One of the most important jobs we do as general contractors in residential construction is hire the right subcontractors. We hire one over another for various reasons, including cost.
Inexperienced general contractors often have to learn the hard way which subcontractors are a good fit, and which aren’t. Construction projects are hard to return if we don’t get what we pay for, so choosing the right subcontractor for the job is important.
Missing out on hiring a good subcontractor is far better than letting a bad one through the door.
Negotiating a fair price for services rendered is one of the most important elements of a general contractor or residential remodeler’s job. That’s because fair dealing makes the process repeatable. New builders may be at a disadvantage in negotiating with subcontractors, so we will offer a few tips for creating a successful relationship from the start.
Here we will discuss how to successfully negotiate with subcontractors for everyone’s mutual benefit. We will discuss why we hire them, what motivates them to accept a job, and why it matters.
A subcontractor is a speciality contractor hired by a general contractor to work on behalf of their client. Most often, a subcontractor is hired to perform a specific task based on their area of expertise. For example, a general contractor might hire a siding subcontractor to install the exterior on a house the general contractor is building for a client. The general contractor will include the value of the subcontractor’s work in the price given to the client.
The best way to negotiate with a subcontractor is to look for the solution with the most mutual benefit. By being fair and honest with a subcontractor, you rise to the top of their list of preferred builders. Most subcontractors expect to negotiate in certain circumstances, but demanding more and more concessions with each project often leads to a severed relationship.
General contractors, residential remodelers and subcontractors are essentially partners. Each depends on the other to ensure everyone wins. Business partners can make or break a business, so trust between the partners is critical to a smooth transaction. Subcontractors that dodge paperwork and make excuses should be avoided.
As important as trust is, as builders we should hold every subcontractor accountable for their work. In most instances, the final funds disbursement is held until the subcontractor’s job is completed and approved.
This arrangement keeps everyone honest and focused on detail. If a subcontractor’s pay is dependent on passing an inspection, the quality of the job is usually improved. Even with subcontractors we’ve hired dozens of times, a gentle reminder that payment is dependent on quality keeps everyone engaged.
The best way to negotiate with subcontractors is the same as with any business, which is to find out what motivates them. Many subcontractors depend on residential remodelers and general contractors for the majority of their work. Subcontractors want to do what they do best and get compensated for it.
You can negotiate for a better price when work is less frequent, but successful builders tend to keep pay as consistent as they can. Smart remodelers understand that relationships are built on mutual gain, not quick profits. For example, the dollars saved by hardballing a subcontractor can result in higher prices for the remodeler when the opposite is true.
To negotiate the best arrangement for your construction company, first look for the best arrangement for the subcontractor. In other words, if you make sure the deal is good for the subcontractor, your profits will often take care of themselves. The subcontractor will provide services you can sell for a profit and the process is scalable and repeatable.
General contractors that pay fairly, treat fairly, and deal fairly will have the most options available to them going forward, especially if labor availability is tight.
Most construction companies are local, so word gets around quickly, both good and bad. The builder with a reputation for fair and honest dealings will attract the best subcontractors. Negotiating in this situation is much more fruitful, because both parties want the deal to happen.
Subcontractors are subcontractors because they choose to focus on a specific task and do it profitably. If you want some type of concession from a subcontractor, focus on what is important to them.
Subcontractors typically don’t want the marketing hassles of constantly looking for work. Most prefer to establish a long term relationship with a great builder that provides them steady work. The builder that provides steady work will usually have no trouble finding subcontractors.
Most subcontractors prefer being paid reliably by someone they trust, as opposed to dealing with new customers every day. Subcontractors don’t want the hassle of marketing, so they rely mostly on remodelers for work. The best builders make paying their subcontractors priority one.
Missing out on hiring a good subcontractor is far better than letting a bad one through the door. A good subcontractor will not expect payment up front unless they are providing the materials. If a subcontractor asks for any payment before any work is done, do not hire them.
Subcontractors that vaguely answer questions, cannot provide photos of past work, or seem in a hurry to get paid are unlikely to do a good job. Good subcontractors love to brag about their successes and are more than happy to demonstrate their knowledge. If a subcontractor offers to work but shows any of these signs, keep searching.
The most successful general contractors and remodelers understand the value of a paper trail. Rookies and non-professionals tend to be inconsistent with paperwork until the lack of it causes a major problem. Misunderstandings are completely avoidable with well crafted RFPs and contractor bid proposals.
Having a paper trail for any significant agreement will be the least expensive, most reliable way to maintain profitability and good will. The agreement entered into by the general contractor and the subcontractor will include the scope of the job, the pay, and an estimated time of completion.
Handshake deals indicate mutual trust and respect, but a written agreement indicates professionalism. A written agreement protects both the general contractor and the subcontractor by ensuring the other party is protected. The enforceability of verbal agreements will vary by state, but a written agreement will usually supersede any handshake deal.
Any subcontractor agreement should include the details of the job, how much it will cost, and how long it will take to complete. In most disagreements between general contractors and subcontractors, one or more of these elements have been violated.
Forward thinking builders use every tool at their disposal to create concise, accurate subcontractor agreements. Many use construction management software to collect the information they need and import it into a request for proposal, or RFP.
Subcontractor agreements should include accurate names, tax information, insurance policy numbers, and any other important specifics. Here are a few elements every well written agreement should also include:
By seeking a mutual benefit when negotiating with subcontractors, we let the subcontractor know they are important to our goals. Subcontractors work very hard, and reminding them how much we appreciate their efforts goes a long way.
Just as we feel the pride of a job well done, so do the subcontractors we hire. If we compensate them in a way that increases their pride in their work, the effect grows. If your subcontractors know you appreciate their skill (and you tell them consistently), many will want to work for you and do their best work even if your job pays a little less.
Your customer is impressed, you’ll have made a great hiring decision, and your subcontractor can bask in a job well done. General contractors and residential remodelers that understand this relationship will have a bright future ahead.
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