In "Press for Success," my column in June's Installed Sales Guide (visit and look under the Installed Sales tab for "past issues"), I discussed assembling the pieces of your program to insure a smooth startup or sound growth. This month, I want to expand on a topic that always generates discussion at meetings: insurance and due diligence issues with installers.

Mike Butts Whether you choose to use employee installers or subcontractors to perform labor operations for your installation program, many of the challenges are the same. The end result hopefully also is the same: a well-installed product and a satisfied customer. Let's explore how we get there.

Many LBM dealers will elect to use subcontractors to begin an installed initiative because of the relatively low startup cost. After all, they're almost free; you only pay for labor when the job is complete, and only then when the job is done to your satisfaction ... right?

Before you do that, there is a number of steps to take to insure you're choosing only the best, most reputable installers to work with your company.

Here is your due diligence checklist of things to do before you hire a subcontractor.

Study a Work History. Check with general contractors or customers from at least three previous jobs with this subcontractor. Don't take someone's word for how good he or she is. Remember, the subcontractor on a jobsite represents you and your company. Get solid references. Verify the quality and timeliness of the subcontractor's work with owners and general contractors. Insure that they show up on time, clean up the jobsites appropriately, and complete the work when promised.

Also, verify that the subcontractor's employees can adequately perform the work. You may be hiring someone to do work for you, but who is the sub going to hire on the site? With some of the new labor laws concerning illegal aliens now arising, you could be liable in some cases for having undocumented workers on your jobsites. Take extra caution here.

Check Out Claims History. Have your subcontractor get in touch with his or her insurance company to furnish you with three years of claims history. Privacy laws prohibit you from directly contacting the insurance company, but you can make this a condition of your contract. The subcontractor contacts the agent, and a copy is sent to you. You are looking for a history of claims that point to lax safety standards, or liability claims that could cause you problems with your carrier. Review this information with your liability insurance carrier.

Look at Workers Compensation. Determine the subcontractor's Workers Compensation Experience Modification Factor. A factor of less than 1.0 indicates a more favorable claims history. In some instances, a sole proprietor will not have workers compensation insurance. Check your local laws and insurance for applicability here. My recommendation is to only hire subcontractors that carry workers comp insurance, but you have to make your own determination.

The bottom line is this: If you have a subcontractor on a jobsite, and that sub suffers an injury, someone is going to be held liable for medical coverage and rehabilitation expenses. If that individual is not covered by workers comp insurance, there's a real good chance that someone will be you. Check with your insurance adviser for specifics here.

Examine Safety. Review the subcontractor's OSHA 200 logs for the past three years. Ask this:

  • Does the subcontractor have a formal, written safety program?
  • Will the subcontractor have a competent safety person on the jobsite at all times?
  • Does the subcontractor have an emergency response plan for accidents and other serious safety situations?

Eye the Financial Stability. Have you verified the subcontractor's bonding line of credit, if applicable? While you may not be involved now in a situation where bonding is necessary, this may become an issue in the future. Some of my clients have requested independent financial reports on subcontractors. You can be as thorough here as you choose. In many cases, you've already performed some sort of credit check when you established this customer's account.

There's more to do after a subcontractor is hired:

Make Contractual Requirements. If you solicited bids with a letter, did the letter spell out your expectations for periodic safety meetings and special requirements for skilled labor?

Put into place an annual subcontractor agreement. It sets forth the terms of your relationship with the contractor and clearly defines the relationship. The contract makes clear that this individual is a subcontractor, not an employee of ABC Lumber Co., not subject to benefits, taxes, insurance, vacation, etc. That contractor is responsible for his or her own taxes, insurance, and vehicle, and must furnish his or her own tools and equipment. This document does not take the place of written work orders or subcontractor agreements executed on each individual job.

Finalize Insurance Requirements. I recommend your subcontractor carry, at an absolute minimum, $1 million per occurrence in general liability insurance. No exceptions. Additionally, your company must be named as an additional insured on the subcontractor's general liability insurance policy. The certificate of insurance also needs to indicate that you will get a 30-day written cancellation notice should the subcontractor's insurance be terminated.

Get Indemnification Requirements. Your contract needs a clear indemnification clause that holds you harmless for any bodily injury, property damage, and defense cost that may arise from the subcontractor's negligence while performing work on the jobsite. In addition, the contract needs to clearly place the responsibility for the safety and well-being of the subcontractor's employees with the subcontractor, not with you.

Unfortunately, you also need a provision in the contract that covers disputes or arbitrations that lets you deal with such matters without having to resort to civil suits.

Set the Final Rule. Last but not least, inform the subcontractor that work cannot begin and payment will not be made until all of the necessary documentation is complete and in your hands.

I know this seems like a lot to accomplish, but believe me, if you don't look after the details of contractual requirements upfront, they simply won't get done. It becomes far too easy to bid the work and do the jobs "like we've always done" without all the paperwork–until something goes wrong. Even with employee installers, we need much of the same documentation, maybe not to this degree but very similar. We'll explore those issues next.

I thank Federated Insurance Co. and John Benz for their assistance in putting together the material in this checklist. Benz has long been a supporter of my installed sales activities and has given advice whenever needed in liability and workers compensation insurance.

Mike Butts is president of LBM Solutions, a DeWitt, Mich.-based LBM supply consulting and training firm. 517.267.8757. E-mail: [email protected]