Contractors: Get your subcontractor insurance house in order!

subcontractorIt’s a tough landscape for the building trades in Connecticut. Jobs are out there, but bidding is competitive and margins are tight.

We’re nearly 10 years past its beginning, but we’re still not fully recovered from the Great Recession that wiped out trillions of dollars in real estate equity.

Given that reality, it doesn’t surprise me when a construction firm — super eager to get started on a newly won job — starts bringing subcontractors into the tent without worrying about “little things” like insurance.

The work needs to get done now, so paperwork can wait, right?

If you don’t mind owning all the risk for the mistakes of your subcontractors, sure, but that’s not a healthy way to do business and it’s a dangerous approach that all but guarantees you won’t be in business very long.

At Sinclair Risk & Financial Management, we teach our clients about an important concept called “risk transfer.” Like a game of hot potato, you want to hold as little risk as possible when you’re working with others, and you want to make sure your subcontractors are operating in a way that minimizes their own risks…after all, you are relying on them to help you complete an important job. You need them to be stable and healthy.

Two important concepts here are “contractual risk transfer” and making sure your subcontractors have adequate worker’s compensation insurance.

Whenever you plan to bring a subcontractor on board, it’s an industry best practice to have a contract in place that clearly spells out the terms of the arrangement. You should also verify that the subcontractor has proper amounts of liability, auto, and worker’s compensation insurance. As part of your agreement with the subcontractor, you should be named as an “additional insured” on their policy, which means that their coverage will extend to you should something go wrong. This transfers risk to their carrier and prevents you from having to tap into your insurance (and run the risk of premium increases) for a situation where you were not at fault.

Some people think getting a “certificate of insurance” is proof of coverage, but it’s not, it’s just informational about the kind of policies your subcontractor has…unless very specific language is included on it. The certificate must accurately name you as an additional insured and include language to the effect that the coverage is binding as per the contractual agreement between you and the subcontractor. The agreement you put in place with your subcontractors needs to specify the amount and type of insurance they must carry, and that you are to be named as an additional insured for a particular period of time.

Some smaller contractors will carry liability and auto insurance but not worker’s compensation insurance, especially if they are a very small firm. This is a mistake, and opens you up to tremendous liability if they get hurt on your job. You don’t want your worker’s compensation policy paying out claims to individuals who don’t work for you.

So what kind of worker’s compensation do they need, and how much? Like contractual risk transfer, these are complicated questions with multiple factors at play. At Sinclair Risk, we specialize in helping construction firms manage their risk in a smart, efficient way, saving lots of dollars on the bottom line.

Besides helping you navigate contractual risk transfer, Sinclair’s Risk Safeguard Advantage program includes accident investigation programs, claims management, OSHA compliance, DOT compliance, return-to-work programs, safety seminars, supervisor safety training, pre/post injury management, workplace wellness, worker’s compensation cost containment, and much more.

We can even help you attract and retain top talent. (Check out my recent white paper about construction industry best practices for getting and keeping awesome employees.)

Drop me a line to learn more.

Jonathan Belek
Risk Management Consultant
jbelek@srfm.com

Jon Belek

8 Steps to Vet Construction Subcontractors

subcontractorAs a general contractor, it’s likely that you’ll use subcontractors at some point. Subcontractors can be an efficient way to outsource work. As specialists, they’ll often do a better job than a generalist and their smaller size means they can work quicker and leaner.

However, the construction job is your responsibility. The performance of the subcontractor will reflect on you. To complete the job properly and satisfy your customer, you need to make sure your subcontractors will produce quality work in a timely manner.

Before you officially hire any subcontractors, protect your business and your customer by taking these steps to vet the subcontractor.

1. Examine their past and current performance

Request information from the potential customer about their licenses, accreditations, history, and references. Look for any public data on lawsuits, disputes, complaints, or bankruptcies. Ask for the contact information of previous contractors they worked for. Then, search for references independently (without the subcontractor’s involvement) to get some unbiased and unfiltered information.

2. Look at their queue of work

It’s smart to make sure potential subcontractors can actually complete the work you need, so you’ll want to examine their log of previous, current, and future work. If the subcontractor seems too busy for their size, your job might overextend them.

3. Ask about their safety practices

Unsafe operations can leave you exposed to liability and force an inspector to close the job site, so make sure any subcontractors have clean or reasonable safety histories. They should also have ample safety protocols in place and a crew who is coached to prioritize safety.

4. Investigate the subcontractor’s employees

Ask the subcontractor about their team. Are they temporary workers, or do they work full time? Have they worked in construction before, or are they new? Does the subcontractor have the proper number of licensed professionals for the site? Do the workers have the right tools and reasonable workloads? Do any have serious felonies or drug problems that might make them unreliable? Answers to these questions will determine whether the subcontractor is right for your job.

5. Validate bonding and insurance

In most states, contractors are required to have bonding. In all states, they must be insured, including worker’s compensation insurance. If the subcontractor doesn’t have these protections in place, you could be held liable if there’s a problem. If the subcontractor doesn’t have these, reject them as candidates.

6. Investigate the subcontractor’s financial health

If your job is large, you’ll want to make sure the subcontractor’s financials are healthy enough to commit. You don’t want their employees to walk off the site one day due to lack of payment, or an inability to purchase materials. Request their annual contractor volume, two years of financial statements, and their total sales and net worth (you might have to sign a confidentiality agreement). Look for signs of poor health, like poor cash flow, a mountain of debt, or declining income.

7. Ask about their quality control process

In order to avoid rework and warranty work, you want your subcontractors to certify the quality of their materials and finished work. Every professional business should have a procedure in place to guarantee quality assurance. This procedure is rarely complex, but a successful business will have an answer to your questions.

8. Demand a written contract

It is shocking how many people work without a written agreement. As a contractor who is purchasing labor, you need to protect your investment. Every deal should be bound by a contract that clearly describes your expectations, including the scope of work, timeframe, and payment arrangements. Describe what you will provide and what the subcontractor will provide in terms of materials, warranties, and cleanup.

Hiring a subcontractor is like hiring an employee: You want someone who will represent your business well without adding drama, stress, or financial burden. If you follow the steps listed above, you’ll find the right candidate and build a lasting relationship.

Jonathan Belek
Risk Management Consultant
jbelek@srfm.com

Jon Belek

Planning for Construction Risk

Planning for Construction RiskThe construction industry is flourishing, with outlooks like the Wells Fargo 2016 Construction Industry Forecast’s Optimism Quotient predicting that local construction, profits, equipment purchases and rentals and overall future growth will be strong this year.  Add to this that warmer weather means the busy construction season is here and it’s a great time to be in the industry, whether you’re an independent contractor or you own a large building construction firm.

However, as you take on more work, you also need to make sure that your risk exposure and insurance coverage is keeping up.  For example, you may hire more workers or rent more equipment to keep pace with your workload, which opens you up to more potential issues, like safety and liability. What if a new worker is injured using construction equipment, the materials you purchased for a huge job are stolen or a homeowner sues you because they feel there was design error in a job you performed for them?

Make sure you are protected against potential pitfalls with these three tips:

1)     Appropriately Assign Risk - Quite simply, think through anything that could go wrong in a project, plan for it and assign the risk to the person who would be most capable of handling and controlling it.  For example, a contractor can best control the safety of the workers on a job site while the homeowner would probably be the best choice for any project design risks since they’re most likely working with the architect and designers.  By spelling out risk responsibility in the contract before the project even begins, everyone is clear in advance about who is responsible for what risk.

2)     Make Sure You’re Covered - Once you know what your role and area of responsibility is, work with a trusted risk and financial management firm that has expertise in the construction industry and will take the time to sit down, understand your unique challenges and customize a program for you.  From Errors and Omissions coverage to Workers’ Compensation to OSHA concerns, ensure you’re aware of and protected from any of the risks associated with your projects.

3)     C.Y.A. – Cover your assets by making sure you closely examine all contracts for consistency and that you also have an experienced and knowledgeable attorney review all contracts.  Also – don’t rely on a cursory review of a certificate of insurance to prove that the parties you’re working with on a project are compliant with insurance requirements.  Beyond requiring a certificate of insurance proving proper insurance coverage in the contract, consider requiring that the full policies be included to provide evidence of adequate coverage.

With the right planning, risk management and insurance coverage, you can enjoy the benefits of the construction boom without the headaches.  At Sinclair Risk & Financial Management, we take the time to understand your company and individual situation and work with you to help you minimize your risks.  Give us a call today!

Jonathan Belek
Risk Management Consultant
jbelek@srfm.com