Chapter 4: Risk Management for Contractors and Small Construction Businesses
Part 2: Considerations When Hiring Subcontractors
If you need to hire subcontractors to help you complete a larger project, be warned — the mistakes your subcontractor makes could become your liability. For example, let's say you're a general contractor working on a residential home. You hire an electrical subcontractor to finish the job. Five years later, the house burns to the ground, and after an investigation, the Homeowner's Insurance provider finds the cause was faulty wiring.
Initially, the former client tries to sue the subcontractor for the construction defect, but finds the electrician has retired and no longer has insurance. So they sue you instead. Not only could you be lassoed into an unpleasant court battle, but you could also lose your coverage for hiring an uninsured subcontractor.
Unfortunately, this scenario is a common one. So how can you keep your business safe and still hire the help you need? Here are a few tips:
- Make sure your subcontractors are insured. If you do business with the same subcontractors each year, be sure you have their latest certificates of insurance. Also, check that you are named as an additional insured — an endorsement to their General Liability Insurance policy that protects you if both you and the subcontractor are liable for errors. If your subcontractor does not have insurance, your provider may consider the subcontractor your employee, which will affect your premiums.
- Check for proper licensing. Check with your state's construction board to ensure you hire a licensed subcontractor. In most states, you can search the subcontractor's license number on the board's website to make sure its current and there are no complaints on their record.
- Document your dealings. Draw up a written contract that outlines project timelines, expectations, and pay rate. Your contract should also include correction steps for errors made and clearly define who is responsible for correcting mistakes. Remember, the document is not legally binding until both parties sign on the dotted line.
- Inspect their work. Once the job is finished, be sure you check their work to see if repairs are necessary. The customer, you, and the subcontractor should sign off on the work before it is considered complete.
- Work with people you trust. A good working relationship not only makes projects easier, but also it can spare your contracting business a load of legal hassles down the road.
If you need more advice about how to check for your subcontractor's insurance and what to look for, talk to one of our licensed agents.
Next: Part 3: OSHA and You: Creating a Safer Work Environment
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