Strategy, Legal & Operations

Don’t risk it: 6 tips to manage subcontractor compliance

For general contractors, a top priority on construction projects is to start the job on time and keep it moving. Consequently, it’s easy to understand why subcontractor compliance processes—such as requiring proof of insurance before a sub begins work—can sometimes take a back seat to timeline pressures.

But hold on. What happens if something goes wrong?

A Georgia general contractor found out the hard way when a worker was injured on the job due to a safety violation. The subcontractor that employed the worker didn’t have a current certificate of insurance at the time of the accident, putting the general contractor on the hook for the claim. The incident drove up the general contractor’s premiums for the next five years, costing the company hundreds of thousands of dollars and impacting the GC’s bidding competitiveness due to higher costs.

Moral of the story: taking your chances with subcontractor compliance is risky business.

Key areas of compliance

When working with subs, three compliance areas present the largest risk for your company:

  • Uninsured workers on the job site: Most states and construction contracts require contractors to carry valid workers’ compensation insurance. And according to many state laws, the GC is liable for paying workers’ compensation benefits if an uninsured sub’s employee is injured on your job.
  • Lien waiver requirements: Anything can happen on a job site, and when it involves a legal claim, that’s when you need to make sure you don’t shoulder all the responsibility. To guard against claims, you need to know when, where, and why lien waivers are required.
  • Certified payroll: When you’re working on public works projects, it’s your responsibility to collect and submit a weekly certified payroll report for all workers, including subs, on the job. Whether audited by the Department of Labor for federal projects or a state agency, this is an area of compliance that is increasingly under scrutiny.

Taking control

How can you be confident that you have the subcontractor compliance processes in place to protect your construction company? Here are six tips that can help:

  1. Create a culture of compliance. Make sure your team understands the importance of compliance and the negative impact on the company if violations occur. To be successful, support for compliance initiatives must start with the executive team.
  2. Understand the rules. Work with an attorney or compliance expert to stay on top of the latest regulations. Check in for compliance advice at least annually.
  3. Establish an automated process. Keeping on top of today’s compliance requirements is virtually impossible if you are handling the paperwork manually. Develop a process that automates as many steps as possible, including ways to prevent paying subs before you receive proof of insurance, lien waivers, and certified payroll reports. Other compliance processes to automate include permits, licenses, warranties, and close-out documents.
  4. Integrate your project management and accounting systems. Communication between your accounts payable department and project managers is critical to compliance. For example, if your accounts payable system is not synchronized with project management, an accounts payable clerk may not be aware that a job is a public works project and could pay a sub prior to receiving necessary certified payroll reports.
  5. Monitor compliance daily. For added protection, set up an automated alert that warns you of subcontractor compliance problems, such as an expired workers’ compensation or liability insurance. Today’s advanced construction software systems offer this type of capability.
  6. Conduct your own audit. Why wait for a formal audit? Once you’ve set up your compliance process, conduct a random spot check of the process every three to four months. Too often contractors assume a process is working just because it’s in place. A random audit helps you easily spot problems and correct them before they put your company at risk.

As a contractor, one of your jobs is to keep your subs in compliance. Understanding compliance requirements, creating an automated process, and spot checking to assure nothing falls through the cracks can reduce the burden of compliance for your team. It will also save you considerable time, money, and headache down the road by preventing noncompliance issues.