Why are Subcontractor Defaults Rising?

While the surety underwriters are tightening their standards, subcontractor defaults are also increasing. An AGC/FMI Survey conducted in December 2023 and January 2024 revealed that 70% of respondents observed an increase in subcontractor distress or defaults compared to the prior year. 

This notable uptick highlights growing financial instability within the subcontractor community and underscores the mounting concerns among general contractors (GCs) and project owners regarding performance risk.

Below are several financial and operational pressures that are making it harder for subcontractors:

Thin Margins & Inflation
Many fixed-price contracts that were signed before the inflation surge are now losing money. Between 2022 and 2023, material prices jumped significantly as well as skilled labor costs, eroding profit margins.

Labor Shortages
Skilled trades including electrical, mechanical, and concrete— continue to suffer from chronic labor shortages. As a result, many subcontractors are unable to fully staff their projects. These staffing gaps are leading to reduced productivity and increase the likelihood of schedule delays, errors, and performance failures.

Cash Flow Strain
Subcontractors are waiting longer than ever to get paid. In 2024, 82% of contractors reported payment delays exceeding 30 days— up from 49% in 2022. This extended payment cycle significantly strains liquidity and limits the ability to procure materials on time. 

Supply Chain Delays
Extended lead times and delivery issues persist, forcing subcontractors to carry labor and overhead costs for longer periods. This burden is causing schedule delays and forces subcontractors to finance longer durations of labor and overhead. As a result, subcontractors are failing to meet their obligations, ultimately jeopardizing the project. 

The Feedback Loop: Tighter Bonds and More Defaults
There are two emerging interconnected trends that are amplifying risk:

1. More Defaults = Tighter Underwriting
   As subcontractor-related claims increase, sureties reassess their portfolios and re-underwrite risk. This leads to stricter terms for both GCs and subcontractors. A GC who experiences a subcontractor default could find their entire bond program reevaluated.
   
   
2. Tighter Underwriting = Fewer Bonded Subcontractors
   Smaller or weaker subcontractors that once qualified for bonds may now be declined. This shrinks the pool of bondable trades and can tempt GCs to award work to unbonded firms— transferring the full risk onto themselves.
   
   Delays and Cost Overruns
   Even when a bond is in place, resolving a claim takes time. During that window (ex. weeks, months), project delays and additional costs can pile up. GCs must often absorb the additional costs and delays. Industry data suggests that completing a defaulted subcontractor’s scope can cost 1.5 to 3 times the original contract amount. This often puts a strain on a GC’s client relationship and limits their future bonding capacity.
   
   Navigate Your Risk
   If you’re concerned about the rising risk of subcontractor defaults or are a subcontractor looking to prevent yourself from defaulting, contact TSIB today. Don’t wait until a default disrupts your project. Put our expertise to work by protecting your pipeline and strengthening your surety position. 
   
   
   
   
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