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More than a check in a box: The importance of external reference checks

The importance of external reference checks on subcontractors

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Verifying and analyzing your subcontractors’ financial prequalification information is one of many key steps in your subcontractor selection process. It may seem tempting to rely solely on that information, with limited or no information being collected about the subs’ past operational performance. However, there are many other aspects of their business and culture that will directly impact the success of your projects - for better or for worse. Therefore, it’s crucial that you broaden your prequalification approach to include additional information – including a thorough check of your potential subcontractors’ references.

 

Why perform external reference checks?

When working through the decision to award a project, the goal is to make the most informed decision possible, and external reference checks can definitely be informative. With reference checks, you can better answer questions about your potential subs’ fit on your project such as:

  • Are they going to work well with your team?
  • Are you going to be glad to see them on your site every day?
  • Are they going to deliver what they promise with a minimum of hand-holding from you or your team?

In the event that the reference check process raises issues around a sub that you still want or need to hire, the information you acquire puts you in the driver’s seat with regards to planning for operational risk mitigation, requesting a particular team, or even giving the next bidder a closer look.

 

Who should make the call?

You need to carefully consider who within your organization is the right person to make these calls. This is not a time for simply “checking boxes”. People with the right experience and insight will offer real value in your process that may be difficult to capture in other ways. The ideal person should be familiar with the details of the project, and especially with the scope the sub will be performing, so that they can ask pertinent questions and identify useful feedback. The right person will also have the ability to reach out to their own industry contacts who can give you informal feedback and fill in any blanks left after the subs’ preferred references are exhausted.

 

Who should you talk to?

In addition to calling the references the sub gives you, consider the value of extending your reach a little further. The references subs give you will typically be their favorite clients – the ones for whom they have done good and untroubled work. The report from those references can be expected to be quite positive. For more in-depth and better information, you should reach out to their most recent clients, and those for whom the project was a “stretch.” You will have good idea who this is if you’ve asked for their recent work, work in progress, and largest projects during your prequal process. This is also one time when your team’s industry knowledge and contacts really count. If you are not convinced, or hear troubling things or only glowing things from your first contacts, the ability to reach out in a different direction is incredibly useful. Sometimes outside relationships or personality conflicts color the information, and those contacts are a valuable tool in getting to an accurate understanding. If there are still lingering doubts, or gaps in the information, the internet and subcontractor’s own website can also give you some insightful information on the work they’ve completed and for whom.

 

Also, remember to talk to their major suppliers.

Suppliers are often the first to know if a sub is having cash flow problems – an issue you need to know about! Obviously, questions for suppliers are different. Here are some suggestions to get you started:

  • How long have they been buying from your firm?
  • Have they followed your payment terms/ any overdue balances now or in the past?
  • Have they done business under another name since they started buying from you?

It’s also important to close this loop with your subs. The good ones have nothing to hide and should have an awareness of why certain jobs didn’t go as planned. They should also be able to articulate what they would do differently now. After hearing their side of the situation, you should have the best possible vantage point from which to make a determination about their fit for your project.

 

 

 

"

Suppliers are often the first to know if a sub is having cash flow problems – an issue you need to know about!"

 

How should you ask?

Considering the goal of developing a full picture of the subs’ potential effect on your project, what’s the best approach for asking questions and gathering information? There is not a one-size-fits-all answer to this question. Methods include:

  • Set list of yes/no questions (less desirable, but can provide basic vitals)
  • Set list of questions with scoring (1-10, for example)
  • Set list of open-ended questions
  • Various combinations of the above (this tends to be the most effective approach)

Consider what may work within your organization. A set list of yes/no questions would be preferred for efficiency, but won’t give your team as clear a picture as a more open ended approach. It can also be effective to score subs in a more quantifiable way, such as “On a scale of 1-10, how likely are you to hire them again? or “How would you rate their performance related to X?” For the best information, develop questions that elicit more of a discussion than a simple yes or no, but which also allow a quantifiable final conclusion (yes/no and a score) to be reached. It takes longer this way to be sure, but the information you receive will be a lot more illuminating. Again, the right person making the calls will be able to get a lot more out of this type of questioning, which underscores the importance of utilizing the right resources if you choose this approach.

 

What types of questions should you ask?

Questions may center around the overall impression of the sub, their quality control, budget, manpower, schedule, change orders, compliance with pay app requirements, etc. Some contractors advocate the use of a single question, like “would you like to work with them again?” However, this makes it harder to draw / support conclusions, requires several follow up questions to be useful, and is more labor intensive to capture well. A better approach may be to ask that question, assess which blanks you can fill with the answer, and then follow up on points not answered. The goal is to let them talk – you never know what you might learn.

This process and its analysis will necessarily be a lot more detailed for new subcontractors and more of a periodic health check for subcontractors you have worked with in the past – similar to your periodic financial checks. Best practice is to perform reference checks in both cases, perhaps with a tiered approach: more questions for the former, fewer for the latter. Conditions in the subcontractor market are always highly dynamic, and your diligence is required to maintain your full understanding of your subs’ current abilities.

 

Timing: When in the process should this happen?

There is no arguing against the fact that reference checks are labor intensive. To make the most of the time and effort, the reference checks should occur late enough in the buy-out process to be selective about who you check on, but early enough to allow the findings to contribute meaningfully to your award decisions.

 

Data Management: Where will you keep the information for future access?

The work that goes into reference checking has value far beyond a single project. One of the goals of developing a standard list of questions to ask each reference contacted is to capture the answers for future use in understanding trends among your subs, and also to be able to vet subs more objectively. To that end, it’s crucial to develop a process or system for how the information is stored and accessed. Can you support this process with your existing technology? As a part of your prequalification database? As survey results? As an in-house Wiki? In order to get the most value from the effort, make your solution searchable by as many queries as possible (Sub Name, CSI Code, Geography, etc.) and think about a scoring method so that the information can be used for trending over time.

 

Maximize the value: Use reference checks on a going forward basis

Reference checks need to become “part of how you do business” for the practice to truly add value. Support and accountability from the top of your organization are absolutely essential in getting the process established in your workflow. Consider ways to drive accountability to the process, and to reward those who adopt the process early, and implement it well. For example, can percent complete with reference checks be tracked on your dashboard? Will you set goals for progress? Can you call it out in weekly meetings? Only you can decide what best fits your company’s culture.

 

How to address concerns

While the information you receive has to be held in confidence, any concerns that arise should be addressed directly. Discuss any questions raised during reference checks in face-to-face subcontractor meetings as needed. There may be more to any given story you have heard. It is critical that you develop an understanding of any issue and perform your due diligence to reach an acceptable level of comfort before you decide to partner with any given subcontractor. If your process reveals concerns on a sub you hire, be sure to address them with appropriate risk mitigation and track its implementation. No one wants to go through this process only to find that a risk was uncovered, but not addressed, to the project’s detriment.

 

Inside info: Check internal references

Don’t forget what you already know! Make use of internal references. If you’re capturing your company’s experience with each sub on your projects as a part of your standard closeout procedure, you probably already have this information readily available. If that’s not a part of your process, make a practice of checking with the project managers, superintendents, and other staff who have worked directly with the sub in order to assess the sub’s history with your company. If possible, develop procedures for capturing this information at project closeout, when it’s fresh in the team’s minds. For more detailed information on this subject, ask your XL Catlin Risk Engineer about the whitepaper, “Construction Insights: Subcontractor Performance Evaluation.”

 

Summary

In conclusion, it’s no secret that reference checks are complex, and a challenge to “get right”, but their value to the success of your projects and the ease with which they are managed makes them critical to your short-term and longer-term business operations.

 

About the Author

Cheri Hanes is a construction risk engineer with XL Catlin’s North America Construction businesses.  She can be reached at cheri.hanes@xlcatlin.com

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