Doing Due Diligence on Contractors: Where to Start

This article is a reprint of Wise Bread's contribution to OPEN Forum from American Express -- where small business owners can get advice from experts and share tips with each other.

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Contractors can provide your company with the capabilities to handle tasks and projects that you might not be able to take on otherwise. Whether it's a builder bringing in a plumber or a marketing firm calling in a copy writer, a good contractor can make all the difference in the world. Unfortunately, a bad contractor can also make a difference in your business' ability to function. Before you agree to work with anyone, it's important to conduct some research. You need to know how contractors have worked with their past clients, what their reputations are and whether they can really fulfill their obligations to your company.

In some cases, you're legally obligated to have such information before you sign a contract. If the money involved in the contract isn't just yours, you need to choose your contractor with due diligence — getting enough information that your choice was made with a certain standard of care.

Reputation Matters

The biggest indicator of whether a contractor is the right fit for your business is whether that contractor has a positive reputation. Cherry Valley Flooring is a family-owned wood flooring business that works with a variety of contractors on a regular basis. AnnMarie DiNenno says that Cherry Valley Flooring relies on referrals to make sure that the business finds trustworthy contractors. When they work with new contractors, they take three steps to check out those contractors: "If it is a new contractor, we ask for references of work they have done (to see if we know someone in common or are familiar with some of their projects), research on the internet to see if there is any discussions about their work and speak to some other industry people to find out what their reputation is in the industry."

There are some situations where reputation simply isn't enough to make a call, though. DiNenno says that Cherry Valley Flooring has had to make a decision based on too little information in the past. "We got a call from an architectural firm that we had never heard of, asking us for a quote on some high-end project. We went through our normal procedures, but because they were new, they had no references as a company and were in the process of building their website. We were very hesitant about doing business with them. We weighed the risks and decided that since it was a small project that we go for it — after all, everyone needs to start somewhere and maybe they would become very well-known. It turned out that is exactly what happened. Although I cannot name the firm, they have become extremely well-known and sought-after. Which of course is great for us because we do most of their flooring work."

Talking to Your Contractors

Before making a final decision one way or the other, it's important to sit down with your prospective contractor and discuss the project. An interview can help you decide if a contractor is really capable of handling the details of your project. Jamie Wallace, a project manager, suggests more than just a casual meeting. "Interview them, focusing on questions about situational solutions with the goal of getting away from canned responses. I like to play the 'what if' game — 'What if the client suddenly decides that they need to switch to a different hosting platform — how would you handle that?'"

Wallace also suggests discussing your contractor's approach to projects — the processes they use, as well as their working style. Finding out part way through a project that your contractor's processes don't mesh with how you approach a project can be an insurmountable problem. Depending on the type of contractor you're talking to, it's worth discussing his portfolio or past projects. How a contractor handled a particularly difficult assignment can provide you with insight as to how he'll approach your project. Portfolios can also give you an idea of the size and scope of projects a particular contractor has worked on in the past. If your project is significantly bigger, it's important to establish if your prospective contractor can actually handle it.

Due Diligence Throughout the Contract

You need to be diligent throughout the contract, especially if you're sub-contracting a task. You need to know if certain expenses are appropriate, if the contractor is staying on track and so forth. There should be no surprises when the contract is complete. Contractors aren't focused on looking out for your business' best interests. They focus on getting their work done. DiNenno describes Cherry Valley Flooring's approach: "Before we agree to work with them on any project, we document phone conversations that deal with time lines and prices. We use these documents along with our contracts to ensure that the pricing is correct. If there are any changes throughout the project, we have a change process whereby the change and the cost get documented and sent to all parties involved. This eliminates surprises at the end of the project."

Contractors should understand that this sort of approach is meant to protect your company and shouldn't have any problems with it. Some contractors will even offer to point you to references and otherwise help vet them for the project from the start. While these references will certainly help you judge how your prospective contractor has made other clients happy, it's important to do some independent research, even if it's just typing a contractor's name into a search engine. After all, a contractor won't point you to anything negative when you're trying to decide whether to hire him.

Wallace points out that alternate references aren't that hard to come by. "Sometimes, you can figure out who the contractor has worked with on a particular project by doing a little sleuthing work in the search engines. For instance, if I saw a website project in a developer's portfolio, I might look to see who the designer was and reach out for some feedback. LinkedIn can also be very handy for discovering shared connections to clients, projects, and other resources. (On the whole, LinkedIn can also give you a quick snapshot of recommendations and network size.)"