Resist the Temptation to Self-Perform Work
At breakfast yesterday, a construction accountant friend of mine mentioned a trend among his general contractor clients in response to the recession. General contractors, usually in the business of coordinating, scheduling and supervising work, but, with some exceptions, not really self-performing, are now self-performing in lieu of using subcontractors. Their thought is they can do the work themselves and avoid the subcontractor’s markup for overhead and profit, thereby theoretically increasing their own profit margins. This is a recipe for disaster on several levels.
First, although general contractors are well versed in all aspects of construction, there is a tremendous difference between coordinating and supervising work, on the one hand, and actually performing it, on the other. The subcontractors are specially trained and experienced to handle the minute aspects of their means and methods, which are largely unobserved and misunderstood by the general contractor. The risk of defective construction increases dramatically when someone tries building something outside their area of expertise. Second, most subcontractors have achieved economies of scale from their years of experience, resulting in a cost efficiency that would be difficult for a general contractor to replicate when they haven’t performed that scope of work many times before, especially where the specific crews are not well versed in it. Work will be slower and less fluid, costing more than the subcontractors would charge with their more efficient economies of scale. Third, there may be licensing ramifications to self-performed work. Although general contractors may contract for all work, they must subcontract out specific trades to licensed subcontractors, such as mechanical, electrical and plumbing, among others. General contractors are not licensed to actually perform that work themselves unless they hold those specialty licenses. Doing so may not only expose the contractor to liability, but may also have serious ramifications on their insurability and possibly their bondability. Finally, you can expect serious errors in the estimating phase. General contractors customarily rely on their subcontractors to provide price estimates for inclusion in their bids and take-offs. However, when self-performing, a general contractor embarking on unfamiliar territory has no expertise in taking-off costs on their own, drastically increasing the risk of underbidding a job, which would certainly lead to failures of the job and expensive litigation later.
The decision to morph from coordinating subcontractors to self-performing is as profound as moving your practice out of state or transitioning from private work to public (or vice-versa). Although all of these changes are certainly doable, they require a tremendous amount of forethought, planning and preparation and should not be undertaken in a cavalier manner. The decision to increase margins by self-performing can very quickly backfire, as the costs of a failed job and subsequent litigation eat up more than the savings you envisioned.
Dorothy (Cobb Law Group)October 1, 2012 12:37 pm
Thanks for bringing this interesting point to light. We’ve experienced similar issues here in Georgia; everyone is trying to cut corners, and when this happens, mistakes can be made, licenses are not obtained, and project completion is further delayed. We relate it to a construction lawyer trying to solve healthcare law.