Subcontracting in the Construction Industry Term Paper

Selection criteria used by construction contractors for selecting a subcontractor.

Criterion

Weight

Organization characteristics

Company reputation

Company age

Responsiveness

Personnel qualifications

Related degree or certificate

Relevant experience in building construction

Technical abilities

Financial performance

Bank references

Profitability history

Current workload

Relevant experience

Similar type of projects to the proposed work

Similar size ($) of projects to the proposed work

Source: Dulung & Pheng, 2005, p. 94.

The respective weights were then sorted in ascending order using Excel (see copy of data table at Appendix a) and are illustrated graphically in Figure 2 below for ease of comparison as to their relative importance in the subcontractor-selection process.

Figure 2. Selection criteria used by construction contractors for selecting a subcontractor.

Source: Based on tabular data in Dulung & Pheng, 2005 at p. 94.

Although the construction is fundamentally different from other manufacturing enterprises as noted above and by these authors, based on their findings, Dulung and Pheng applied a similar assumption in the subcontractor selection process that suggested the main contractors (as buyers) typically select subcontractors (as services provider) based on three primary factors:

Project specifications and subcontractors' proposal;

Subcontractor profiles; and,

Main contractor's objectives that include qualitative aspects.

Whatever subcontractor is selected for a given project, it is important that such subcontractors and their employees "walk the same walk" and "talk the same talk" as the contractor to ensure effective communications and mutual rapport on the worksite. For example, Dulung and Pheng (2005) determined that, "trust" was a common variable that affected the decision-making process of the main contractor when selecting a subcontractor; the authors add that "trust" and "communication" were not only able to reduce the transaction costs, which make possible the sharing of sensitive information and permit joint projects of various kinds, but also provide a basis for expanding moral relations in businesses (Dulung & Pheng, 2005).

In this regard, Applebaum (1999) reports that the following traits are characteristic of those employed in the construction industry today:

The culture of construction workers is based on their control of their own work process through their ownership of their tools and their knowledge of their craft;

Construction proceeds through an informal, face-to-face organization of work;

Construction technology is largely a handicraft technology. This is modified somewhat by the use of machines like cranes and hoists for heavy lifting, and excavation, grading, and loading machines for site work, foundations, on-grade slabs, street utilities, and roadwork;

Construction work is dangerous and arduous; indeed, construction has one of the highest accident and death rates of any industry;

Uncertainty is the norm in the construction industry. Construction workers are employed for the limited time of a project and most do not work a full year. Uncertainty is also the result of weather conditions that can suspend construction;

Field management of construction work is loose, informal, and nonbureaucratic; the nature of the industry tends to encourage informality, personal relations, and the establishment of community-like networks within the local and decentralized construction industry that exist in every locale today;

Job satisfaction among construction workers is relatively high because of high wages, worker autonomy, loose supervision, and pride in craft and product;

Construction workers can be said to constitute an occupational community through their lifelong commitment to craft, merging of their work and nonwork lives, and their sense of identity and self-image stemming from their work (Applebaum, 1999, p. 3).

Beyond these similarities among the trade, construction workers can also be regarded as distinct occupational groups because they tend to identify more with their occupation than with a specific employer or specific job (Applebaum, 1999). Moreover, Finkel (1997) also points out that while a number of large and small construction companies are involved with a wide variety of types of jobs, there are also specialty companies that have developed an enormous amount of expertise in a given area. For example, "One concrete firm may focus almost exclusively on sidewalk installations while others will become associated with block work or foundations. A particular plumbing contractor will consistently be a subcontractor to a particular architect/interior designer while another may only install and maintain hospital plumbing systems" (Finkel, 1997, p. 34).

Smaller subcontractors in particular may use this approach to doing business because such highly skilled specialists are in big demand and smaller concerns are in a better position to monitor those factors that contribute to a quality job. For example, "Repetition, personal relationships, and quality control are important features of successful competitors.By carving out a defined piece of the marketplace, smaller firms can withstand the intense competitive pressures associated with small-scale construction projects" (Finkel, 1997 p. 34).

In many cases, these small- to medium-sized subcontracting construction companies are not unionized, and they are highly vulnerable to intense price competition while operating on thin profit margins. For instance, Finkel notes that, "Of course, productivity in construction can be largely related to individual hourly outputs; therefore, numbers of employees coupled with hours of employment provide a clue to the thinness of the profit margin. Self-employed proprietors or partners are limited by physical hourly limits and the industry-average levels of outputs" (Finkel, 1997 p. 33). Market entry costs for such smaller subcontracting companies, though, typically involve relatively low capital investments. In this regard, Finkel notes that, "Licensing provides a minor hurdle, as do insurance and bonding to guarantee fiscal responsibility. For many employers, the relatively low start-up costs are strong inducements for going out on one's own" (Finkel, 1997, p. 33). These subcontracting firms are typically highly departmentalized, with estimation, engineering, drafting, and installation representing specific areas of responsibility within the subcontracting company; however, some of the larger or more ambitious specialty subcontractors may in some cases undertake the role of prime contractor, thereby serving as a subcontractor for one project while operating as a contractor in yet another (Finkel, 1997).

According to Bosch and Phllips (2002), governmental policies also play an important role in the subcontracting decision-making process: "This can happen directly through contractor licensing regulations and indirectly through a host of policies and building codes that exacerbate or moderate the risks construction firms and customers face. Tax policies can also play a role" (p. 10). In some projects, the structure of subcontracting can be redefined to the point that a contractor is able to treat many of the individual workers on a construction site as self-employed subcontractors in order to avoid paying the taxes associated with wage work (Bosch & Phillips, 2002).

The structure of subcontracting on the construction site can be categorized into two specific types as shown in Table 1 below.

Table 1.

Two basic types of construction subcontracting.

Type

Description

Cooperative

In cooperative subcontracting, each subcontractor is assigned distinct tasks over which that subcontractor has sole responsibility.

Competitive

In competitive subcontracting, two or more subcontractors are assigned the same task and their longevity on the job is dependent upon their ability to out-compete their rivals

Source: Bosch & Phillips, 2002, p. 10.

Although the types of work performed on construction sites are not amenable to the same processes used in other manufacturing settings, highly articulated subcontracting systems can serve to introduce and extend specialization within the division of labor on the construction site which is the case in cooperative subcontracting; this is not always the purpose or result of subcontracting, though (Bosch & Phillips, 2002). According to these authors, "Risk shifting and risk reduction provide a second reason for extending the subcontracting system. Competitive subcontracting does not increase specialization; rather it introduces competition on the job site among similar subcontractors" (Bosch & Phillips, 2002, p. 10).

The articulation of the subcontracting process all the way down to the individual worker level employed for a construction project is typically intended to avoid governmental regulations that are legitimately intended to protect wage workers instead of being intended to extend specialization in a given area and these mutually competing reasons for articulating subcontracting may work at odds. For example, Bosch and Phillips (2002) caution that, "The cost-cutting goals of competitive subcontracting and independent individual subcontractors may heighten the risks general contractors face in attempting to meet construction deadlines and quality standards, because they come to rely on low-skilled workers" (p. 10).

These considerations suggest that safety on the job site remains an overriding consideration during the subcontractor selection process, a finding that is supported by Nash (2005) who emphasizes, "Current ANSI standard calls for a construction process plan, describing the construction sequence for the safe completion of the project. In addition, pre-work planning is required of all subcontractors. This means they must conduct a physical survey of the job site before they begin working. Ensuring that subcontractors execute an effective safety and health program is one of the thorniest issues confronting general contractors. Pre-job planning, if done.....