To navigate this environment, with tightening surety underwriter standards, and managing subcontractor defaults, it’s evident that contractors must strengthen their risk management practices. Today’s construction landscape requires more than just operational efficiency, but rather strategic foresight and financial discipline.
Here are 5 essential strategies every contractor should consider to protect their business and ensure long-term success:
2. Require Subcontractor Bonds
For critical trades or larger scopes, require performance and payment bonds. These provide a financial safety net and ensure project in the event of a default. At a minimum, request a bondability letter from the subcontractor’s surety.
Subcontractor Default Insurance (SDI) is another risk transfer option. SDI covers multiple subcontractors under one program and offers faster claims resolution than traditional bonds and typically includes higher coverage limits.
However, SDI requires strong internal controls and active claims management. This option is generally limited to larger and financially sound general contractors.
3. Strengthen Contracts and Contingency Planning
Review your existing subcontract agreements. Include provisions for:
On long-term projects, require periodic financial reporting from key trades. These terms give you more options when problems arise.
Additionally, budget for contingencies. If possible, allocate funds for delays, rework, or replacement subcontractors. In today’s climate, contingencies are not optional, they are necessities.
4. Improve Payment Practices
Payment delays can trigger subcontractor defaults. Look for opportunities to shorten payment cycles or consider a milestone-based progress payment to keep the work moving.
Issuing joint checks can also ensure suppliers and laborers are paid on time, especially if a subcontractor shows signs of financial stress.
5. Collaborate with Sureties
Surety relationships are more important than ever. Involve your surety early in discussions about key subcontractors, especially when awarding work to high-risk trades. These proactive discussions can yield creative solutions, such as:
Collaborate with Sureties to better understand current underwriting expectations. Preemptive communication allows you to avoid surprises and strengthen your bonding program.
Looking Ahead
Contractors today face elevated financial risk is elevated at every tier of the construction pyramid. Subcontractor reliability can no longer be assumed, and bonding capacity should not be taken for granted.
The combination of rising defaults and tightening surety terms demand a proactive mindset. Get ahead of the risk by prequalifying subcontractors, strategically transfer risk through bonds or SDI, review your contract language, and most importantly stay closely connected with your surety broker.
The market isn’t collapsing, but it is evolving. Contractors who recognize these dynamics and adapt now will be better positioned for stability and growth moving forward. Reach out to TSIB today and speak with one of our Surety experts to craft a risk management strategy tailored to your business.
TSIB’s Risk Consultants are currently servicing the following locations:
East Coast: New York City, NY; Bergen County, NJ; Fairfield County, CT; Philadelphia, PA
Texas: Austin, San Antonio, Houston, Dallas
California: Orange County, Los Angeles County, Riverside County, San Bernardino County, San Diego County
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