The Cove View – Subcontract Risk Management

inline-icon-clock 9 MIN READ 13/05/20
News

George Dale Managing Director US
13/05/20
News
inline-icon-clock 9 MIN READ
George Dale Managing Director US

The Cove View – Subcontract Risk Management

Click the link below for downloadable PDF version:

The Cove View – Subcontract Risk Management PDF – May 2020

 

Introduction:

It is more important than ever to continue to monitor the financial health of subcontractors. General Contractors need to ensure that subcontractors have the resources to support projects.  Cove Programs urges its community to investigate and increase their use of additional resources in this crucial area.  Even if you do not normally use third-party pre-qualification services; these are not normal times to say the least.

To help improve the understanding of what services are available in today’s environment, we surveyed eight of the leading providers to see how they could help “re-qual” strained subcontractors.  Some key takeaways from our discussions with these service providers are as follows:

 

Subcontractor Prequalification Trends since the outbreak COVID-19

In general, it does not appear that there have been any significant changes yet in how General Contractors are utilizing prequalification services.  However, several service providers have noticed that General Contractors have a heightened interest in their subcontractors’ prequalification status and are starting to ask more about the frequency of updates.  Some General Contractors are also looking for new or better ways to engage with subcontractors more frequently in the near term.  With regard to the standard prequalification updates, because the COVID-19 crisis has hit at the time of the year when year-end financial statements are becoming available, this is typically one of the busiest times of the year for prequalification updates anyway and the heightened interest in updates has not significantly added to the prequalification activity already underway.

Service providers have not reported any new challenges in obtaining information from subcontractors beyond the usual push back from some subcontractors that are reluctant to share financials even during good times. Instead, many service providers have noted that subcontractors have actually been more responsive than usual, since they recognize that the General Contractors have a heightened interest in the subcontractor’s financial strength and their ability to take on and successfully perform new work.

 

Subcontractor Financial Condition Trends

None of the service providers we contacted noted any specific cases where they have seen evidence of COVID-19 impacts in the prequalification information received from subcontractors.  The general consensus has been that it is still too early to see any financial impacts in subcontractor’s financial statements, especially considering many are still just issuing their 2019 year-end statements. Internal financial statements as of March 31, 2020, should start to become more readily available by mid-May, although even these statements are unlikely to reflect COVID-19 impacts, since many of the work restrictions and suspensions did not go into effect until mid to late March.  Regardless of what is or is not reflected in financial statements, for subcontractors in regions where projects have been suspended, another general consensus is that they may be most stressed financially about two months after their projects restart based on typical payment cycles

 

New or modified Third Party Prequalification Services in response to COVID-19

We have been encouraging prequalification service providers vendors to supplement their normal services to help with these “re-qual” efforts.   At least four companies – Bespoke Metrics, Vertikal, TradeTapp, and Alliant – are offering supplemental services focused on identifying potential near-term liquidity issues resulting from the COVID-19 crisis.

 

The COMPASS PULSE tool, offered by Bespoke Metrics, is designed so subcontractors can complete a short survey centered around questions designed to flag potential issues with liquidity. It is expected that these surveys will be updated monthly to provide regular updates on subcontractor status. Bespoke Metrics is offering this service at no charge to General Contractors (or subcontractors), regardless of whether or not a General Contractor utilizes the full COMPASS SRP prequalification platform.

 

In a similar vein, Vertikal has developed a COVID-19 form with a supplemental set of questions that can be added to complement PreQual, which is their standard subcontractor prequalification service.  Vertikal will analyze the responses to these supplemental questions to provide a quick snapshot of a subcontractor’s short-term liquidity, along with a rating. This supplemental review can also be provided as a stand-alone service to General Contractors who are not existing Vertikal customers.

 

Trade Tapp is also offering a supplemental questionnaire to address COVID-19 impacts.This questionnaire, which includes sections addressing People & Projects, Liquidity, and Supply Chain, can be added to a General Contractor’s usual subcontractor qualification  process to provide additional insights into any challenges a subcontractor is facing as a result of the pandemic.

 

In another example of a new service developed in response to COVID-19, Alliant has rolled out a liquidity stress test analysis that focuses on a 13-week cash flow projection modeled off of subcontractor financial statements and supporting information.  Although this service was initially developed to support Alliant’s customers who utilize their C2M (Contractor Credit Model) tool, Alliant will also consider offering this service to General Contractors who are not C2M users.

 

Options for Supplemental Support for “Re-qualification”

We are aware that many General Contractors have been and will be contacting subcontractors directly to check on their financial health, including discussions relating to liquidity and access to capital (including Paycheck Protection Program loans). While we certainly encourage frequent and open communication between GC’s and subcontractors, these inquiries will be most effective if they follow some structure in terms of frequency, types of questions asked, information requested, and analysis.  For GC’s who handle their subcontractor prequalification in-house, completing more frequent or “supplemental” reviews may require additional resources.  In these cases, it might make sense to consider engaging with a prequalification service provider to augment the review process and “re-qualify” subcontractors during this period of economic uncertainty.

For reference, we have provided a partial list of subcontractor prequalification services along with their contact information below.  We would also like to thank each of these service providers for their insights, as we spoke with each of them while compiling this update.

 

Prequalification Service Providers (partial list)

Descriptions below are as provided by service providers, not Cove Programs. We list them here merely to inform our community.  We take no position or evaluation as to how effective they may be or do not specifically endorse the use of any particular vendor.  Nevertheless, we urge our community to seriously consider the use of a third-party vendor company of their choice.

 

Compass (by Bespoke Metrics)

“COMPASS SRP allows for the most accurate subcontractor risk analysis on the market. Backed by years of experience and utilizing the proprietary Q Score methodology, COMPASS SRP is truly an integrated platform providing analysis for all departments.

COMPASS PULSE was specifically developed in response to COVID-19 as a tool for General Contractors to gain insight into their current Subcontractor risk exposure. Simplicity, standardization, and a seamless interface make it quick and easy for Subcontractors to submit data on a regular basis allowing for more comprehensive analysis and better information for General Contractors. PULSE is intended to supplement, not replace, traditional risk management tools and is currently available to any General Contractor free of charge whether they use bonding or SDI.”

Contact: Connell O’Leary, coleary@bespokemetrics.com, (416) 737-8718

 

Markel (formerly SureTec)

“Markel’s subcontractor prequalification offers the most thorough and comprehensive subcontractor risk assessment process in the industry.  Our Prequalification division provides a rigorous, independent evaluation of subcontractor financial condition and capabilities to help our clients make informed decisions.”

Contact: Shelly Sullivan, Shelly.Sullivan@markel.com, (972) 265-8313

 

PreQual (from Vertikal)

“PreQual brings a new level of transparency to outside business relationships by organizing, simplifying, and monitoring key risk indicators and exposure to outside liabilities. This innovative software and service solution combines dynamic software with expert financial analysis to identify potential liabilities before they financially impact your company.”

Contact: Matthew Kelly, marketing@vertikalrms.com, (877) 576-2378

 

SubQual

“The people at SubQual, LLC have been providing subcontractor prequalification services for General Contractors since 2002. Our purpose is to make the prequalification process easier for the subcontractor while providing information to General Contractors to use in the subcontractor selection process.”

Contact: Lisa Best, lebest@subqual-llc.com, (520) 750-4625

 

TradeTapp (from Autodesk)

“Significantly decrease the time it takes to analyze subcontractor risk, annually or for a specific project. Advanced risk profiles enable a streamlined process and offer financial benchmarking, key metric calculations, capacity recommendations and safety performance history.”

Contact: Dustin DeVan, dustin.devan@autodesk.com, (916) 770-0612

 

Services affiliated with Brokers

 

Alliant Contractor Credit Model (C2M)

“Alliant Contractor Credit Model™ (C2M™) gets to the heart of the subcontractor prequalification process by providing an analytical tool to evaluate a subcontractor’s ability to perform on a particular project. By using a series of financial measurements, Alliant C2M will provide a credit score that helps end users determine if the subcontractor is in the low, medium or high-risk category for their size.”

Contact: James Bly, James.Bly@alliant.com, (412) 863-4589

 

Lockton SCORE

“The Lockton SCORE System is the next level of consultative support for the subcontractor prequalification management process – providing general contractors, owners, developers, architects, engineers and specialty trade contractors with straightforward, analytical ratings on your key partners financial strength and safety record.”

Contact: Evan Sizemore, esizemore@lockton.com, (816) 960-9781

 

Marsh SubSecure

“SubSecure measures financial factors to identify subcontractors that present a high risk.” The analysis provides “an individual subcontractor benchmark report that scores a subcontractor’s financial factors (and) an individual subcontractor “Z Score” report that is widely recognized as an indicator of potential financial problems.”

Contact: Daniel Machado, Daniel.Machado@marsh.com (for US), Shane Sinclair, Shane.Sinclair@marsh.com (for Canada)

 

We look forward to working with you during this phase of the crisis.  If you have any questions, please do not hesitate to contact us.