In addition, if there is a call for default due to lack of production on the labor portion of the contract, the GC already has
rightful possession of the crucial items needed to continue
work and has only to resubcontract the balance of the labor
required to complete the project.
Conversely, when labor and materials are best subbed out
together (as in mechanical work and equipment), issuing joint
checks to suppliers and subcontractors also decreases payment claim liability. Why? Because if the mechanical subcontractor encounters cash flow problems, at least the equipment
supplier has received its payment directly from the GC.
Collateral or Funds Control
There are two options that mitigate the risks associated with
subcontractor growth: 1) requiring collateral from a subcontractor that is undertaking a first-time major increase in project
size or 2) instituting funds control (which empowers a third-party escrow agent to control the subcontractor’s portion of
If funds control is employed, the contract with the escrow
company can even be designed to automatically accumulate
a proportionate collateral reserve by retaining additional
funds as the contract payments are made.
Retainage, on the other hand, allows a GC to build its own
collateral cache directly against the subcontractor by withholding a certain percentage of payment until work is satisfactorily complete or until a given maintenance period has
passed without incident.
However, GCs must recognize that subcontractors need sufficient cash flow in order to remain productive. Retainage
practices that overstep these bounds and render subcontractors insolvent hurt everyone, including GCs.
Lastly, most GCs are familiar with the personal guarantees
that put an owner’s personal assets within the surety’s grasp
in the event of contractor default. In turn, requiring a personal guarantee from a subcontractor serves the same interest from the GC’s perspective, and may be more feasible than
a back-bond in certain instances.
One possible ancillary benefit: The subcontractor may place
a higher priority on the job with a personal guarantee than
might otherwise have been the case.
A commitment to ongoing subcontractor management is the
final step that elevates a GC’s management of its subcontractors to the elite five-star level. This primarily entails monitoring
the progress of construction against billings, as well as adhering to the schedules and budgets outlined at project inception.
Attempts to use the project’s schedule of values to frontload
billing and make the job self-funding form a common theme in
many contractors’ operations. But, by steering subcontractors
toward funding projects themselves, GCs encourage accurate
In addition to project funding, tracking the schedule and budgets established at the onset of the project is essential to effective ongoing subcontractor management. Deviations can quickly
become fodder for back charges, change orders, and potential
claim case preparations.
Prevention requires frequent comparison and immediate reporting of any disparities to the PM who can then develop a
modified schedule to account for the changes as necessary.
Subcontractor default and payment claims are real threats to
GCs. But, when all points of the five-star subcontractor management system are aligned, then every link in the GC/subcontractor chain becomes as strong as the next. BP
MICHAEL S. CULNEN is President of C&H Agency Inc.
in Totowa, NJ. Mike generates new business, maintains
existing client and market relationships, and oversees the
company’s operational and strategic management.
He earned a BSBA from the University of Denver, CO and
has his P&C Producer’s License in 12 states, including New
Jersey, New York, Ohio, Pennsylvania, and Rhode Island.
Mike is a member of CFMA’s New York City and New
Jersey Chapters. He is also a member of the Surety Underwriters Association of New Jersey (SUANJ), AGC of New
Jersey, and Professional Insurance Agents of New Jersey