Subcontracting problem: challenges and solutions

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 in regard to whether to take the project, as the subcontractor is fully informed of every aspect of job. If rejected, the subcontractor can at least feel that the choice was a fair one - that her or his organization was not perfectly suited to the job at hand. If selected; however, a potentially long-lasting relationship is created, one that is based on mutual trust, shared goals, and a feeling of true partnership.

Methodology

Numerous potential problems exist in the main contractor/subcontractor relationship. These problems range from subcontractors' lack of understanding of the work (or main contractor's inability to explain it) through to subcontractors' lack of skills, size necessary to take on the project, financial difficulties, and lack of feeling that there exists any kind of joint effort or partnership between the main contractor and subcontractor. Any one of these difficulties might lead to delays, cost overruns, poor workmanship, or even outright failure within the context of the project. The foregoing study is designed to discover which concepts are of most importance in creating a good and workable main contractor/subcontractor relationship. A workable relationship would be defined precisely in terms of one that leads to the successful completion of the project in accordance with project goals as set out at the beginning of the project, and which do not include unnecessary additional costs, delays, or other inefficiencies or errors. Once the primary problems have been determined, the researcher will work with the study participants in order to come up with possible solutions. In particular, the study will focus on the efficacy of a partnering arrangement between main contractor and subcontractor as an active solution to the existing problems.

Study Participants

The study's participants will consist of a group of construction industry main contractors representing major concerns that undertake significant multi-million dollar government and private contracts, and a separate group representing a cross-section of construction industry subcontractors. These subcontractors will represent the range of different trades and application currently in use in large scale projects. Following the Likert Scale method of analysis employed in Lam, Chan, and Chan, participants will be asked to rate their level of agreement in regard to questions concerning the relative impact of different factors on the main contractor/subcontractor relationship. (Lam, Chan & Chan, 2006)

Survey Instrument questionnaire was developed that attempted to measure participants' reactions to a variety of criteria believed to have the potential to adversely affect relationships between main contractors and subcontractors, which criteria would also potentially adversely affect the final outcomes of projects.

The questions included participants' reactions to such concepts as (1) subcontractor's prior work experience (2) subcontractor's ability to carry out a project of specified size and scope (3) subcontractor's skills as they related to proposed work (4) subcontractor's financial situation i.e. line of credit ability, credit worthiness, etc. (5) Ease of communication, flow of information, openness to suggestions, etc. between main contractor and subcontractor; and other related ideas. The questionnaire also endeavored to reflect concepts in regard to overall feasibility of the relationship as reflected in such statements as that by David a Drabkin, former Deputy Associate Administrator of the Office of Acquisition Policy of the Office of Government Policy of the General Services Administration to the Subcommittee on Government Management Information and Technology Committee on Government Reform on July 13, 2000. Drabkin discussed the importance of allowing main contractors the freedom to select subcontractors largely free of government interference. Drabkin's comments possess wider implications even for non-government work, as they cut to the heart of the relationship between main contractors and subcontractors, touching as they do on issues of mutual understanding, knowledge of skills and aptitudes, adaptability, and so forth. Drabkin's concern to keep undue regulation and oversight out of the main contactor / subcontractor relationship further underscores the overall complexities of the current environment as illustrated in Figure 1. An important part of the evaluation consisted, too, in discovering the extent to which subcontractors understood their full role in this comprehensive picture.

Figure 1. Overall Feedback Loop between Contractors and Outside Entities

Purpose of the Study

The purpose of this study is to better understand the factors that make for a good main contractor/subcontractor relationship. In particular, the researcher will attempt to address whether the system of partnering will help alleviate the specific complaints identified, and improve levels of cooperation thereby leading to increased cost-effectiveness, higher quality of work, and improved end-results. The results of the study will be used to make recommendations in regard to how to best improve the partnering relationship in order to achieve these goals.

Format of Study Results

Results will be presented in the form of a discussion of the information obtained from the questionnaires, and its analysis by the researcher. Results will be analyzed in connection with the existing literature as it relates to the responses given by the study participants. Additional information may be gathered, as well, in formal and informal interviews with various participants in so far as this information contributes to the furtherance of the aims of the study. A summary of the findings and recommendations will be presented in a concluding chapter.

RESEARCH FINDINGS and DISCUSSION

Issues and Subproblems

As a result of participants' response to the survey questionnaires, supplemented also with formal and informal interviews of participants, the researcher was able to identify certain major issues considered to be impeding main contractor/subcontractor relations. Issues were not necessarily the same within each group; each group appearing to have its own perspective, though in outline, the issues were similar and tend to reflect two sides of the same argument.

Issues and Subproblems from the Main Contractor's Perspective

From the main contractor's point-of-view, the main issue appeared as the overall reliability of the subcontractor with several subproblems being identified under this heading. In the view of the main contractor, an unreliable subcontractor was one who cost the main contractor money either through shoddy workmanship, inattention to plans and specifications, or through cost overruns. The area of cost overruns further broke down into cost overruns that arose through unnecessary delays such as those that occurred through subcontractors not showing up, not showing up fully staffed, not possessing the proper equipment or materials, etc. Frame identifies cost overruns as a particular problem given that the main contractor would be liable for the additional costs incurred by the subcontractor in these cases. (Frame, 2003, p. 141-142)

Issues and Subproblems from the Subcontractor's Perspective

These issues and their associated subproblems are largely countered by the subcontractor's perspective. Subcontractors identified as a primary problem the issue of late payment, or non-payment of funds on the part of the main contractor. This main problem broke down into several subproblems namely, moneys that arrived late or not at all through no apparent fault on the part of the subcontractor, late payments that were blamed on the ultimate employer by the main contractor, funds that were supposed to be delivered incrementally but arrived lumped together or at a different stage than expected; equipment that was not forthcoming, and various other expenses that were supposed to have been covered by the main contractor, but were not, or were only reimbursed later. These expenses included equipment rental, funds (at times0 for additional personnel or transportation, etc. Insufficient or late payment, especially in large government projects, as identified by Anson, Chiang, and Raftery in their look at the situation in East Asia, is clearly a problem all over the world, and causes undue hardship for many subcontractors. (Chiang, Anson & Raftery, 2003, p. 344)

Discussion

The findings indicate that while the issues and subproblems described by the two groups - main contractors and subcontractors - are not identical, they are similar enough as to reflect two views of essentially the same issues and subproblems. The main contractor's primary concern is cost. This concern with cost has its direct counterpart in the subcontractor's concern with insufficient or late payments. The main contractor views any deviation from expected norms on the part of the subcontractor as contributing to potential cost overruns. These deviations form the norm might include purposeful, accidental, or unintended delays or work time overruns on the part of subcontractors. These might be the subcontractors' fault, the main contractor's fault, or the fault of neither i.e. The fault of a supplier, transportation provider, government regulatory body, etc., but have the potential to cause the subcontractor's work to be late, incorrect, etc., and thus the unintended result of causing the main contractor to withhold funds, or to use the occasion as an excuse to withhold funds. Such situations can create a considerable amount of resentment between subcontractors and main contractors. Further, subcontractors frequently reply to main contractors' charges of late work or shoddy work with the response that they were not either properly informed in the first place, or were not kept properly apprised of conditions as the project progressed. Conversely, the main contractor will charge that the subcontractor did not ask enough questions, or provided improper or insufficient information at the start of the job that led to the main contractor to believe that the subcontractor fully understood what the work entailed. In either case, a lack of communication, or apparent lack of communication is what is revealed, as is a fundamental dearth of trust and genuine cooperation.