Reviewing job contracts and subcontractor agreements is a tedious, time consuming job.

While someone in your back room tries to decipher a contract's confusing language, your efficiency slows and profitability declines. Failure to manage these activities at all will help increase efficiencies, but it also puts you at risk for unintended gaps in insurance and the potential for costly claims. Having to choose between inefficiencies and risk isn't much of a choice, but what else can you do?  The solution is surrounding yourself with good people.

Job Contracts

In the construction industry everything is dictated contractually. It starts with your insurance policy, which is little more than a contract between you and your insurance company of choice.  This agreement affords you certain rights and privileges, but it also places burdens and obligations on you.

For a "best-fit" policy, choose a broker who is a specialist in the construction industry.  They will know what kind of coverage you need and likewise can help you determine what is unnecessary given the kind of work you typically do. Especially in these economic times, you don't want to spend more on insurance than is necessary.

Lastly, your broker should help you compare your insurance policy to the next kind of contract you encounter frequently, a new job contract from an owner or general. With any new job, regardless of size, the contract governing the terms of the new project must be reviewed in conjunction with your insurance policy. Do you have everything this new contract is requiring of you? Only after you have compared this contract with your insurance policy are you ready to move on to the next piece of this paper-pushing puzzle.

Subcontract Agreements

What should be required of your subcontractor? After you have compared the requirements of the new job against your own insurance policy, you are ready to issue appropriate subcontractor agreements. Based on what the contract outlines, you may need to request specific coverages of your subs. For example, does the new job contract say you and your subs must carry specific limits and/or endorsements for a specified amount of time?

A good rule of thumb is to manage your agreements to the 90th percentile. To get started, work with your broker to find a good blanket subcontract agreement. To find one that fits, first examine the type of jobs you do and for whom. If most of your jobs are small in scope and your subs are typically a one- to five-man operation, don't ask for a $5 million umbrella-they are likely not able to provide that, given their size. On the other hand, if most of your projects are larger, public entities, universities or municipalities, don't require your subs to carry a $1 million umbrella-the job contract will likely require much more. When a job comes up that is different, know that going in and make allowances from the beginning.

Requiring appropriate coverages of your subs is step one. Step two is making sure the contract actually gets signed. Step three, which we will concentrate more on here, is tracking the insurance certificate that shows your sub has the required coverages and endorsements. This is an infinitely larger job than most contractors realize or give credit to. Across contractors, there are many different levels of care given to this process, but one thing is certain, it is difficult to do well.  The conclusion most contractors come to after they truly understand the intricacies of certificate management is they are not equipped to do it correctly, and they could never complete it cost effectively.

Often a contractor's fail-safe mechanism when managing insurance certificates is withholding payment until the certificate is in hand. Unfortunately, this is not an effective practice because many requirements of your sub will not take effect until a portion of their work is done.  For example-A sub starts their work on March 1. You process the first payment on April 15. Only then do you realize you do not have a current certificate in hand.  In response, you call and inform them they cannot receive payment until the certificate is updated.  They in turn call their insurance agent and have one faxed over to you by April 16.  Everyone is happy.  Right?  Wrong!

Assuming you have someone in your office who can decipher the certificate beyond the limits and simple wording in the "remarks" box on the certificate, does he/she know what items were asked for in the contract and how that compares to what is actually present in the insurance certificate? It is very rare, even with a sophisticated contractor, that the answer is yes. And it isn't intentional-you don't know what you don't know. Using the example above, did your backroom realize some of the items required in the agreement did not take effect until the sub called their agent on April 15?  Now you are faced with the dilemma of letting it go or enforcing the contract. If you don't choose the latter, you are likely in breach of the contract you signed upstream or worse, a loss has already happened.

Most small- to mid-size construction companies are not equipped to tackle contract language and certificate management as well as it should be done. The best people to interpret contracts and determine appropriate coverages are the people that work with them every day-insurance brokers. These forms come out of the insurance industry, not the construction industry.  Rely on your broker to help you determine what you need for prudent risk allocation and in turn what you should be asking of your subcontractors. Ask them to regularly review your policy based on the work you do.  Have them write your subcontract agreement, facilitate getting it signed, answer the subcontractor's questions about it and then have them track and catalog the insurance certificates. Put this kind of work into the hands of someone who knows more and give your back room more time to do what they do best. You will reap great rewards.

Construction Business Owner, July 2009