Survival Factors for Subcontractors in Economic Downturns

Abstract

This paper analyzes key issues facing subcontractors in the context of a severe economic crisis, aiming to detect the factors that are critical for the survival of the subcontractors. While previous research efforts have analyzed factors related to subcontractor performance in regular financial conditions, there remains only sparse knowledge of how subcontractors are to survive when economic conditions become dire as they have in recent times in the Spanish construction market. In this research, in-depth interviews with managers of relevant Spanish subcontracting companies were carried out, resulting in the identification of eight factors for subcontractor survival: project delivery method, demand, financial capital, relationship assets, managerial assets, human assets, legal framework, and geographic scope. The project delivery method used by the owner and also by the main contractor is mainly based on price. As a result, the subcontractors bids get lower, making them unsustainable in the long run. Furthermore, subcontractors do not get financial support from banks easily in order to cover their additional financial costs. These facts push subcontractors to get a guarantee of payment by the main contractor, while subcontracting companies may even ask for payments in advance. Subcontractors also seek long-term relationships with the contractor. These trusting relations are very often a prerequisite to qualify and bid for contracts. Subcontractors have to continuously improve, plan ahead and adapt quickly to the new environment. Therefore, subcontractors must remain flexible and maintain a lean hierarchical organization. Doing so makes it is easier for subcontractors to compete in both their native markets, as well as abroad. To this end, the most successful subcontractors have become international during the expansion phase of the economic cycle; many of them went abroad with the help of a contractor from their home country.