Why Subcontractor Default Insurance Is an Alternative to Bonding
Construction is risky when working with many third-party contractors. So, what happens if a subcontractor does not finish a job? Are you left to do the work? Who pays for unfinished work or the cost of hiring a new subcontractor?
To remain safe, general contractors or construction managers can use tools to mitigate the risk of default. Subcontractor Default Insurance (SDI) is one of the most useful policies to implement. It is also an alternative to surety bonds.
Learn more about the solution that covers your individual construction needs.
What Is Subcontractor Default Insurance?
SDI is a type of coverage for contractors that helps pay for losses when a subcontractor defaults on their work. It can provide savings to the GC and more control in case of a default.
This coverage doesn’t mean a subcontractor can get out of their contract. They are still liable for the work they promised to do. When a subcontractor defaults, the contractor is the one who deals with the financial repercussions. Because of this liability, SDI helps pay for common risks like:
- Finding a new subcontractor to finish the job
- Payments for finishing late
- Redoing work that does not meet requirements
As shown above, SDI covers your company for costs associated with a subcontractor not completing the work they promised to do.
As can be seen, subcontractor default insurance is a great coverage choice. Although it is also important to understand surety bond options to guarantee you have the right coverage.
What Is a Surety Bond?
SDI involves two parties, but a subcontractor surety bond is an agreement between a GC, the subcontractor, and a surety bond company. That being said, according to the National Association of Surety Bond Producers, “a surety bond is a promise to be liable for the debt, or failure of another. It is a three-party contract by which one party (the surety) guarantees the performance or obligations of a second party (the principal) to a third party (the obligee).”
Given these points, there are two distinct types of surety bonds:
- Subcontractor performance bonds
- Subcontractor payment bonds
If you use a surety bond, remember that when a subcontractor has defaulted on a project, you must open an investigation with the bond company. They will decide if there was a breach of contract.
It is also important to point out that with a surety bond, the bond company handles finishing a project. This is important to consider if you are working on many projects and don’t have time to find new subcontractors.
Help Me Decide What Tool I Need to Protect My Company
Regardless of the size of your organization, managing risks is critical. Whether you are a primary contractor or a subcontractor, be mindful of contract terms. Know your options for mitigating risk and involve your risk advisors in the conversation.
If you need help deciding if you need SDI or a surety bond, download this free guide!
