Subcontractor Default Insurance: A Strategic Tool for GCs Managing Major Risk

Few things can throw a construction project off course faster than a subcontractor default. Work grinds to a halt. Schedules collapse. The GC faces liquidated damages, reputational risk, and a scramble to find qualified replacement labor — often at higher cost and under greater time pressure.

Most general contractors know this. That’s why performance and payment bonds have long been a staple in the risk management playbook. But as project complexity increases and subcontractor reliability becomes harder to gauge — especially amid ongoing labor shortages and economic uncertainty — more GCs are looking beyond the traditional tools.

Subcontractor Default Insurance, or SDI, is one of the options gaining traction.

How SDI Works

SDI isn’t a new product, but it remains underutilized by many contractors who could benefit from it.

When a covered default occurs, SDI reimburses the GC for the actual costs incurred: the price of completing the work, extended general conditions, liquidated damages paid to the owner, legal expenses, and other associated losses.

Just as important, subcontractor default insurance gives the GC more control over how the default is handled.

That means the GC can make decisions quickly — bringing in a replacement sub, reassigning work, and managing the recovery timeline on their terms.

Not a Replacement, but a Complement

That said, SDI is not a replacement for bonds, nor should it be positioned as such.

Surety remains essential in many contexts, especially in public works projects where bonding is required by law or contract.

Surety also offers value in transferring risk entirely off the GC’s balance sheet. SDI, by contrast, requires the GC to take a more active role in vetting and managing subs — and to absorb some risk via self-insured retentions.

SDI tends to be most effective for companies with significant subcontractor spend — generally north of $50 million annually — and well-developed internal risk management processes. Underwriters typically look for strong subcontractor prequalification procedures, solid financial controls, and a track record of managing performance issues in-house.

For GCs who can demonstrate that level of discipline, SDI can be a cost-effective layer of protection that aligns with how they already operate.

What SDI Covers — and Doesn’t

The coverage isn’t blanket. SDI does not apply to every type of loss. Design errors, self-performed work, owner-caused delays, and known subcontractor issues that weren’t disclosed or documented properly are generally excluded. Coverage also varies by carrier, and policy language needs to be negotiated carefully to match the realities of the contractor’s project portfolio.

Still, in the right scenario, SDI can be a powerful financial backstop. We’ve seen it help contractors avoid major disruptions when critical trades failed to deliver.

Cost Considerations and Broader Strategy

Costs for SDI vary. Premiums typically range from 0.4% to 1.2% of enrolled subcontract values, with self-insured retentions often starting in the $250,000–$500,000 range.

It’s worth noting, too, that SDI allows GCs to cover a portfolio of projects, not just a single job. That makes it an appealing option for firms that want to standardize their approach to subcontractor risk across their book of business. It can also be used alongside surety bonds, depending on project requirements and the GC’s appetite for risk-sharing.

The Bottom Line

Our experience shows that subcontractor default insurance can serve as a useful risk transfer mechanism in the right circumstances, particularly for GCs managing multiple large projects and relying on a diverse subcontractor base.

It’s not a solution for every contractor, nor for every job. But when paired with strong internal processes and a thoughtful review of project exposures, it can offer a level of control and protection that works well alongside surety.