
When we hear the word “default,” it often conjures images of bankruptcy, termination, disputes, and costly litigation. Catastrophic defaults requiring millions of dollars in payouts dominate our perception. Yet, default is not synonymous with bankruptcy or termination. At its core, default simply means a failure to meet a contractual obligation. A Subcontractor who does not deliver on a specific provision of an agreement has defaulted, even if the relationship remains intact and the project moves forward. So, regardless of if a Construction Manager or General Contractor (CM/GC) has Subcontract Default Insurance (SDI), defaults affect the bottom line. The immediate consequence of any default is the need to allocate resources—time, money, or manpower—to fix the problem. These costs eat into profits, strain project teams, and damage reputations as minor defaults accumulate and compound.
The All-Too-Common Micro-defaults
Subcontractor defaults are more common than many realize—approximately 1 in 4 subcontracts experience some degree of default. While SDI is designed to protect against catastrophic defaults, such instances are rare, affecting less than 1% of SDI-covered subcontracts. However, the financial burden of the far more frequent "micro-defaults," those defaults that are not large enough to make a claim practical, are almost always borne by CM/GCs. These defaults may seem minor in isolation but can easily snowball, or aggregate across a portfolio, into larger financial problems that erode margins and threaten overall success, regardless of whether the CM/GC has SDI coverage or not.
Management Costs to Drag a Subcontractor Over the Finish Line
When Subcontractor defaults occur, the associated costs often extend far beyond the immediate issue - the expenses of replacement are just the beginning. Critical path delays, increased labor rates, acceleration costs, and redoing defective work can quickly escalate the financial impact. Even when a Subcontractor resolves their issues without termination, the delays and disruptions still demand additional oversight and resources from the project team—resources that are rarely accounted for in the initial budget. This extra effort, typically unbudgeted, strains general conditions and forces CM/GCs to divert staffing resources from other tasks and projects to address the problem. The magnitude of these costs is difficult to fully quantify and recover, and the costs oftentimes chip away at profits unnoticed until they accumulate into significant financial strain.
The Challenge of Fully Recovering Back Charges
CM/GCs, under pressure to meet tight budgets, must often exclude contingency values for managing Subcontractor issues in estimates and budgets. Correcting a challenged Subcontractor usually demands extra trade staffing or labor, whether self-performed or by other Subcontractors, adding unanticipated costs that are often subject to premiums and the effects of inflation. Of course, these values should be back charged to the offending party, however, they are almost always highly contested and almost never fully recovered. Without proactive measures to assess and reduce the default risk and the resultant project delays and cost overruns, non-reimbursable and unexpected expense exposures are inevitable.
Subcontractor default risk must be assessed and reassessed throughout a project to minimize its impacts. By staying proactive, CM/GCs can safeguard their projects, protect profit margins, and avoid unnecessary schedule delays. While monitoring default risk can be labor-intensive, the alternative—burning through contingency funds, delivering late, or compromising project quality—is far costlier. Even for those without SDI, understanding and managing Subcontractor default risk is essential for successful project delivery and long-term business health.
Completely Unrelated Trivia Treasure: The Eisenhower Tunnel, 60-miles west of Denver at an elevation of 11,158 feet, was the highest vehicular tunnel in the world when opened in 1973. The tunnel is so important to economic activity in Colorado that for every hour it is closed, the state loses $2 million in lost sales, services, and deliveries.
Maple Insight quantifies default risk, both insured and uninsured risks, so that you can monitor the dollar value of your exposure. This helps our clients to budget effectively and protect their projected fee.