Nine Steps to Managing Subcontractor Default Risk

In a recent podcast episode of The Building BITE, we caught up with Jim Budwell, Director of Subcontractor Default Insurance Risk Management and Claims at Construction Risk Partners. Jim’s experience as a builder, engineer, scheduler, carrier and now broker advisor makes him a great resource for all things SDI.  Having observed over 500 SDI claims, Jim has developed a guidance framework on what contractors should do, and what you should not do when managing subcontractor default risk.  We will list out a three of Jim’s nine ideas here, and if you would like to know more about all of Jim’s steps to mitigate subcontractor default risk, please take a listen in to The Building BITE podcast episode on: 9 Steps to Managing Subcontractor Default Risk.

Be Alert for Early Warning Signs

We all know the importance of communication around complex issues, and possible subcontractor default is no different.  While project teams and the risk management team need to be on the lookout for any potential red flags during the lifecycle of the project, the true beginning of this process goes back to pre-qualification. Asking yourself about the sub's current workload, are they going to staff the project fully? Have we had a consistent workforce on the project, or has it been sporadic?  In times of uncertainty, such as the current environment, subs have been known to overextend their capacity, leading to a potential default. That said, it is not enough to check a box on pre-qualifications but to continuously monitor and stay vigilant.

Know Your Terms and Conditions

Jim explained how failing to understand the specific terms and conditions of the subcontract can seriously impact a contractor’s management of the risk.  For example, if the terms of a subcontract default require a written notice to cure, and a three -day cure period, the contractor should not terminate the subcontractor two days after a verbal notice of poor performance. Doing so could create risk for the contractor and raise questions.  Was this a proper default?  If the matter proceeded to subrogation (where the SDI carrier sues the subcontractor for recovery of payments under the insurance policy), and a court or arbitration panel stated that it was an improper default which failed to follow the terms and conditions of the subcontract, the contractor could have jeopardized its coverage under certain SDI policies. Knowing and understanding your standard subcontract terms is critical, and deploying those terms carefully is essential. But that is only one part of managing the risk.

Communicate/Escalate Accordingly

One of the more significant takeaways from the episode was to keep the lines of communication open and accessible between the project team and the subs. Jim details how keeping communication open and flowing between the various parties mitigates potential risks and helps establish trust and a better working environment. Another benefit of open communication is the project team having greater insight into the status and capacity of their project’s subs, empowering them to bring in the right partners such as the risk management team, brokers, or even the carrier should the need arise. Many Project Managers have a strong can-do attitude when it comes to problem-solving and maintaining the project schedule. Still, Jim clues us into how even seasoned PMs may only encounter 1-2 SDI claims in their career. That is why it is critical to escalate the situation when called for and bring in the Insurance and claim specialists who live in this space, bringing valuable professional experience and expertise when claims happen.

Understanding these three guidance points is a great start, but there is much more to be done to successfully manage subcontractor default risk.  Be on the lookout for other information from the Proactive Institute regarding tips to achieve successful SDI claim outcomes and let us know if you have some tips of your own.

Links:

Connect with Jim on LinkedIn
Follow CRP on LinkedIn
Visit CRP on the web here 
Email Jim at jbudwell@constructionriskpartners.com
Connect with Peter Duggan
Connect with Mike Diercksen