Subcontracting in the Construction Industry

¶ … Subcontracting in the Construction Industry Today

The vast majority of the operations connected with the construction of buildings and public works are carried out by various companies, an important category of which is the construction firm or contractor. The management of the general contractor function is particularly important because, following the design, the contractor is responsible for giving shape to the end product; furthermore, the construction process includes features that complicate its management, such as labor-intensivity, handling and storage of large amounts of bulky materials, difficult site conditions, and tasks of coordination of materials and subcontractors (Sebestyen, 1999).

In addition, the construction industry is different from virtually all other types because of the structure of the industry itself. For example, in sharp contrast to other industries where the design, construction and marketing of a product are handled by one company, construction contractors are presented with the end result of the planning and marketing process with alternatives existing only as to how the work will be accomplished. In this regard, Bosch and Phillips (2002) emphasize that, "The idea of the building has been sold to the customer before the construction contractor bids on the project. Moreover, the winning general contractor does not even make most of the contracted product. That is subcontracted out to others" (p. 9). As these authors and empirical observations confirm, general contractors in some cases will be "pushing actual construction work down towards subcontractors while at the same time attempting to obtain some of the work associated with the design or engineering of the project. All the while, the project manager may be attempting to assume some of the site management work traditionally associated with the general contractor" (Bosch & Phillips, 2002, p. 9). As a result, the construction industry today represents a moving target of sorts concerning who does what on the construction site: "The relative roles of consumer, designer, manager, and 'constructor' are constantly shifting. This constant evolution of structure is both a source of and an attempted - if temporary - solution to the ever-present turbulence of this industry" (Bosch & Phillips, 2002, p. 9).

This ubiquitous turbulence may be part and parcel of the construction industry today, but it is not particularly conducive to the efficient management of construction projects. Furthermore, there remains a paucity of timely guidance for construction contractors concerning the most advantageous approaches to subcontracting. According to Dulung and Pheng (2005), "Main contractors need subcontractors with good caliber and appropriate resources to execute the work at a fair price and high quality. Therefore, there is a need to develop an advanced decision tool to undertake this selection process in a more formal way" (p. 93). To this end, and to help determine when and what components of a given construction project should be subcontracted out in a given construction project setting, this study was guided by the following research questions:

What are the considerations that a construction company should use to determine what work will be contracted out and what work should be retained and completed by the construction company itself?

Is the use of subcontractors always the most effective approach?

Research Findings and Discussion

As noted above, the construction industry is different from most other types of industry; therefore, management theories intended to help manufacturing managers are applicable to construction to only a limited degree (Sebestyen, 1998). Furthermore, given the fundamental changes that have taken place in the industry in recent decades, today is not even possible to consider the construction industry as being one homogeneous economic sector. In this regard, Sebestyen (1998) emphasizes that, the constituent enterprises of the construction industry today differ in terms of size and professional character, and their managements must also conform to varying characteristics. "Large companies experience most of the problems," the author advises, "although it is quite justifiable to consider the management problems of small and medium-size firms" (Sebestyen, 1998, p. 248).

Many larger contractors may have some commonalities with their manufacturing counterparts in other industries in that they share with their industrial counterparts a linear staff and a functional staff; cooperation between the two types of staff can be organized along the military system of general staff and linear subordination, or by the so-called "matrix management method" characterized by the dual structure of project managers and functional divisions (Sebestyen, 1998). Whatever management framework is used, large (and successful) construction contractors share some commonalities that can be defined by the following five features:

They are diversified;

Management, not fixed assets, is their main scarce resource;

They have low fixed assets;

They have a positive cash flow; and,

They subcontract extensively (Sebestyen, 1998, p. 248)

It has also been determined that a majority of large construction contractors undertake various types of projects such as housing, property development, production of building materials and components, and frequently non-construction activities as well, that will influence their decision whether to subcontract a particular component of a job or not (Sebestyen, 1998). This decision will also relate to the relative size of the contractor and any subcontractors involved, but this is not necessarily a make-or-break factor. In fact, it is not unusual for construction subcontractors to range from the very small to the same size as the construction contractor (or even larger in some cases), and the choice of which company is best suited for a particular job depends on a number of factors that can spell the difference between success and failure.

For example, in their study, "Factors Influencing the Selection of Subcontractors in Refurbishment Works," Dulung and Pheng (2005) report that, "Refurbishment projects differ from new build projects, the former are perceived to be more difficult to manage than new build projects" (p. 93). These types of projects may require the extensive use of subcontracting because, "Subcontractors perform vital roles in these projects" (Dulung & Pheng, 2005, p. 93). If managed improperly, though, contractors may lose time, money and credibility because of problems that result from a poor choice of subcontractor:

Time and cost over-runs, and contractual disputes are common in these projects because of the improper selection of subcontractors. Currently, however, there is a lack of knowledge relating to the selection of subcontractors for building refurbishment projects" (emphasis added) (p. 93).

Complicating the issue of whether to subcontract or complete a given component of a construction project in-house is the wide array and sizes of businesses structures used throughout the construction industry today. According to Finkel (1997), "Construction firms appear as a mind-boggling array of different-sized units of capital. Proverbial mom-and-pop shops are typical participants in alteration and small-scale building projects. In these situations the employer is often estimator, expediter, and installer while family members work as bookkeepers and occasional helpers" (p. 33).

From a purely pragmatic perspective, using subcontractors to augment the core competencies of the contractor just makes good sense in many cases because of the specialty areas involved in a major construction project as Finkel (1997) emphasizes, "It is not difficult to get a sense of the fragmentation of the construction industry. A walk down a busy big-city block where buildings are under construction is usually very revealing. Multimillion-dollar structures are erected by large-volume contractors only a few yards from small-scale projects that are handled by one- or two-person shops" (p. 32). A survey of 135 construction contractors by Dulung and Pheng (2005) identified the following trends and common practices for subcontracting:

Almost all of the respondents (89%) had a pool of subcontractors from which the firms regularly selected to carry out the subcontracting works;

Although they maintained the subcontracting pool, these contractors also considered new subcontractors from time to keep up with the competition;

More than 50% of the respondents indicated that they have a written policy to serve as a guidance in the subcontractor selection process; however, fully 86% of the respondents answered that they did not employ a specific computer tool to support data processing for the selection of subcontractors;

Almost three-quarters (71%) of the respondents used a group decision-making process that was based on informal discussion, experience and intuition to select subcontractors; and,

The decision for the selection of subcontractors was mainly produced manually and decided from more than one decision maker; because a majority of the respondents did not utilize a special decision support system, they made decisions through unstructured and unsystematic ways, and consequently, the decisions made may be ineffective and inconsistent (Dulung & Pheng, 2005).

The salient findings from the Dulung and Pheng (2005) study are illustrated graphically in Figure 1 below.

Figure 1. Percentage of surveyed construction firms using various subcontractor selection methods.

As can be clearly seen from Figure 1 above, a majority of the construction contractors surveyed by Dulung and Pheng recognized the ongoing need for selecting appropriate subcontractors for a given project and a majority of them even had written policies in place to help guide the process, but there remains a dearth of computer-assisted applications used for this purpose and the decision-making process has suffered as a result.

The study by Dulung and Pheng (2005) also identified several aspects of a subcontractor as being the most important for contractors during the decision-making process as shown according to their respective importance in Table 1 below:

Table 1.

Selection criteria used by construction contractors for selecting a subcontractor.

Criterion

Weight

Organization characteristics

Company reputation

Company age

Responsiveness

Personnel qualifications

Related degree or certificate

Relevant experience in building construction

Technical abilities

Financial performance

Bank references

Profitability history

Current workload

Relevant experience

Similar type of projects to the proposed work

Similar size ($) of projects to the proposed work

Source: Dulung & Pheng, 2005, p. 94.

The respective weights were then sorted in ascending order using Excel (see copy of data table at Appendix a) and are illustrated graphically in Figure 2 below for ease of comparison as to their relative importance in the subcontractor-selection process.

Figure 2. Selection criteria used by construction contractors for selecting a subcontractor.

Source: Based on tabular data in Dulung & Pheng, 2005 at p. 94.

Although the construction is fundamentally different from other manufacturing enterprises as noted above and by these authors, based on their findings, Dulung and Pheng applied a similar assumption in the subcontractor selection process that suggested the main contractors (as buyers) typically select subcontractors (as services provider) based on three primary factors:

Project specifications and subcontractors' proposal;

Subcontractor profiles; and,

Main contractor's objectives that include qualitative aspects.

Whatever subcontractor is selected for a given project, it is important that such subcontractors and their employees "walk the same walk" and "talk the same talk" as the contractor to ensure effective communications and mutual rapport on the worksite. For example, Dulung and Pheng (2005) determined that, "trust" was a common variable that affected the decision-making process of the main contractor when selecting a subcontractor; the authors add that "trust" and "communication" were not only able to reduce the transaction costs, which make possible the sharing of sensitive information and permit joint projects of various kinds, but also provide a basis for expanding moral relations in businesses (Dulung & Pheng, 2005).

In this regard, Applebaum (1999) reports that the following traits are characteristic of those employed in the construction industry today:

The culture of construction workers is based on their control of their own work process through their ownership of their tools and their knowledge of their craft;

Construction proceeds through an informal, face-to-face organization of work;

Construction technology is largely a handicraft technology. This is modified somewhat by the use of machines like cranes and hoists for heavy lifting, and excavation, grading, and loading machines for site work, foundations, on-grade slabs, street utilities, and roadwork;

Construction work is dangerous and arduous; indeed, construction has one of the highest accident and death rates of any industry;

Uncertainty is the norm in the construction industry. Construction workers are employed for the limited time of a project and most do not work a full year. Uncertainty is also the result of weather conditions that can suspend construction;

Field management of construction work is loose, informal, and nonbureaucratic; the nature of the industry tends to encourage informality, personal relations, and the establishment of community-like networks within the local and decentralized construction industry that exist in every locale today;

Job satisfaction among construction workers is relatively high because of high wages, worker autonomy, loose supervision, and pride in craft and product;

Construction workers can be said to constitute an occupational community through their lifelong commitment to craft, merging of their work and nonwork lives, and their sense of identity and self-image stemming from their work (Applebaum, 1999, p. 3).

Beyond these similarities among the trade, construction workers can also be regarded as distinct occupational groups because they tend to identify more with their occupation than with a specific employer or specific job (Applebaum, 1999). Moreover, Finkel (1997) also points out that while a number of large and small construction companies are involved with a wide variety of types of jobs, there are also specialty companies that have developed an enormous amount of expertise in a given area. For example, "One concrete firm may focus almost exclusively on sidewalk installations while others will become associated with block work or foundations. A particular plumbing contractor will consistently be a subcontractor to a particular architect/interior designer while another may only install and maintain hospital plumbing systems" (Finkel, 1997, p. 34).

Smaller subcontractors in particular may use this approach to doing business because such highly skilled specialists are in big demand and smaller concerns are in a better position to monitor those factors that contribute to a quality job. For example, "Repetition, personal relationships, and quality control are important features of successful competitors. By carving out a defined piece of the marketplace, smaller firms can withstand the intense competitive pressures associated with small-scale construction projects" (Finkel, 1997 p. 34).

In many cases, these small- to medium-sized subcontracting construction companies are not unionized, and they are highly vulnerable to intense price competition while operating on thin profit margins. For instance, Finkel notes that, "Of course, productivity in construction can be largely related to individual hourly outputs; therefore, numbers of employees coupled with hours of employment provide a clue to the thinness of the profit margin. Self-employed proprietors or partners are limited by physical hourly limits and the industry-average levels of outputs" (Finkel, 1997 p. 33). Market entry costs for such smaller subcontracting companies, though, typically involve relatively low capital investments. In this regard, Finkel notes that, "Licensing provides a minor hurdle, as do insurance and bonding to guarantee fiscal responsibility. For many employers, the relatively low start-up costs are strong inducements for going out on one's own" (Finkel, 1997, p. 33). These subcontracting firms are typically highly departmentalized, with estimation, engineering, drafting, and installation representing specific areas of responsibility within the subcontracting company; however, some of the larger or more ambitious specialty subcontractors may in some cases undertake the role of prime contractor, thereby serving as a subcontractor for one project while operating as a contractor in yet another (Finkel, 1997).

According to Bosch and Phllips (2002), governmental policies also play an important role in the subcontracting decision-making process: "This can happen directly through contractor licensing regulations and indirectly through a host of policies and building codes that exacerbate or moderate the risks construction firms and customers face. Tax policies can also play a role" (p. 10). In some projects, the structure of subcontracting can be redefined to the point that a contractor is able to treat many of the individual workers on a construction site as self-employed subcontractors in order to avoid paying the taxes associated with wage work (Bosch & Phillips, 2002).

The structure of subcontracting on the construction site can be categorized into two specific types as shown in Table 1 below.

Table 1.

Two basic types of construction subcontracting.

Type

Description

Cooperative

In cooperative subcontracting, each subcontractor is assigned distinct tasks over which that subcontractor has sole responsibility.

Competitive

In competitive subcontracting, two or more subcontractors are assigned the same task and their longevity on the job is dependent upon their ability to out-compete their rivals

Source: Bosch & Phillips, 2002, p. 10.

Although the types of work performed on construction sites are not amenable to the same processes used in other manufacturing settings, highly articulated subcontracting systems can serve to introduce and extend specialization within the division of labor on the construction site which is the case in cooperative subcontracting; this is not always the purpose or result of subcontracting, though (Bosch & Phillips, 2002). According to these authors, "Risk shifting and risk reduction provide a second reason for extending the subcontracting system. Competitive subcontracting does not increase specialization; rather it introduces competition on the job site among similar subcontractors" (Bosch & Phillips, 2002, p. 10).

The articulation of the subcontracting process all the way down to the individual worker level employed for a construction project is typically intended to avoid governmental regulations that are legitimately intended to protect wage workers instead of being intended to extend specialization in a given area and these mutually competing reasons for articulating subcontracting may work at odds. For example, Bosch and Phillips (2002) caution that, "The cost-cutting goals of competitive subcontracting and independent individual subcontractors may heighten the risks general contractors face in attempting to meet construction deadlines and quality standards, because they come to rely on low-skilled workers" (p. 10).