Why general contractors should make sure they get the right documents from their subcontractors.
If you’re a general contractor, you probably are waiting on subcontractors for a lot, even before you land the client and the job starts.
First, you’re waiting on subs to get their numbers together so you can submit YOUR bid. Then you’re waiting on them to get you their agreements, licenses, tax forms, and insurance certificates so you can get that all together for each client. Later, you might be waiting on them to either show up to the job or complete the job or agree to a change order. In the end, you might even end up having to nag them for their invoices so YOU can finalize your own.
There are many pieces of the puzzle that are out of your hands, but there is one area you should ensure you retain control of: making sure you receive the correct documents and certificates from ALL of your subcontractors. And since paperwork historically isn’t the forte of general contractors, this is one area that quite often falls through the cracks for GCs. Don’t let it! Here’s why:
Workers’ Compensation Insurance
If you start a project and half way through there’s an injury, the first thing you’re going to do is look at the insurance. Guess what? If a sub was injured on the job and you never checked that they had Worker’s Compensation insurance, that’s on YOU. Your company and your insurance company are liable.
Your insurance carrier will end up covering your subcontractor’s injury, and the first thing they are going to do is audit you to find out how much you’ve paid your subcontractor during your policy period. Then they’ll include that sum and call it “payroll”, and charge you additional premium. Next, they’ll most likely look to recoup some of their costs by attempting to find someone at fault for the accident so they can file a lawsuit. This can cause further strife between you and your subcontractors, as multiple parties are likely to be named in any suit.
Not only will you pay additional premiums and possibly alienate your subcontractors, but because an accident is being covered under your policy, your Experience Modification rate will now increase, which will cause you to have higher premium payments down the road for the next 3-5 years.
General Liability Insurance
When a third party injury or damage occurs (as in, damage to your client) this type of insurance is often the first line of defense. Making sure that your subcontractor has this essential line of coverage should be a top priority. If something happens, and it wasn’t your fault, you want your subcontractor’s general liability insurance to cover it, and not your own. Claims happen, and insurance carriers know this and are prepared for it, however, the more claims you have on your record the higher the perceived risk in covering you….and that means higher premiums down the road.
How do you know the person that signed your contract is actually a legal signatory for the company he claims to represent? And how do you know that the company he is doing business under holds the actual contractor’s license, and isn’t doing business under someone else’s license? Checking the status of a contractor’s license to verify it is current is great, but make sure to get a copy of the State Board license card as each new card is issued. This will ensure that you are dealing with someone who is in possession of the card, versus someone who is simply attempting to run their business under another’s license.
Get a W9 from every person or entity you hire. You’ll need to determine which type of entity you are dealing with to figure out whether you are required to send them a 1099 form each year. A W9 is the way to get that information. Failing to send a 1099 to your subcontractor can cause several issues. If you are audited by the IRS you could be assessed “failure to file penalties” which come with very heavy fines.
Ensuring that you have a signed subcontractor or independent contractor agreement is critical if ever there is a dispute with the work being performed. A detailed scope of work, who is responsible for what, payment timeframes, duration of work, and quality are just a few of the variables involved. It is vital to have everything listed in as much detail as possible so both parties have the same expectations. Be sure to have a detailed agreement with every subcontractor you hire.