Subcontractor Default Insurance vs Performance Bonds: Complete Comparison Guide 2025

Understanding Subcontractor Risk Protection

Why Subcontractor Protection Matters

Sub Work Percentage:

70-90%

Of project value

Default Rate:

2-5%

Annual sub defaults

Cost to Replace:

120-200%

Of original sub cost

General contractors face significant risk from subcontractor default. Two primary protection mechanisms exist: traditional performance bonds and subcontractor default insurance (SDI). Each has distinct advantages, costs, and appropriate use cases.

The Core Problem

When a subcontractor defaults mid-project, the GC faces:

Direct Costs

• Re-procurement costs
• Schedule acceleration
• Premium for replacement sub
• Legal and administrative

Indirect Impacts

• Schedule delays
• Liquidated damages risk
• Other trade coordination
• Owner relationship damage

Performance Bonds

How Performance Bonds Work

A performance bond is a three-party agreement between the subcontractor (principal), GC (obligee), and surety company. The surety guarantees the sub will perform per contract terms.

Bond Mechanism

If sub defaults, surety has options: complete work themselves, hire replacement contractor, or pay obligee the cost to complete (up to bond amount).

Bond Amount

Typically 100% of subcontract value. Some GCs require 50% for smaller subs or trusted relationships.

Surety Investigation

Before paying a claim, surety investigates the default. This process can take weeks or months.

Bond Advantages

Surety prequalifies subcontractors
Sub pays the premium (no GC cost)
100% protection per subcontract
Well-understood by owners and lenders
Surety may complete the work

Bond Disadvantages

Slow claims process (60-120 days)
Surety may dispute claims
Limits sub pool (not all can bond)
Administrative burden per subcontract
Sub costs passed to GC in bids

Subcontractor Default Insurance (SDI)

How SDI Works

SDI (also known as SubGuard) is a first-party insurance policy purchased by the GC. It covers costs to complete work when enrolled subcontractors default.

Policy Structure

GC purchases annual or project-specific policy. Coverage applies to enrolled subcontractors who meet prequalification criteria.

Coverage Trigger

When enrolled sub defaults, GC controls response immediately. Claim payment based on documented costs to complete.

GC Prequalification Role

GC must prequalify subs using insurer-approved criteria. GC takes on underwriting responsibility.

SDI Advantages

Fast claims (GC controls response)
Broader sub pool (unbondable subs OK)
Subs reduce prices (no bond cost)
Single policy covers all enrolled subs
Covers soft costs and delay damages

SDI Disadvantages

GC pays premium (significant cost)
High deductible per occurrence
GC bears prequalification risk
Only for large GCs ($100M+ volume)
Owners may still require bonds

Side-by-Side Comparison

Performance Bonds vs SDI

Factor	Performance Bonds	SDI
Who Pays Premium	Subcontractor	General Contractor
Cost Range	1-3% of subcontract	0.5-1.5% of enrolled work
Deductible	None	$250K-$500K per occurrence
Claims Speed	60-120 days	30-45 days
Control of Response	Surety decides	GC controls
Prequalification	Surety handles	GC responsible
Sub Pool	Limited to bondable	Broader options
Soft Costs	Usually excluded	Usually included
Minimum GC Size	Any size	$100M+ annual volume

Cost Analysis

True Cost Comparison

Performance Bond Costs

Premium Rate:

1-3% of subcontract value

$1M Subcontract Example:

$10,000 - $30,000 premium

Note: Sub pays, but typically includes in bid price to GC

SDI Costs

Premium Rate:

0.5-1.5% of enrolled subcontract value

$1M Subcontract Example:

$5,000 - $15,000 premium

Plus: $250K-$500K deductible per claim

Net Cost Comparison Example

$100M project with 80% subcontracted work:

Bond Approach

• Sub bond costs: ~$1.6M (2% avg)
• Passed to GC in bids
• Admin cost: ~$50K
Total: ~$1.65M

SDI Approach

• SDI premium: ~$800K (1%)
• Sub bid savings: ~$1.2M
• Net premium cost: -$400K savings
Savings if no claims

When to Use Each Approach

Use Performance Bonds When:

1
Owner/contract requires bonds
2
GC annual volume under $100M
3
Limited prequalification resources
4
Working with new/unknown subs
5
High-risk specialty trades
6
Government projects (often required)

Use SDI When:

1
GC has $100M+ annual volume
2
Strong prequalification program exists
3
Need broader subcontractor pool
4
Owner accepts SDI in lieu of bonds
5
Want faster claim resolution
6
Schedule-critical projects

Best Practices

Hybrid Approach

Many sophisticated GCs use a combination:

SDI for trusted subcontractor base
Cover repeat subs with proven track records under SDI program.
Bonds for new or high-risk subs
Require bonds from first-time subs or those in distressed trades.
Bonds when owner requires
Government and some institutional owners mandate bonds regardless.

Critical Success Factors

Robust prequalification regardless of approach
Monitor subcontractor financial health continuously
Maintain strong payment practices (reduce sub stress)
Document default thoroughly before making claims
Build relationships with surety and SDI insurer