Learn about the benefits of prequalification for construction firms and subcontractors.
What Is Prequalification?
Construction projects are inherently dangerous. There are risks from safety hazards that can lead to work accidents and injuries. Financial troubles can occur when bad planning or budget overruns happen. There are also project delivery risks from faulty construction and poor scheduling.
While there is no way to eliminate the inherent risks of construction work completely, contractors can mitigate them through a structured process known as prequalification.
The prequalification process allows contractors to gather and assess information about interested subcontractors to determine their capacity to complete the job by considering their experience.
The Advantages of Contractor Prequalification
Both the contractors qualifying the bidders and the bidders themselves benefit from prequalification. For contractors looking for subcontractors or suppliers to prequalify, the process can assess the interest generated by a project. If there is little interest, adjustments need to be made to make the project more attractive. The process also reduces the time and work involved when evaluating applicants, as the process naturally weeds out individuals that do not meet the contractors’ requirements.
For the bidder, the prequalification procedures help simplify the bidding process for qualified and unqualified individuals. Those who are underqualified can evaluate whether the bid is worth their time. If they still want to pursue the project, they have the option to form a joint venture to increase their chances of success. For qualified contractors and subcontractors, the prequalification process gives them an advantage and can make bids more competitive.
The Formal Prequal Process
Whether you are setting up a prequalification process for your business or you are taking part in one as a subcontractor, it is essential to understand how the process works. It typically starts with a prequalification form that quickly assesses each contractor’s abilities. Many companies offer online prequalification forms to make the process simpler and faster. After the initial form has been completed, applicants should provide various forms and documents to prove their eligibility. Some of the most common forms include:
- Form W-9 - must include legal name, signed and dated within the past year
- Insurance Certificate - must be current and meet state requirements
- OSHA Forms 300 and 300A - companies with ten or fewer employees must provide Form 300 for the past three years to record the number of employees and the total hours worked every year; Form 300A is required if recordable incidents occurred
- EMR Verification - this may be in the form of an NCCI comparable letter or a letter from your workers’ compensation carrier, including letters from the past three years
- Letter From Surety - the letter from your surety must be dated within the last 30 days and state your single project bonding capacity, aggregate bonding capacity, and the amount available
- Financial Statements - third-party prepared financial statements are required from your last fiscal year
- Additional Financial Information - requirements vary; examples include WIP schedule, accounts receivable aging summary, line of credit bank statement
Factors Considered for Prequalification
Once a firm has the relevant information to examine a contractor’s or supplier’s prequalification application, the firm can check off requirements to make the best decision for their project and business. There are a number of factors to consider, the most crucial being business information, financial stability, payment history, and safety records.
If hiring a subcontractor, you need to verify they are appropriately licensed in the state where your project is taking place. Anyone being prequalified should research the company to determine if there are any problematic officers, shareholders, partners, or other stakeholders involved in the business.
A history of financial stability typically indicates being able to follow through on a project. You can request information on past job history to learn more about their most recent projects and the size of the largest contract they performed. Some common questions asked include:
- Has the applicant ever filed for bankruptcy?
- How large is their workforce?
- Do they have a backlog of projects?
- What is their expected annual revenue?
- Do they have the capacity for your job?
If you are considering working with a new construction company, you want to know that their subcontractors and suppliers get paid for the work they do. A smoother payment system ensures people get paid on time and avoids potential liens or bond claims. Consider researching payment history, reviews, and ratings to learn more about their payment track record.
Safety Statistics & Procedures
Safety concerns are a top priority when prequalifying applicants. There are a number of ways you can determine a potential subcontractor’s safety statistics. One of the most reliable ways is evaluating their experience modification rating (EMR), which is what insurance companies use to gauge the past cost of injuries and the chances of future risk.
Explore Business Requirements by State
Click on a link below to view business information in your state for your construction company.
Keeping on track with your business’s requirements can be complicated, especially as a growing company. If you are concerned about managing the business registration process or licensing on your own, you can seek guidance from the business licensing experts at Harbor Compliance.
With our professional licensing services, we offer full support through all of the stages of the corporate life cycle and can provide access to expert software insights. We make preparing and filing applications easy and handle communication with government agencies on your behalf. With our software, you can track your registration status, license numbers, filing history, fees, and renewals 24/7. Contact out licensing experts today to learn more.
Associated General Contractors of America
Professional association providing advocacy and organization for construction firms and workers.
National Association of Home Builders
National association for the promotion of the housing industry.
National Association of State Contractors Licensing Agencies
National organization that represents and promotes the interests of state level contractor licensing agencies.