Subcontractor Prequalification
You can lose money on a job in a lot of ways. Most of them you control: you can bid it wrong, staff it wrong, or manage it badly. Those hurt, and they are yours to fix.
Subcontractor default is different. A sub who walks off at 60% complete costs you the completion premium, the schedule, the liquidated damages, the claims from their unpaid suppliers, and the argument with the owner — and you did not make a single mistake to earn it. On a job you self-perform 20% of, you are exposed to eighty cents of every dollar through companies whose books you have never seen.
Prequalification is the one gate you control on that risk. This is how to run it.
If you are being asked to fill in a prequalification package, read this instead — it explains what the GC is actually looking at and why you keep getting passed over.
What prequalification actually is
A gate that decides who is allowed to bid, applied before the bid list is issued.
That timing is the whole thing, and it is the most common mistake in the discipline. Prequalifying after bids come in is not prequalification, it is regret management. By then you have a number in your estimate that you want to be true, and everyone in the room is looking for reasons to accept it. The low bid is low for a reason, and "they did not understand the scope" and "they cannot afford to perform it" look identical on bid day.
Qualify first. Then take bids only from qualified subs, and the low number is a number you can actually use.
The five things you are evaluating
Capacity. Can they carry this financially, and do they have room in their workload? A profitable company with no working capital fails on a big job just as reliably as an unprofitable one.
Capability. Have they done this scope, at this size, in this market? Twenty $200,000 jobs is not the same experience as one $2,000,000 job. Different cash flow, different supervision, different consequences.
Compliance. License, insurance, safety program, and whatever the owner's contract pushes down to them.
Character. Do they finish, pay their suppliers, and tell you when something is wrong? This comes from references and from your own history with them, and it is the most predictive of the five.
Continuity. If their one estimator or one foreman leaves, does the company still work?
Tier the requirements — do not ask everyone for everything
The single biggest practical failure in subcontractor prequalification is running one process for all subs. Ask a $30,000 flooring sub for three years of reviewed financial statements and one of two things happens: they do not respond, or they do respond and you now hold sensitive documents you never read.
Tier it by the size of your exposure.
| Your contract with them | Require |
|---|---|
| Under $50,000 | W-9, contractor's license, certificate of insurance with required endorsements, signed subcontract |
| $50,000 – $500,000 | Everything above, plus the prequalification application, three GC or owner references, three supplier references, EMR and OSHA recordables |
| $500,000+ | Everything above, plus financial statements, current backlog at cost to complete, a bonding capacity letter from their surety producer, key personnel assigned to your job |
| Critical path, sole-source, or more than 10% of your contract | Everything above, plus a performance and payment bond, a site visit to their shop or a current job, and a financial review |
Set the tier by your exposure, not by their size. A $400,000 mechanical scope on the critical path of a nine-month job deserves more scrutiny than a $900,000 flooring package delivered in the last six weeks. Ask what happens to your schedule and your owner if this specific sub stops showing up.
The number that predicts default better than any other
Compare your contract value to their annual revenue.
| Your scope as a share of their annual revenue | Reading |
|---|---|
| Under 10% | Routine work for them |
| 10–20% | Meaningful. They will feel it if it goes badly. |
| 20–40% | This is now their most important job. Watch the staffing. |
| Over 40% | This job can take the company down, and it can take you with it. |
A sub taking on a job that is 40% of their annual revenue is the classic setup for a default even when they are profitable and honest. The job outruns their cash. They need the money from your job to fund your job, and any delay in your payment cycle becomes their payroll problem. This is exactly the overtrading pattern that kills growing general contractors, one tier down.
The reverse concentration matters too. If you are already 45% of their book and you award them another package, you have made yourself their entire business and yourself their entire risk.
Set an award limit for every sub
This is the part almost nobody does, and it is the single highest-value habit in the whole discipline.
Give each approved sub two numbers:
- Single job limit — the largest one contract you will award them
- Aggregate limit — the total uncompleted work you will have with them across all your jobs at once
If that sounds familiar, it should. It is exactly what your surety does to you, and for the same reason. See bonding capacity explained — you are running a small credit operation on your subcontractors whether or not you have noticed.
Two things follow immediately:
The aggregate is the one people miss. A sub who is comfortably inside your single job limit on four of your jobs at once may be well past their own capacity. Nobody notices, because each award was individually reasonable and no one adds them up.
The limit has to be visible to the people awarding work. An award limit in a spreadsheet on the office manager's desktop is not a control. It has to be on the screen when the project manager picks up the phone.
Sureties commonly cap a subcontractor's total backlog at about 10× their working capital, and their single job around the same. You can use the same arithmetic as a sanity check on your own award, allowing for the fact that you are only one of their customers. Every one of these multiples varies — treat them as a starting point.
What to actually read when it comes back
You will get a packet. Most of it is noise. These are the parts that carry information:
Have you ever failed to complete a contract? A yes with a candid explanation is often fine and occasionally a good sign. A no from a company you know had a bad job two years ago is the end of the conversation.
Has a surety ever paid a claim on your behalf? The most compressed question on the form.
The three largest completed projects. Compare them to the scope you are about to award. If your job would be their largest ever by a factor of two, that is the finding.
Supplier references — and actually call them. Suppliers know before anyone else whether a contractor pays. Ask two questions: are they current with you, and has that changed in the last year? The second question is the one that matters.
EMR and OSHA recordables. An experience modification rate above 1.0 means they cost their insurer more than an average company in their trade. Above 1.2 with no explanation is a real finding, both for safety and because it is expensive money they are carrying.
Current backlog. If they cannot tell you their backlog at cost to complete, they do not have a WIP schedule, which tells you what their financial reporting is worth.
For the financial section, see reading a subcontractor's financial statements.
Three answers, not two
Prequalification is not pass/fail. The middle answer is where most of the value is.
Approve
They meet the requirements for the tier. Set the award limits, record the date, set the annual expiry.
Approve with conditions
You want them, and something in the file needs managing. Conditions available to you:
| Condition | Use it when | What it costs |
|---|---|---|
| Require a bond | The scope is large or critical and the financials are thin | Roughly 1–3% of their price, which you pay in their number |
| Joint checks to their key suppliers | Supplier references show slow payment | Administrative effort |
| Increased retention | General financial concern | Strains their cash — which may be the problem |
| Weekly conditional lien waivers with every pay application | You need visibility down their chain | A little paperwork |
| Funds control | Serious concern, big scope | A fee, and it works |
| Direct purchase of long-lead material | Their credit with suppliers is the weak point | You carry the material |
| Reduced scope, or phased award | They are close but unproven at this size | Coordination |
| More frequent site meetings and manpower reporting | Any of the above | Time |
The conditional approval letter template covers how to communicate this — the short version is: state requirements, name what would lift each one, and never write an opinion about their solvency.
Requiring a bond is not free and it is not a substitute for judgement. It converts a performance risk into a claims process, and a claims process takes months while your job needs a finished scope now. Bond the subs you would award anyway; do not bond your way into a sub you do not believe in.
Decline
Say so, directly, and say why. Two reasons this matters. They cannot fix a problem nobody told them about, and subcontractors talk to each other — a GC with a reputation for a fair, explained process gets better bid coverage than one who goes quiet.
Insurance and the part that quietly costs you money
Certificates get their own guide, because the detail matters and because most GCs are carrying a cost here they have never measured.
The short version: a certificate of insurance is evidence, not coverage. It confers no rights, the disclaimer on the form says exactly that, and ticking the "additional insured" box proves nothing without the endorsement form behind it.
And the part that shows up on your P&L: at your general liability and workers' compensation audit, any sub you cannot produce a valid certificate for can be charged to you as uninsured subcontractor exposure — at your rate, on their contract value or payroll. For a mid-size GC that is a five-figure annual surprise, generated entirely by a filing failure.
Full detail: certificates of insurance and collecting and tracking certificates.
It expires
Prequalification is not a permanent status, and treating it as one is how a file goes stale without anyone deciding to let it.
Requalify annually. Refresh the financials, the certificates, the license, the safety record, and the ownership. See annual requalification.
Requalify off-cycle when anything material changes:
- Ownership or key personnel change
- A bad job with you, or a bad job you hear about elsewhere
- A lien, judgment, or tax lien appears
- A large award somewhere else that changes their capacity picture
- An insurance lapse
- They ask you for a joint check or an early payment
That last one deserves its own line. A sub asking for joint checks is asking for help, and it is usually the earliest reliable signal you will get. It rarely arrives labelled as distress — it arrives as a small favor. See warning signs a subcontractor is in trouble.
The mistakes that show up over and over
Prequalifying after the bid. Covered above. It is not prequalification.
One process for all subs. Either too heavy for small scopes, or too light for large ones. Usually both at once.
Collecting information nobody reads. If no one reads the financial statements, stop asking for them — you are creating a data-handling liability for a document that changes no decisions.
Asking for Social Security numbers and dates of birth. Many GC prequalification forms were copied from surety forms, which do ask for these because a surety takes personal indemnity. You do not. Collecting owners' personal identifiers gives you a breach liability and zero information you can act on. Do not ask.
Never calling the references. They are the highest-signal, lowest-effort item on the form, and they are skipped more than anything else.
No award limits. Or limits that exist somewhere the person awarding work cannot see.
Letting them mobilize without documents. The certificate arrives on day 30 or never. The only enforceable rule is no documents, no site access, no first payment — and it only works if it is applied to everyone.
What good looks like
- The requirement tiers are written down and applied by size, not by feel
- Prequalification happens before the bid list, with a 5–10 business day turnaround
- Every approved sub has a single job limit and an aggregate limit, visible to the people awarding work
- References get called, especially the suppliers
- Conditional approval is used regularly, because the middle answer is usually the right one
- Certificates are tracked with expiry dates and chased before they lapse, not after
- Every sub gets a post-job evaluation at closeout, while it is fresh
- The whole file expires annually and somebody owns the sweep
None of that requires software. All of it requires somebody to own it.
Related Resources
- Subcontractors Hub — full section index
- Prequalification Workflow — operational steps
- Subcontractor Prequalification Form — send this to applicants
- Getting Prequalified as a Subcontractor — the sub-side view
Not legal or insurance advice. Insurance requirements, licensing rules and contract terms vary by state, by owner and by trade. Set your requirements with your own broker and attorney.
Try it: Subcontractor Risk Scorecard — enter a sub's financials, capacity, safety record and your contract value, and get a risk read, a suggested award limit, and whether to require a bond.