding redesigns that reflect the incorporation of these materials into the work:

The complexity of construction products requires that these consumers hire architectural and engineering services to help them with conceptualizing and implementing their design. Not only do most construction consumers need help designing what they want, but also they often seek help in purchasing what they design. Because construction goods are durable, many consumers of construction services only seldom enter the market. When they do, they are confronted with a potentially bewildering system of subcontracting and material providers. (Bosch & Philips, 2002, p. 9)

The subcontractor must adapt to these changed circumstances. A particular technique or material may not be adapted to the realities of the site, or may be too expensive to use. The subcontractors selected must be able to deal with these eventualities in a way that will not work to the detriment of the overall project.

Subcontractors' Financial Soundness

As already mentioned, a subcontractor's reputation is based, in good part, on that subcontractor's reputation for financial soundness. Fiscal solvency and ability to secure adequate lines of credit are important factors in guaranteeing that a job will be done properly. Without good financial status it is nearly impossible for a main contractor to obtain work. The contractor must be bonded at various stages of the process. First, there is the bid bond, a guarantee of funds that declares that the contractor is able to carry out the work if awarded. This is followed by a payment bond that guarantees the contractor's ability to pay the organization's workers subcontractors and suppliers. Lastly, there is the performance bond, in effect, an insurance policy that makes an insurer liable for any defaults on the part of the contractor. (Phelan, 2003) Subcontractors' financial difficulties create problems for the main contractor in terms of fulfilling any, or all, of the obligations represented by these three forms of bond. Furthermore, should the main contractor become unable to pay according to any of his obligations, or run short of cash during the project, the subcontractor that is dependent upon a constant cash flow will also be adversely affected. Subcontractors with good credit and lines of credit can continue to work through temporary interruptions of cash flow. Cash flow and other aspects of financial soundness are major components of Total Quality Management - factors that affect an entire project. Main contractors must work with subcontractors to ensure that there exists a firm commitment to achieving Total Quality Management. (Pheng & Teo, 2003)

Partnering between Main Contractors and Subcontractors

In selecting a subcontractor, and afterwards beginning to work with that subcontractor, the main contractor must seek to ensure that a good relationship is created between the main organization and that of the subcontractor. An extension of the Total Quality Management idea, close cooperation between main contractor and subcontractor involves the one keeping the other fully informed both of present conditions, and of future goals, including the final use and intents of the project. Kumaraswamy and Matthews discuss, at length, the importance of providing subcontractors with sufficient details prior even to the subcontractor's actual selection for the project. (Kumaraswamy and Matthews, DATE) in keeping with a system of "partnering" between main contractor and subcontractor, Kumaraswamy and Matthews describe a process wherein finalists for a contract participate in a series of interviews that serve the following aims:

Ensuring that Subcontractor understands nature of project

Gives Subcontractor chance to make suggestions and submit alternative proposals

Mutual understanding of price

Technical specifications and ability

Subcontractor's past experience with work

Design content

Procurement times

Quantity of work

Subcontractor's financial background

Desire (if any) of main contractor to develop long-term relationship with subcontractor

These points and others combine to produce the partnering relationship, thereby guaranteeing a two-way flow of information and understanding. A mutual relationship is born, one that makes the subcontractor feel that his or her organization is an integral part of the overall project. The subcontractor not only receives instructions from the main contractor, but also is given the chance to make inputs of his or her own. As well, the interview process makes sure that the main contractor has a good grasp of the subcontractor's abilities, financial status, and so forth. On the other hand, the subcontractor can make an informed decision… [END OF PREVIEW]

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