Dos and Don’ts of Subcontracting

Features - PROTECTING YOURSELF

Many PMPs outsource services, which can be a real boon to the business…until it isn’t. From vetting vendors to ensuring work quality, here’s how to avoid pitfalls and do subcontracting right.

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November 28, 2018
Anne Nagro
Istock

Companies big and small outsource services from bird and wildlife control to fumigation, bed bug heat treating and canine inspection. They subcontract out work where they have clients but no branch locations and where they aren’t licensed to operate.

“If you do it right, you can make more money in the subcontracting than you can actually performing the pest control,” said Dan Gordon, owner of PCO Bookkeepers in Newton, N.J.

“It can mean an improved margin,” agreed Craig Torrance, who supervises the subcontractor management program at Terminix International. “That cost (to do a subcontracted job) is only realized at the time of service” and doesn’t impact the bottom line like having to carry investments in staff, equipment and inventory to do that same job, he explained. Subcontracting “can make the business leaner and more efficient” and even make it easier to manage the “peaks and troughs” of seasonal business, Torrance said.

That’s old news to Bryan Nichols, owner of Advanced Maintenance and Pest Solutions in Chicago. Subcontracting has been “a mainstay at my business from the beginning,” he said. Nichols hires out all of his handyman, termite, bird and wildlife jobs, as well as work done in the nearby town of Cicero, Ill., where “for one account it’s not worth it for me to pay $600 a year for a license.”

Termite fumigation is the No. 1 service that pest management professionals hire out in California, Florida and Hawaii. “It’s definitely the norm now” due to the regulatory pressures, licensing, stewardship training and coordination required for this service, said Travis Swope, president of Griffin Pest Management in Santa Ana, Calif.

By subcontracting, PMPs can focus on doing what they do best while still meeting customer needs.

NOT WITHOUT RISK. But subcontracting also can expose companies to potential pitfalls. “We can lose control of the quality of both the work and the training level of the people performing the work on our behalf,” which makes it difficult to guarantee that your standards are being met, said Bert Putterman, who recruits and manages subcontractors for Rentokil N.A.

You’re also giving a third-party pest control company access to your customer base and subjecting customers to a different customer experience, something companies like Terminix spend a lot of time trying to optimize, said Torrance.

Neither does subcontracting reduce your risk. If an employee of a subcontractor engages in an act that harms the customer or another third-party, you may be liable if there was “information about that person that you could have known, should have known or did know and ignored” that indicated the worker posed a risk, said Jean Seawright, a human resources expert and president of Sea-wright & Associates in Winter Park, Fla.

“This happens more often than people think” and as a result “there are more” negligent hiring, retention and supervision lawsuits, said Seawright, who has provided expert testimony on this subject for 15 years. Having insurance won’t insulate you from a lawsuit. “Oftentimes it’s an indication that plaintiffs can collect if they settle or prevail in the claim,” she said.

Neither do you escape “most levels of liability due to poor workmanship or regulatory violations,” said Putterman.

Fumigation accidents in the Virgin Islands and Florida in 2015 spurred the pest control industry to take a closer look at how it engages subcontractors and to improve vetting and quality assurance practices. Pros-in-the-know and experts urged PMPs to develop a structured, comprehensive process to protect themselves and customers.

>> Learn the Service

Whatever you sub out, it’s important to get the same high-level training your subcontractor has so you can tell the customer what to expect, said Swope. He requires his salespeople to attend fumigation training, even though they’re not certified in this service. Twoie Knox, owner of B&C Exterminating in Vinton, Va., learned about heat treating for bed bugs and how to price jobs by riding with his eventual supplier of this service.

>> Vet Carefully

“There are some flaky companies out there, unfortunately, so we’re very careful about what subcontractors we use,” said Tami Stuparich, general operations manager at California American Exterminator in Boulder Creek, Calif.

Putterman evaluates a company’s experience and whether it is capable of meeting customer expectations. He looks at examples of work and for referrals in the community where the jobs will occur. Potential subcontractors need to demonstrate that they are adequately licensed and insured, can provide evidence of current training for all workers involved in Rentokil projects, and share Rentokil’s commitment to safety and quality, he said. Finally, Putterman wants to know that the subcontractor has adequately vetted its employees “so we can be assured that they meet legal requirements and have acceptable backgrounds.”

Torrance follows an extensive, three-step vetting process that ranges from setting expectations to conducting comprehensive background and field audits. His top requirements for subcontractors are reliability and quality. Also important are a company’s “specialty knowledge,” its capacity to take on the work and geographic location, he said.

Many PMPs rely on professional connections to find subcontractors. Stuparich, who subs out bed bug fumigation and canine work, said her fumigator belongs to Pest Control Operators of California, same as her. “I’ve known him for a long time and I know what kind of work he does and I really trust him,” she said.

Still, a company’s owner can be “the nicest guy or girl in the world but if they don’t utilize a sufficient hiring process, that’s where the risk is,” said Seawright. Not all companies claiming to do background checks conduct adequate checks, she added.

Members of the National Pest Management Association’s QualityPro program are obligated to verify that a sub’s employees meet the same hiring standards as their own before sending them to a client’s home or business. This involves completing an employment application, face-to-face or phone interview, pre-hire drug test, criminal background and motor vehicle records checks, and having his or her references checked (or documenting the attempt to do so).

If the QualityPro company cannot verify these actions were taken, it must notify the client that somebody will be on the property who hasn’t met the same hiring standards, said Andy Architect, NPMA’s chief of staff. As such, “we get a lot of requests from QualityPro companies (looking) for other QualityPro companies” as subcontractors, said Architect.

>> Don’t Shop Price

“Too many companies simply look for the lowest price and there are subcontractors that solicit prime contractors like us just based on price,” said Swope. “It’s an easy temptation to go that route but you get what you pay for,” he reminded.

“Pricing is important but it’s not nearly as important as the reliability and quality aspect,” agreed Torrance. A subcontractor’s price has to be competitive, but it is “near the bottom of the list” in terms of requirements, he said.

>> Get It In Writing

Don’t rely on a handshake; write a contract that covers the scope of the job, payment terms, insurance requirements, time and schedule of work, who is responsible for the work, warranty against failure and how any resulting claims will be handled, among other issues.

Terminix executes master service agreements with approved subcontractors; individual jobs are assigned by branch managers via purchase order.

Swope meets annually with his fumigation subcontractors to refresh contracts, which are required in California. It’s an opportunity to discuss the relationship, pricing, warranty, the level of service, hiring practices and a supplier’s violation history. “I think that’s an important element you should do with all of your vendors,” he said.

>> Insure Properly

“People need to understand that they’re responsible for the work, whether they’re doing it or a subcontractor is doing it. That’s why it’s so important to make sure that the sub has valid insurance,” said Kristina Phillips, who leads the policy unit of PestSure, a pest control insurance program owned and operated by PMPs and administered by insurance broker Arthur J. Gallagher & Co.

“Ideally we would want (the subcontractor) to have the same limit that our insured is being requested to have for the job,” she said. If that’s $5 million, then she’d like the sub to have a $5 million policy, as well.

She said it’s easy to work things out when claims are small, “but when it is a million-dollar claim, insurance companies get involved and they don’t care that you’re buddies or what you’ve agreed to. It’s about what you can prove and what you can prove is all about your documentation.”

Ask to be added to the policy as an additional insured. If there’s a claim, generally the sub’s insurance will be responsible for paying the claim but the additional coverage should cover the legal costs of getting you out of the claim since you’ll also be named in it, said Phillips.

Request a certificate of insurance from the sub and verify it by contacting the listed insurance company. Phillips has seen where a certificate is provided but the insurance is expired, cancelled or has exclusions that don’t cover certain situations or types of jobs. “Err on the side of caution and take that extra step; it doesn’t take long to be certain,” she said.

Equally important: Get proof of workman’s compensation insurance. Otherwise, a subcontractor’s employee hurt on the job could look to you for coverage under your work comp policy. “You definitely don’t want that,” said Phillips.

If the subcontractor is driving his own vehicle make sure coverage is sufficient here, as well.

Even “though the subcontractor is responsible for their work, and they are insured, we can never fully escape shared liability on all issues,” cautioned Putterman of Rentokil N.A.

>> Cover Your Costs

Some PMPs mark up subbed work significantly; others may add a small fee or pass along costs at wholesale. For most, it’s “whatever you can negotiate,” said Gordon of PCO Bookkeepers.

“I mark it up and charge for my time,” said Nichols. Depending on the job, he may add an inspection fee or take 30 percent of the revenue generated.

“The key for us is to determine what’s involved” from a liability standpoint, said Swope. In the event of a failure, what will it cost to redo the job? What if the subcontractor sells out or goes out of business; what is my cost to honor that warranty claim? Or to fix a claim following a failed WDO report? Not charging enough is “a recipe for disaster,” he said.

The potential exists to make good money. “A decent pest control company is going to turn a 15 percent bottom-line profit but if you can mark your subcontracting up more than 15 percent then you’re ahead of the game,” said Gordon. And, “when you do your insurance audits, (subcontracted) work can actually be excluded from your gross receipts because it’s covered under a different (subcontractor) policy,” thus saving you money, he said.

>> Safeguard Quality and Safety

How do you make sure that subcontractors perform to your standards? A rigorous vetting process “helps you mitigate some of the risk” early on by selecting the best companies to work with, said Torrance.

For higher-risk jobs like fumigation, some pest management companies hold training sessions for subcontractors, prepare risk assessments and site management plans that are monitored by quality assurance managers, and conduct field audits.

Terminix meets quarterly with bigger subs to review key performance indicators like managing on-time delivery, pricing, reliability and availability. The company also monitors and responds to client feedback. “The customers are very quick to pick up the phone, to respond to surveys, to email” to express dissatisfaction with a sub’s performance, Torrance said.

>> Tell It Straight

Most PMPs who use subcontractors for big jobs said they are transparent with customers. “I always try to be upfront with them and let them know” and “I think they have a great deal of respect for that,” said Dan Rao, technical manager at MD Weaver in Natick, Mass., who hires out large bed bug heat treating jobs.

Some states require that customers be notified when subcontractors are performing fumigation work.

Terminix has a clause in its client contract that says it has the right and ability to subcontract the work. It would be difficult to alert a client with thousands of locations every time a subcontractor is used, but if a customer with a few locations has one outside a branch’s service area then it’s a good idea to let the client know up front that you’ll be using a subcontractor for that site, said Torrance.

The author is a frequent contributor to PCT.