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9 Ways To Manage Hidden Subcontractor Risk

By Avetta Marketing
August 22, 2022
8 minutes
9 Ways To Manage Hidden Subcontractor Risk

Fifty-nine percent of supply chain disruptions originate with suppliers that your suppliers hire. The larger your workforce spans, the more difficult it can be to stay on top of your supply chain. Beyond keeping track of the suppliers you hire directly, many of your primes will subcontract work too, creating multiple tiers that open your company up to a greater degree of risk.

If you have subcontractors in your supply chain, it’s important to have visibility into every aspect of their work, so you can manage them effectively. Today, we’re sharing how to achieve this level of oversight, as well as other best practices for subcontractor management.

Best Practices for Subcontractor Risk Management

Without proper screening protocols in place, it can be difficult to discern if a sub possesses the skills, qualifications, and experience required to perform safe and compliant work. Rushing ahead without a thorough review stage, or relying on your primes to handle subcontractor qualifications, exposes your organization to risk and potentially disaster.

To mitigate these risks, let’s review a few of the key steps to take to protect your business throughout the entire supply chain.

Maintain Visibility Into Lower-Tier Providers

Invest in tools that allow you to achieve deep oversight into all of the contractors in your supply chain, even if your organization wasn’t the one that hired them.

Perform Background Research

Conduct a background check using an industry-standard program, but don’t stop there. In preliminary interviews, ask questions about each sub’s relevant business experience, as well as the methods and techniques they use to comply with industry laws, codes, and professional standards.

Check License, Bonding, and Insurance

Ensure every sub in your network is licensed and bonded, and also meets your insurance requirements for your prime contractors.

Performing a thorough insurance check guarantees that subs don’t slip through the cracks. Don’t just take the word of your prime contractors and assume that your lower-tier subs are also insured. Validate these qualifications before allowing any teams to begin work.

Document All Subs Working For Your Company

By effectively documenting your subcontractor relationships and following sound business practices, you can prevent many costly mistakes and operational setbacks. While there isn’t a single risk management technique that can guarantee you’ll bypass every roadblock, you can establish a firm foundation by investigating and carefully organizing all communications from the beginning.

Managing Subcontractor Risks Across the Supply Chain

Risks can occur at any point along a supply chain, especially if there are lower-tier subcontractors involved. A centralized management platform can help you maintain real-time visibility into all activities, so you can identify potential issues and correct them before they occur.

In addition to implementing the right software, a solid risk mitigation strategy can help you protect your supply chain from fraud, non-compliance, and other red-flag issues. Here are critical items that should be part of that strategy:

1. Identify and Prioritize Risks

Researchers recently found that 49% of supply chain leaders capture real-time data insights and immediately act on them, giving them a more holistic view of their supply chains and a closer understanding of customer demands. When you know what might happen in your supply chain, it’s easier to effectively deal with any disruptions if they occur. Before you build out your team and bring contractors on board, take the time to break down every step of your supply chain into individual workflows.

Identify what could go wrong at each touchpoint, taking both internal and external risks into account. Specifically, look for weak areas that could possibly affect key areas of your business, including pricing, quality, delivery, and reputation.

Once you’ve identified those risks, you can document and prioritize them based on their likelihood of occurrence, as well as their resulting impact. Supply chain management platforms with built-in data analytics can help you gather these details in a matter of seconds, allowing you to reference historical data or generate forecasting reports to predict the probability of risk occurrence.

2. Create a Culture of Risk Awareness

Everyone in your company should understand why being aware of risk is important, and the role that they can play in it by reporting it without reproach.

Make sure your entire workforce has access to the critical information they need to mitigate risk within their own departments. This includes:

  • The common risks and challenges affecting your supply chain
  • Best practices for managing supply chain risks
  • Training resources on how to use risk-assessment software

When this knowledge is readily available, it empowers employees to be proactive and responsive. They’ll know the specific steps to take if they notice a risk down the pipeline, and can prevent known issues from occurring. They’ll also be able to maneuver internal and external changes with minimal disruption.

3. Invest in Liability Insurance

When researching insurance options for your company, don’t scrimp on insurance. The right policy and coverage can protect your organization against a range of supply chain risks, ensuring that one weak link doesn’t lead to widespread disaster.

For instance, insurance can protect you from the financial and legal liabilities that could arise if your company is unable to honor a contractual agreement with a subcontractor and vice versa. In addition, it can also shield your bottom line and prevent long-term losses if a supply chain disruption occurs.

4. Confirm Supplier Stability

When hiring new suppliers, always make sure to do your due diligence before signing them to a contract. This sets the stage for a successful working relationship and helps minimize your vulnerability to risks. Make sure you take this same step for your prime contractors as well as any subs conducting work.

As you do, pay special attention to their financial reports. A supplier that’s reputable, viable, and financially stable will protect your company’s bottom line. Otherwise, you could be left picking up the pieces if they suddenly go bankrupt.

Perform these evaluations early in the review stage, so you can eliminate suppliers that are obviously too risky or don’t align with your goals. This is one of the easiest and most effective ways to reduce supply chain risk.

5. Perform Supply Chain Audits

Prequalifying all your contractors and subs is important, but don’t stay satisfied with the status quo. Perform regular supply chain audits to continually monitor for evolving risks.

These audits can also help you build better and stronger business relationships with your suppliers. As you examine each touchpoint, you’ll find room to improve in certain areas, including health, safety, and ESG.

Lower Risk, Stronger Supply Chain Performance

A central supply chain management platform can help you stay up-to-date on every aspect of your operations, from tier 1 suppliers all the way to the subs of their subs. When you fail to monitor your lower tier suppliers, you leave an enormous amount of unknown risk lurking in your supply chain.

Avetta One offers visibility and risk management for your entire supply chain, including prime contractors and subs. To learn more and see our tools in action, request a demo today!

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