The Benefits and Risks of Contractor Prequalification

As a global trend, more organizations are outsourcing work. This means contractor management is increasing in importance, and prequalification is a vital part of the process.

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By prequalification, we mean the preliminary stage of the contractor management cycle, where the goal is to determine whether a contractor has the capacity and capability required to complete the job successfully. We'll examine this critical business activity's benefits and risks.

THE KEY BENEFITS OF PREQUALIFYING CONTRACTORS 

Prequalification of contractors is an essential step in the contractor management process. And a well-designed prequalification system will achieve four main goals: 

1. Conserve your time
2. Conserve your financial resources
3. Reduce risk by using vetted and reliable contractors
4. Improve communication and improve your contractor relationships

There are many compelling reasons how prequalification brings value to clients:

It Mitigates Risk

Clients take on a degree of risk and liability whenever contractors are hired. Prequalifying contractors offers peace of mind and ensures they know and understand the potential risks to complete the job safely. 

It Helps Create a Safer Worksite

Worksite safety depends on each employer pulling their weight. Harmonization of safe work practices is more seamless when all contractors are prequalified to a known minimum standard.  

It Fulfills the Legal Concept of 'Buyer Beware'

Whether it's a product or service, it makes good business sense to understand who you're buying from. In fact, the legal principle of caveat emptor says that each party to a contract is responsible for protecting their own interests. Prequalification allows you to check out the providers and be confident in your choice.

It Reduces the Risk of Litigation

Doing your due diligence ensures contractors are qualified to safely and professionally handle your work. This reduces the risk of high-loss incidents and, ultimately, the potential for litigation.

FIVE RISKS OF SKIPPING CONTRACTOR PREQUALIFICATION

While prequalifying contractors can be time-consuming, the results are well worth the effort when done correctly. Failing to do this due diligence - getting to know the contractors you're considering working with - can have significant consequences for your business.

Let's break down five significant risks of not prequalifying contractors, leading to loss of business opportunities and other liabilities.

Risk 1: Loss of Business Opportunities Due to Improper Incident Recording 

Clients that pre-screen or assess contractor safety performance typically consider at least these three things:

1. Health and safety performance
2. Worker compensation rates, and
3. Regulatory compliance issues

Health and safety performance is usually expressed as the OSHA rate and DART rate. In Canada, the total recordable incident frequency is a common metric. These rates reflect the number of lost time and restricted work injuries your company has sustained. It is critically important to understand the definitions of medical treatment, restricted work, and lost time. Not all doctor trips are recordable incidents.

Further, workers' Compensation performance, expressed as the Employer Modification Rate or a Premium Rate in Canada, uses different criteria than OSHA and DART rates. You may be putting yourself out of consideration for work if you report incorrectly. It is a sound business practice to know your legal, insurance-driven, and clients' incident classification requirements.

Risk 2 Loss of Business Opportunity Due to Poor Safety Performance 

Clients and prime contractors want to work with safe contractors. It follows that if you affiliate with subcontractors with poor performance records or your performance is spotty, it can hinder your ability to get new business.

Implement management standards that ensure contractor compliance with legal and industry standards to mitigate the risk. Further, actively manage claims when they occur to minimize costs and improve the well-being of your workforce.

Risk 3: Loss of Business Due to Poor Regulatory Performance 

Poor regulatory performance can also seriously impact whether or not you can secure new business. Things that get client attention are serious OSHA violations, frequent workers' compensation claims, and work refusals for safety-related issues.

Experts recommend getting to know the most frequently cited OSHA violations in your industry and ensuring that you have an effective, well-implemented health and safety system to prevent those incidents. 

Risk 4: Liability for Unpaid Contractor Workers' Compensation Premiums 

If contractors have not paid their workers' compensation premiums, general contractors and their prime contractors can potentially be held liable for thousands or tens of thousands of dollars in recovery costs.

When a contractor is mobilized, the client or prime contractor must obtain a workers' compensation clearance or certificate of insurance to ensure proper coverage is in place. Obtain a clearance at regular intervals, such as with monthly billings and at the end of a contract, before final payment.

Risk 5: Liability from Unmanaged Contractor Certificates 

About 20 percent of certificates in an automated document tracking system are expired or due to expire within 30 days. Expired certificates can put a client or prime contractor at serious risk of liability if incidents occur without coverage, including direct costs and legal liabilities. 

Risk increases if you use a spreadsheet to manage your contractor's dated documents because expiry date tracking cannot be automated with Excel or email. Databases and web applications designed for certificate management track dates and manage notifications with automation. Let technology manage your risk down.

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CQNetwork guides purchasing organizations to better contractor management outcomes with a custom web application and outstanding customer service. Find out more at www.cqnetwork.com.

CQNetwork Training provides online training solutions for purchasers and contractors in high-risk industries. We have compiled 20 years of contractor management best practices to benefit operations, supply chain professionals, and health and safety personnel. Find out more at www.cqntraining.com

Download the accompanying PDF here >>