You may have heard about Subcontractor Default Insurance, or SDI, on larger commercial projects. It's becoming more common, especially on projects over $50 million where the GC wants protection against subcontractor failure.
But as a subcontractor, what does this mean for you?
The short answer: SDI is primarily the GC's protection, but it affects how you'll be vetted, monitored, and potentially replaced if problems arise. Understanding it helps you navigate the process better.
What Is Subcontractor Default Insurance?
Subcontractor Default Insurance is a type of insurance policy that general contractors purchase to protect themselves against losses caused by subcontractor default — meaning when a subcontractor fails to perform their contract obligations.
Think of it as an alternative to requiring performance bonds from every subcontractor. Instead of asking you to provide a bond, the GC buys a policy that covers losses from any subcontractor defaults on the project.
This matters because:
How SDI Differs from Surety Bonds
Traditional surety bonds are provided by subcontractors. You pay for the bond, and if you default, the surety pays to complete your work (then potentially comes after you for reimbursement).
SDI flips this model:
For subcontractors who struggle to get bonded — due to size, financial history, or limited experience — SDI projects can be an opportunity to participate in work you couldn't otherwise access.
The Prequalification Process
Here's where SDI directly impacts subcontractors. GCs using SDI programs have very specific prequalification requirements because their insurer requires it.
You'll typically provide:
The SDI insurer evaluates this information and assigns you a rating. Your rating determines:
If you don't pass prequalification, you can't bid on that GC's SDI-covered work.
Project Monitoring Under SDI
Once you're on an SDI project, expect more monitoring than you might be used to:
Progress Reporting
Regular updates on your work progress, schedule status, and any issues. SDI insurers want early warning of potential defaults.
Financial Check-ins
Depending on your risk rating, you may need to provide updated financial information during the project.
Subcontractor Meetings
More frequent meetings focused specifically on subcontractor performance and potential problems.
Issue Escalation
If problems arise — payment disputes, schedule delays, quality issues — they may escalate faster to SDI-related oversight.
This isn't necessarily bad. It means problems get addressed earlier rather than festering until they become defaults. But it does mean more administrative work.
What Happens If You Default
If you're unable to complete your work — whether due to financial problems, performance issues, or other factors — here's how the SDI process typically works:
1. Default Declaration
The GC determines you're in default based on contract criteria. This isn't taken lightly — there's usually a formal process.
2. SDI Claim
The GC files a claim with their SDI insurer for the costs of completing your work and any other covered damages.
3. Completion Arrangement
The GC hires a replacement subcontractor to finish your work. The SDI policy covers the excess costs.
4. Recovery
The SDI insurer may pursue you for reimbursement of their losses, depending on the circumstances. Your assets and your company's assets could be at risk.
The Advantages for Subcontractors
Despite the added scrutiny, SDI projects offer real benefits:
Access to Work
If bonding is expensive or unavailable for you, SDI projects let you compete for work you'd otherwise miss.
No Bond Premiums
You don't pay the 1-3% bond premium that would normally apply to bonded work.
Relationship Building
Successfully completing SDI projects demonstrates reliability and builds your track record for future opportunities.
Financial Monitoring
The structured monitoring can actually help you catch financial problems early — before they become catastrophic.
The Disadvantages
Be aware of these downsides:
Administrative Burden
More paperwork, more reporting, more meetings. This takes time that costs money.
Less Privacy
You're sharing detailed financial and operational information with the GC and their insurer.
Faster Escalation
Problems that might be worked out informally on other projects can escalate quickly on SDI projects.
Recovery Risk
If you do default, the insurer has resources and motivation to pursue you for losses.
Questions to Ask on SDI Projects
When considering an SDI project, ask:
What are the prequalification requirements?
Get specifics so you can prepare properly.
What's the ongoing monitoring process?
Understand what reporting you'll need to provide throughout the project.
What triggers a default determination?
Know the contract terms that could lead to default so you can avoid them.
What's the cure period for issues?
If problems arise, how much time do you have to address them before default proceedings start?
How is replacement contractor selection handled?
If you do default, do you have any input on who finishes your work?
How to Succeed on SDI Projects
Based on patterns from successful subcontractors on SDI work:
Be Honest in Prequalification
Don't overstate your capacity or hide financial issues. If they come out later, it's worse.
Communicate Proactively
When problems arise (and they always do), communicate immediately. SDI programs are designed for early intervention.
Document Thoroughly
Keep detailed records of your work, communications, and any issues. This protects you if disputes arise.
Manage Cash Flow Carefully
The monitoring means you can't hide cash flow problems. Make sure you have adequate working capital before taking on SDI work.
Build the Relationship
The GC's project managers are your allies, not adversaries. Good relationships mean problems get solved rather than escalated.
Is SDI Good or Bad for Subcontractors?
Honestly? It depends on your situation.
If you're an established subcontractor with good financials and operational discipline, SDI is mostly neutral — some extra paperwork in exchange for not needing bonds.
If you're a smaller or growing subcontractor, SDI can be a door opener — access to work you couldn't get otherwise, with structured support that can help you succeed.
If you're financially stressed or operationally challenged, SDI projects might not be a good fit right now. The monitoring will catch problems early, which could lead to default proceedings before you have a chance to work through issues.
Know your situation and choose accordingly.
Frequently Asked Questions
Do I still need general liability insurance on SDI projects?
Yes. SDI covers the GC's losses from your default. You still need your own GL, auto, workers comp, and other required insurance.
Can I negotiate SDI prequalification requirements?
Generally no — they're driven by the insurer's underwriting standards. You either meet them or you don't.
What if I disagree with a default determination?
Your subcontract should specify dispute resolution procedures. You have rights, but the bar for reversing a default is high.
Does SDI affect my payment terms?
Not directly, but SDI projects tend to have more structured payment processes overall.
Should I mention SDI experience in future bids?
Absolutely. Successfully completing SDI projects demonstrates you can handle rigorous requirements.