Prequalify Your Partners Up and Down Your Contractual Chain To Prevent the Risk of Subcontractor Default: ConsensusDocs Resources Can Assist

Rising tides can sink ships in construction. While construction is one of the riskiest industries in the United States, it also has one of the thinnest profit margins. According to the Small Business Administration (SBA), less than 35% of construction businesses survive a decade. Just one bad and unprofitable project in ten can sink a construction business. Subcontractor defaults are a significant risk to the construction industry and can have far-reaching consequences. The 2024 AGC/FMI Study highlights that 70% of respondents reported an increase in subcontractor distress or defaults compared to the previous year, and nearly half of respondents reported project disruptions due to subcontractor defaults.

While it seems counterintuitive, subcontractor defaults increase when the economy is improving. Some subcontractors, suppliers, and general contractors overextend themselves and face higher costs than when bids were submitted. Prequalifying your contracting parties up and down the contractual chain is not only crucial, but mission critical to maintain financial solvency. ConsensusDocs has created this resource center with valuable links below that help the design and construction industry in this effort, including sample prequalification statements for subcontractors, constructors/general contractors, design-builders, and design professionals.

The terms in ConsensusDocs standard contracts provide valuable resources in prequalification, project financial information transparency, and positive contract terms that help facilitate contract administration and direct party communications.

General Contractors should choose their subcontractors and suppliers carefully, but also their owner clients. Prequalifying an owner entails ensuring project financial information. A late-paying or difficult owner causes stress on the entire contractual chain of parties. Best practices aim to avoid, mitigate, and resolve the risk of subcontractor default. Conflict and tension with a construction owner may be the root cause of conflicts escalating and deviation from best practices. Your contracts should help empower financial transparency as well as encourage rather than silo communications.

Contract terms play a fundamental role in subcontractor default prevention. Valuable resources are highlighted below, and standard prequalification questions for subcontractors, constructors or general contractors, design-builders, and design professionals are provided. ConsensensusDocs is the only published standard questionnaire to request project financial information before and after the commencement of the project. ConsensusDocs contracts incorporate contractual best practices that assist in all subcontractor default prevention areas including prequalification at all contracting levels, contract terms (like timely payment), and contract administration.

Prequalification

ConsensusDocs publishes five contract documents that make it easier for Designers, Owners, Contractors and Subcontractors to bid projects. These documents are offered for free in an effort to improve the industry by providing equitable access to best practice contract documents.

These forms include:

  • ConsensusDocs 220 - Construction Contractor's Qualification Statement for Engineered Construction
  • ConsensusDocs 221 - Constructor's Statement of Qualifications for a Specific Project
  • ConsensusDocs 222 - Design Professional Statement of Qualifications for a Specific Project
  • ConsensusDocs 421 - Design-Builder Statement of Qualifications for a Specific Project
  • ConsensusDocs 721 - Subcontractor's Statement of Qualifications for a Specific Project
Gain Access Here

(Please click the Gain Access Here button above and complete the following form. After completing the form, you will receive an email from hello@mail.consensusdocs.org with a link to download a zip file with all five prequalification forms. Please check your spam folder if you do not receive the email.)

Owner

ConsensusDocs is the only catalog of standard construction contract documents that offers guidelines and a questionnaire that provide an easy and direct way for contractors to quickly determine the financial viability of projects.

Both documents have been endorsed by national owner groups including COAA, CURT and NASFA.

These documents are available in the following ConsensusDocs Packages:

Subcontractor

A recent study by the Associated General Contractors of America and FMI on key risks in the construction industry, noted a significant uptick in subcontractor defaults. In response, they published a comprehensive checklist for construction professionals seeking to safeguard their projects and ensure successful outcomes — "Preventing and Managing the Risk of a Subcontractor Default - A Best Practices Checklist."

This comprehensive checklist is designed to enhance your risk management strategy, covering key areas such as prequalifying subcontractors, using contracts to manage and reduce risks, and monitoring contract performance to mitigate defaults.

Learn More

Additional Resources