Meeting the Challenge of Subcontractors and Contract Compliance

Organizations expect the benefits of contract management software and contract compliance to accrue to them. Their procurement team will gain in efficiency, shorten turn-around time, and reduce costs. Their attorneys will focus on unreviewed, contract-specific terms in high-value agreements instead of checking and re-checking boilerplate language in routine contracts.

Even the hard-to-quantify reduction of risk that contract management software makes possible is viewed in company-centric terms: making sure that the actions and commitments the company makes carry limited risks that are well understood and manageable.

This focus on the internal processes and obligation management within one’s company often leaves unexamined the work and commitment of a company’s subcontractors. While subcontractors are vital in getting large projects done, it is important to stay on top of their work as well as their qualifications, insurance and documentation.

It can also seem like an overwhelming project.

Here are two questions that your organization should be able to answer quickly.

Is subcontracted work getting done?

At the most basic level, a company’s contract managers want to be sure that work is done before it is paid for. But this small detail has been known to slip when it is not any one person’s job to check. Sometimes overworked government agencies pay for services that are said to have been completed by the contracted company, who have themselves taken the word of the subcontractors. In construction projects, subcontractors may appear to have completed a job satisfactorily, but did so in a substandard way that comes to light later.

Contracts for recurring services – as when a government contracts for management of routine services or specialized ones such as managing prisons or traffic infrastructure – are open to this problem without careful management. An inspection on one occasion can show a service is being rendered by the subcontractor, but the contract’s obligation may be ongoing, calling for repeated inspections that never happen.

Another scenario: personnel levels, such as qualified staffing in a healthcare or correctional facility, may be required in the contract according to a certain formula (e.g., “no fewer than x persons with medical certification at or above level y, and an average staff level of z over a one-week period”). Is the subcontractor keeping a record of these staffing levels? Is the contractor?

The contractor faces risks when work is not getting done by the subcontractor:

• Project costs may go up because of delays or reworking of the job in question.
• Governments and other contracting organizations may refuse payment for work not done or impose penalties when the shortcoming is discovered
• Legal action and harm to the contractor’s reputation can follow if the subcontractor’s failures are publicized. That means loss of work.
• Risk mitigation strategies may not pan out; for example, a subcontractor’s faulty work may not be considered an “occurrence” eligible for compensation under a commercial general liability policy.

Contract management software can help companies manage subcontracts in several ways.

• Contracts can be stored in relation to all subcontracts so that terms and obligations of the main contract are related to those of the subcontract.
• Obligations under subcontracts can be created along with related inspection or certification tasks for the contracting company’s team. These tasks can require photographic or signed documentation that the subcontractor's work has been completed.
• The rendering of ongoing services can be confirmed by contract managers who are assigned recurring tasks to check on the services. These tasks auto populate in the system until the contract’s expiration date.

The obligation tracking capabilities of contract management software is not limited to one’s own direct obligations; it can be used to successfully monitor the work that a company is relying on its subcontractors to complete. This helps projects stay on target, but more importantly, protects companies from risk.

Do personnel and practices meet the requirements of the contract?

While a contract may simply call for getting something done – something that the contractor turns to subcontractors to accomplish – it may require more than that.

Government contracts, in particular, may require that any employees under a subcontract:

• Have specific qualifications, training, or licensing
• Have the qualifications commensurate with their pay grade
• Are treated fairly according to specific employment standards

In many cases it’s the contractor who is responsible for insuring that these things are in fact the case.

Health insurers often face a similar task with their health care providers, making certain each year that the providers’ licensing and inspections are up to date.

The contractor faces risks when qualifications are not met by the subcontractor:

• There can be legal liability if the subcontractor’s licensing is not current.
• There can be government penalties if work practices governing hours, overtime, protections in dangerous environments, etc., violate state or federal law.
• There can be penalties or requirements to reimburse payment for wages that exceeded the qualifications of the personnel who did the work.

Contract management software can help companies keep subcontractor records up to date in several ways:

• Software allows for detailed subcontractor records that hold basic employer information as well as specific records of insurance and licensing within one or many jurisdictions.
• Copies of licenses or certificates of insurance can be stored along with a subcontractor’s record.
• Gaps in any subcontractor’s record can trigger an automated form for completion by the subcontractor or a due diligence task for the contractor’s own contract managers to complete.
• Documentation of education and licensing can be stored with the individual personnel records of those approved for work on specialized projects (often high tech, engineering, defense, or healthcare projects). Completion of this information can be required for submission of payment requests at certain pay grades whether by the contractor or the subcontractor.
• E-signature can facilitate collection of information from many subcontractors quickly, automatically updating the subcontractors’ records in a contract management system. An overlooked feature of mature e-signature software is this data-collection capability. Annual checks on licensing can be automated and capture other data with much less overhead by a company’s busy staff.

The job of keeping subcontractors in compliance with contract terms can be accomplished for dozens or hundreds of subcontractors, not with endless person-hours, but with thoughtfully deployed technology.

Every contractual relationship, ideally, should benefit and protect both parties. Subcontracts should do the same – and they can when managed with the help of contract management software.