The Downward Flow of Risk in Construction and Why Trade Contractors Need Better Project Documentation Now

In commercial construction, the line between profit and loss can be razor thin. For trade contractors, who often operate on tight margins and are vulnerable to the cascading effects of decisions made higher up the project hierarchy, safeguarding their profits is priority one.

Wendy Rogers, the founder of eSUB Construction Software, succinctly captures this sentiment with her assertion: “Your daily report is everything, it is your single most important profit protection tool, bar none.”

In this article we break down the meaning of this from a practical standpoint for subcontractors.  

The construction industry operates on a hierarchical structure. At the top, you have the project owners or developers who work with architects or designers to create a vision for the project. Then you have general contractors who are hired to coordinate the various work on the project. And finally, the various trade contractors who do the actual building, making the vision a reality.

This hierarchy is not just about the chain of command but also about the flow of contractual risk and the reality of how it jeopardizes profits for trade contractors. As projects progress, risks are often passed down this chain, with trade contractors frequently bearing the brunt of it.

Here’s a deeper dive into how this risk transference happens and why documentation is the shield trade contractors need.

The Anatomy of Risk Transference in Construction

Contractual Agreements:

The primary vehicle for risk transference is the contract. General contractors, in their agreements with project owners, often accept various risks related to project completion, quality, and timelines.

However, when general contractors enter into contracts with subcontractors, they frequently include clauses that transfer many of these risks down the line.

This means that if there are delays, disruptions, unforeseen site conditions, design changes, or numerous other issues negatively impacting original timelines and budgets, trade contractors are likely to be held responsible, or at least accountable at project completion, even if the root cause isn’t directly their fault.

Payment Terms:

Payment terms, such as “pay when paid” or “pay if paid,” are other mechanisms that transfer financial risk to trade contractors. In these arrangements, trade contractors risk not only the timeliness of their payments from the GC, (pay when paid) but the viability of payment at all, (pay if paid). In both cases, payment for work that the trades have already performed falls at the mercy of negotiation tactics involving the GC and owner that could be completely unrelatable to the work that they’ve already performed,   

If the owner delays payment or disputes a charge, the trade contractor is left waiting at best, or empty handed, even if they’ve fulfilled their part of the contract.

Scope Changes and Delays:

Construction projects are dynamic, with changes and delays being a given. However, trade contractors often bear the cost of these changes. If there’s a delay that isn’t the trade contractor’s fault, they will likely face penalties and additional costs in the form of liquidated damages. Similarly, when there are changes to the scope of work, their bid becomes merely a baseline against actual costs. That delta between what they “bid” and what they “did” becomes money left on the table unless quantified and documented in a timely manner to the general contractor. Trade contractors may also have to bear the cost of ramping up labor and overtime to accommodate an accelerated schedule. When this happens, labor costs skyrocket considerably and trade contractors are left to bear that financial impact.

The Power of Documentation

Given the risks that trade contractors face, documentation becomes their most potent tool for defense and mitigation. Here’s why:

Proof of Work:

Proper documentation provides a clear record of the work done by the trade contractor. This can be invaluable in situations where there’s a dispute over when and whether a particular task was completed and how it was executed.

Timeline Tracking:

By maintaining detailed daily reports, trade contractors can demonstrate when they started and completed tasks. This can protect them from claims of delays or disputes over timelines.

Material and Equipment Logs:

Keeping track of materials used and equipment rented or deployed can help in billing disputes. It ensures that trade contractors are compensated for all the resources they’ve invested in a project.

Safety and Compliance:

Documentation also plays a crucial role in proving that trade contractors followed all safety protocols and met compliance standards. This can protect them from liabilities in case of accidents or regulatory scrutiny.

Communication Trail:

Keeping a record of communications with the general contractor, suppliers, and within the team, provides clarity in the face of misunderstandings or disputes. It ensures that all parties are on the same page and can be used as evidence if there’s a disagreement.

“We don’t get paid for the work we do. We get paid for the work that we document.”

Wendy Rogers Founder of eSUB Construction Software

This quote by Rogers encapsulates a profound truth about the commercial construction industry. At its core, the statement underscores the critical importance of documentation in ensuring that contractors receive fair compensation for their efforts. Let’s delve deeper into the layers of meaning behind this statement.

The Tangible vs. The Verifiable

In commercial construction, the work done is tangible. Buildings rise, infrastructures are laid, and physical transformations occur. However, in the complex web of contracts, agreements, and multi-tiered project hierarchies, the mere act of completing a task isn’t enough.

Given the intricate nature of construction projects, disputes are rampant. Whether it’s about the quality of work, the timeline of completion, or the resources used, disagreements can arise at any stage. In such scenarios, the only way to validate a claim or defend against an allegation is through comprehensive documentation.

The Financial Implications

In commercial construction, payments are tied to milestones and specific deliverables. Without proper documentation detailing the completion of these milestones, trade contractors have no basis to invoice clients or general contractors and, consequently, to get paid.

Because of this, it is critical that subcontractors protect themselves, and the work they do, through proper documentation that will ensure they are paid fairly for all work performed on a project.

This holds especially true when it comes to being thorough in the documentation of change orders.

Construction projects are dynamic, with changes in scope or design being quite frequent. These changes, known as change orders, have financial implications. Without proper documentation detailing the nature of the change, the additional resources used, and the extended timelines, contractors won’t be compensated adequately for their additional efforts.

In cases where there’s a disagreement about payments or the quality of work, documentation serves as evidence. Detailed records can be the difference between a contractor receiving their due payment or facing financial losses.

“Your daily report is everything, it is your single most important profit protection tool, bar none.”

Wendy Rogers Founder of eSUB Construction Software

For all the reasons outlined above, it’s not hard to see the gravity of Rogers’ assertion. The daily report is the bible for subcontractors to ensure their work is accounted for on every project. So, let’s take a closer look at what makes up a daily report, and why they are so vital.

The Anatomy of a Daily Report

Before understanding its significance, it’s essential to grasp what a daily report typically encompasses:

Work Completed: A detailed account of the tasks that were completed on any particular day.

Resources Used: Information about the manpower, machinery, and materials utilized.

Incidents or Delays: Any unforeseen events or challenges that might have affected the day’s work.

Progress Photos: Visual evidence of the work done which can be invaluable in case of disputes.

Weather Conditions: External factors that might have influenced the quality or timeliness of the work.

Daily reports offer a snapshot of the day’s activities. This real-time recording ensures that there’s a running account of the project’s progress. If there’s a discrepancy between the contractor’s account and the client’s or general contractor’s perception, these reports serve as an immediate and validated point of reference.

The Protective Nature of Daily Reports

Every decision on a construction project has financial implications. Because of this, daily reports stand as a sentinel for trade contractors. They are not mere administrative tasks but strategic tools that shield profits, validate claims, and drive operational excellence.

These documents are a testament to the subcontractor’s diligence and commitment to transparency, providing a detailed narrative of the day’s work. They capture the essence of the subcontractor’s progress, offering a real-time recording that is invaluable in maintaining an accurate account of the project’s evolution.

This continuous documentation is crucial when there is a discrepancy between what the subcontractor claims to have done and the client’s or general contractor’s perception. In such cases, the daily reports become an immediate and indisputable point of reference that can clarify misunderstandings before they escalate.

When it comes to billing and invoicing, the details captured in daily reports is indispensable. These reports allow subcontractors to generate precise invoices, ensuring that they are paid for every hour of labor and every piece of material used. This level of detail is not just administrative; it directly influences the subcontractor’s financial health. The reports ensure that the hard work translates into deserved revenue, safeguarding the subcontractor’s bottom line.

Daily Reports: The Best Defense

As previously noted, construction sites are dynamic environments where plans can change at a moment’s notice. Daily reports are critical in these situations, providing a day-by-day account of the work as it adapts to new circumstances. When deviations from the original plan occur, these documents serve as a solid foundation for justifying change orders. They provide the necessary documentation to substantiate additional charges, ensuring that subcontractors are compensated for the extra work necessitated by these changes.

In the unfortunate event of disputes or legal confrontations, daily reports are a subcontractor’s best defense. They offer a chronological, detailed, and often visual account of the work completed, making it difficult for clients or other parties involved to refute the subcontractor’s claims. The reports serve as an evidentiary backbone in dispute resolution, providing clear and organized facts that can stand up to scrutiny in negotiations or even in court.

A Means for Continuous Improvement

Finally, the benefits of daily reports extend beyond the protection of profits. They also contribute to operational efficiency by capturing actual labor, equipment and material costs to compare against budget. When tied to specific cost codes, Daily Report entries can tie into a backend database system such as eSUB, and capture productivity levels, as well as anomalies to budget. This is where subcontractors can improve their processes and optimize profits for future projects.

By regularly reviewing these reports, subcontractors can identify inefficiencies, allocate resources more effectively, and optimize workflows. This introspective practice can lead to enhanced productivity and, ultimately, higher profit margins. In essence, daily reports are not just a tool for documentation; they are a catalyst for continuous improvement within the subcontractor’s operations.

eSUB: The Digital Shield for Trade Contractors

Digital solutions like eSUB Cloud provide trade contractors with a comprehensive platform to manage their documentation. By centralizing and digitizing records, trade contractors can easily access, share, and archive their documents. This not only streamlines operations but also strengthens their position in case of disputes. As Rogers rightly points out, documentation is akin to an insurance policy against the inherent risks trades face on their projects.

While the construction industry’s structure might inherently pass down risks to trade contractors, they aren’t defenseless. Armed with robust documentation practices and tools like eSUB, trade contractors can navigate the complex landscape of construction projects with confidence, ensuring that they’re fairly compensated for work.

To learn more about how eSUB Cloud can work to protect your profits, reach out to schedule a demo today.