Don't Take the Loss for a Subcontractor's Default

General contractors for big-budget construction projects look for ways to manage risks, including the possibility that subcontractors won't perform the work they were hired to do.

Typical Prequalification

When looking into the qualifications of a subcontractor, a surety bond firm generally analyzes the company's:

Financial strength and credit history;
Experience and reputation;
Exposure and progress on other contracts;
Ability to perform the work;
Subcontract documents; and
Size and location of the job.

When your construction company applies for subcontractor default insurance, underwriters typically look at:

The quality of your firm's processes and programs involving prequalification, subcontract procurement, and management;
How your company has previously dealt with subcontractor defaults;
Your firm's financial strength; and
The mix of subcontractors, their typical territory, and their utilization of surety bonds.

Generally, that has meant shifting the performance risk to some guarantee form such as a surety bond. But there might be an alternative for risk transference: subcontractor default insurance (SDI).

There are some major differences between a surety bond and SDI:

SDI policies have some coverage limitations and under certain conditions, the carrier could charge a 15% administrative cost for losses charged against the initial premium.

Additionally, your company may not be able to use subcontractor default insurance for public projects because it may not meet the requirements of the federal Miller Act and state public bond statutes.

When considering SDI, consult with your accountant or insurance broker to review the alternatives for managing subcontractor risks and find the most effective program for your business.