Look at incentives to complete early. What are the risks to
the schedule, both on an increase and decrease in fee? The
greater the likelihood of schedule disruption, the more pricing should reflect the risk.
Different project types will determine the risk built into the
project. Max price, for example, features a different profile
than a design-build or T&M project.
Working in lower Manhattan vs. building a pier vs. constructing a warehouse on an empty lot drives costly decisions
around material delivery, staging, parking for laborers, and
mode of traffic issues, to name a few.
As each element of the project risk assessment is examined,
consider the financial, safety, and insurance concerns as
potential project impacts. Finally, the ultimate project pricing for risk should reflect the severity and frequency of the
risks identified. Ask: Is it billable? How much will the contract
sustain? And, if risk is managed correctly, will the profit be
Honing the Prequalification Process
Just one bad subcontractor can undermine an entire project.
All the upfront work in identifying risk and building out the
project risk register will be wasted if the right downstream
parties aren’t selected. A good project risk assessment and
formalized handoff process combined
with a best in class prequalification process can help ward off potential issues
with subcontractors and suppliers.
In the absence of information, project
teams may assume that all subcontractors working on a project are equally
qualified. Getting to know the subcontractors as well as possible helps identify, manage, and mitigate such risks.
As a result, the project team will be
educated about every aspect of the job
and forced to review the project with
a fine-toothed comb. This will not only
help identify and mitigate risk, but it can
also create a competitive advantage.
For example, the project team that
considers a project through the microscope of a subcontractor
may identify issues of which the owner isn’t aware, or that the
competition missed completely.
In honing the prequalification process, be sure to not only
consider, but also look beyond, the basic components of
financial well-being and safety statistics. While the financial
health of a subcontractor is important, such information can
be dated and thus not very relevant. Likewise, safety statistics such as an EMR are important to consider during the
selection process. Yet, these are historical in nature and do
not tell the entire story.
Financial reviews are critical to understanding the financial
health of subcontractors. Through ratio analysis, insights can
be gained into A/R, working capital, and utilization of lines of
credit with an understanding of the subcontractor’s current
Qualifications are where the rubber meets the road. The
ability to complete the project, and have the résumé and
experience doing so on similar project scopes and sizes, are
paramount to ensuring an on budget, quality project.
EMR safety statistics are the benchmarks upon which most
subcontractors are qualified. For government work, generally an EMR of 1.0 or below is required. An argument can be
made that OSHA statistics are more valuable benchmarks to
EXHIBIT 6: Subcontractor Management: Prequalification
Financial Quali;cations Safety Experience
Output Is a Tiered Subcontractor List