Contractor Selection and Risk Transfer

The energy sector is a constantly evolving industry. With this evolution, manufacturing methods and techniques are frequently changing and advancing. Subsequently, many companies are dependent upon contractors/vendors to support their operations. Regardless of the size of an operation, or their role in a particular project, companies should be aware of the operational and financial risks associated with contractor/vendor selection and the related subcontract agreements. Without a proper contractor/vendor selection process and written contracts – companies may encounter unwanted liability.

Here are a few things to consider when selecting and working with contractors or vendors.

Selection

Contractor prequalification is an important initial step in determining the most suitable contractors for your project. There are a variety of elements to consider as part of this selection process.

  • Safety experience
    Evaluating a contractor’s safety performance may include a review of retrospective indicators such as a contractor’s Experience Modification Rate and OSHA incident rates and compliance history. A review of a company’s safety program including preplanning and site management may be helpful in verifying the adequacy of their policies and procedures.
  • Quality and documentation
    A review of the company’s quality control process is also a key component of the selection process. Prequalifying contractors to help confirm each has the proper credentials, experience on similar projects and skills to deliver quality work are some areas to consider when evaluating their ability to perform such work. Project documentation should be retained throughout the life of a project and thereafter in accordance with state specific statutes.  During this timeframe, the ability to recover items such as design drawings, change orders and requests for information that can help defend against claims of poor workmanship (see CRT section below) should be maintained. In your effort to pre-qualify contractors and to help confirm they have the proper credentials, experience and skills to deliver quality work, you should seek out prior work/customer references.
  • Contractor/vendor knowledge of codes and standards
    Codes and standards are an area to pay particularly close attention to with respect to certain renewable energy projects. Codes and standards are constantly evolving along with advances in technology. Current building codes may even lag. It is essential to ensure that the individuals within your organization and your subcontractors keep up with current codes and standards, including building codes, industry advisories and related best practices.

Contractual Risk Transfer Process

Subcontract agreements contain many different obligations for both higher and lower tier contractors. It is a best practice to consult with legal counsel familiar with construction law regarding risk transfer tools and how they may apply to your particular arrangement with a contractor or vendor. Some topics commonly encountered in discussions of risk transfer include:

Indemnification Agreement – If hiring contractors or vendors, a written contract that includes indemnification and defense clauses to may help protect your company’s interests. It is a best practice to have indemnification clauses reviewed by legal counsel.

Insurance Specifications – Insurance specifications within the written subcontract, detailing such things as coverages, limits, and other insurance arrangements, may help you establish what you require from the contractor or vendor. Legal counsel, or your insurance agent, may be able to help you with specific details.

Certificate of Insurance – Obtain Certificates of Insurance from all contractors and vendors performing work on your premises before work begins. The certificates can be reviewed to help confirm that the requirements of your written contract have been addressed by contractors and vendors before work is started.

By considering a company’s safety performance, quality control and ability to meet your insurance and indemnification requirements during the selection process, you may be in a better position to form the right team for your project and effectively manage your risk transfer process.

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