By Joseph P. Leverich, CPA

Sometimes getting the right subcontractor for a job may seem like playing the lottery. You can look over all the "numbers" and think about which one feels right but, at some point, you have to make a choice. Then the waiting game begins, as work gets underway and you see whether you've picked a winner or a loser.

A good way to help ensure you win the subcontractor lottery is to prequalify the subs with whom you intend to regularly work. From there, having a sound scheduling system can go a long way toward getting the most from subs that make the list.

History and staffing

The first thing to look at in prequalifying a sub is its company history. When did the business get started? What kind of projects has it worked on? Generally, a sub that's been around for a while — say, more than five years — is probably doing something right.

Then again, a recent ownership change could affect this rule of thumb. So check into the sub's owners and managers. Are they reputable individuals with strong track records of being easy to work with? A good way to gather this information, as well as other important tidbits, is to simply ask for trade, financial and business references. Have your attorney check into any legal actions the sub might be involved in as well.

Of course, if a prospective sub happens to be a relatively recent startup, you shouldn't necessarily dismiss it outright. Maybe a star project manager has struck out on his or her own. In this case, you may need to rely on financial projections and direct interactions. It's not out of the question to pay a site visit to a sub, check out its office and, if possible, even see how it goes about its business on a job site.

Financials

As mentioned, a sub's financials can and should play a critical role in your prequalification effort. Although the raw dollar amounts associated with the company may not tell you the whole story, they'll give you a strong foundation upon which to build a reasonably accurate assessment.

Request at least the most recent year's worth of financial statements and go over the numbers with your CPA. Look at items that give you an idea of the sub's cash flow and how well capitalized it is, such as:

·        Current ratio (or quick ratio),

·        Debt-to-equity ratio,

·        Overhead expenses, and

·        Total revenues.

Also inquire about the sub's bonding capacity. Does it have enough? Is its surety willing to give the company a thumbs-up? Other types of insurance are important, too — a subcontractor that skimps on coverage may be a legal disaster waiting to happen should something go wrong on the job site.

Scheduling capacity

As part of the prequalification process, look into a subcontractor's scheduling capacity. That is, examine the company's ability to smoothly and effectively integrate itself into your job schedules.

How tech-savvy is the subcontractor? These days, a company you can contact only via landline telephone or clunky fax machine may not be as responsive as one whose owners and managers provide multiple means of communication (voice mail, e-mail, text messaging and so forth). This can make a big difference when you need to make last-minute adjustments to the job schedule.

In addition, use your interactions with a sub during prequalification to gauge how receptive it may be toward reminders about job scheduling. A company that responds quickly and in a friendly manner should earn points in the "easy to work with" category. And scheduling reminders and updates play a big role in getting a job done right.

Standard operating procedure

During a time when the rocky economy and its slow recovery are causing construction companies to look closely at risk management, prequalifying subcontractors is fast becoming standard operating procedure for many general contractors. After all, that's just what the prequalification process is: a way to manage the risk of bringing these outside providers into your projects and give yourself a better shot at keeping the project on time and within budget.

Getting prequalified: 3 tips for subcontractors

If you're a subcontractor, you're probably aware that getting prequalified by a general contractor (see main article) is a big plus for your business. How can you make the process easier and increase your chances for success? Here are three tips to consider:

1. Get and keep your financials in order. Prequalification isn't entirely a numbers game, but your financial statements will likely form the core of their assessment of you. Ask your CPA to review yours with a specific eye toward highlighting information a general contractor would like to know.

2. Optimize your bonding capacity. Has your relationship with your surety slipped in recent months? Don't let it: General contractors won't likely take a chance on a sub that's not properly bonded. Communication and (as noted above) sound financial statements are key to strong bonding capacity.

3. Put together a package. Perhaps the most straightforward move you can make toward getting prequalified is anticipating the process itself.  The American Institute of Architects ( http://www.aia.org/index.htm ) and the Associated General Contractors of America ( http://www.agc.org ) both offer sample prequalification forms via the Internet. By filling one of these out in advance and using it as a cover sheet for your financial statements, company history and other information, you can make the general contractor's job easier and put yourself ahead of the competition.