
Default risk generates real costs. Paying a premium for quality and reliability might feel expensive but rectifying a default can be even more costly on the back end. A smart approach balances both, and when comparing Subcontractor bids, it is essential to quantify each Subcontractor’s default risk. Incorporating this value into your leveling sheet—alongside all other costs and notes—provides a clear, comprehensive view of the best choice for your project. By doing so, you can avoid the hidden expenses of selecting the lowest bidder who may not always offer the best long-term value.
Budget constraints often push Construction Managers and General Contractors (CM/GCs) to select the lowest bid, but these initial savings can be deceptive. While it is tempting to view a low bid as a great deal, the reality is that the cost differences between Subcontractors rarely stem from labor rates or material prices, which are typically consistent across a region. Instead, these variations often arise from insufficient insurance coverage, impractical work methods, or inaccurate estimates. Hidden costs frequently emerge in the form of increased General Conditions, necessary expedited work by other trades, rework, or ambiguous change orders.
What seems like a bargain may lead to project delays, rework, or even default when a financially strained Subcontractor cannot deliver. Accurately assessing the full value of a Subcontract—including potential exposure to these risks—allows you to better anticipate and allocate for the costs you may end up absorbing, with little chance of recovery from the client.
To address this challenge, CM/GCs must perform due diligence on the scope of work and assess the monetary impact of each decision. First, use a data-driven process to predict the probability of a Subcontractor default. Then, evaluate the potential damage a default could cause to both the project and the CM/GC’s bottom line. This varies by trade—for instance, a major default on a painting Subcontract will likely cause less disruption than a minor default on a critical trade like curtainwall installation.
By calculating the potential damages and weighing them against the likelihood of default, estimators can derive a real number to input into the leveling sheet, allowing for an accurate, apples-to-apples comparison of Subcontractors. This approach does not mean always choosing the most expensive option, but it gives CM/GCs a clearer understanding of total costs, enabling them to prepare financially—whether by paying more upfront or setting aside a larger contingency or General Conditions budget.
Selecting the lowest bidder is not inherently bad, but it is crucial to account for the risks. Just as good estimators adjust bids for missed scope in the leveling sheet, they should also account for default risk exposure. Without this, your leveling sheet remains incomplete. By including the probable estimated losses tied to each bid, you can proactively allocate funds, preparing for potential issues—whether through General Conditions, rework, or replacing a defaulted Subcontractor—before they erode your profit margins.
Completely Unrelated Trivia Treasure: In July 2024, nearly every airline was critically impacted by the CrowdStrike system update error except Southwest Airlines, who was still using Microsoft Windows 3.1, released in 1992.
Maple Insight provides default probability calculation and loss exposure calculations for Subcontract default. Our quantified approach to analysis allows CM/GCs to compare prospective procurement decisions and plan financially.