Subcontractor Default Insurance (SDI) is a type of insurance that protects general contractors and project owners from financial losses caused by subcontractor non-performance, such as insolvency or bankruptcy. Unlike traditional bonding, which requires contractors to secure a bond from a surety company, SDI is an alternative option that can offer greater flexibility and cost savings.

The construction industry is rife with risk, and one of the biggest risks that contractors face is subcontractor non-performance. When a subcontractor fails to complete their work or goes bankrupt mid-project, the general contractor or project owner is left to pick up the pieces. Traditional bonding has long been the go-to solution for mitigating this risk, but it comes with its own set of challenges.

For one, bonding can be costly. Surety companies typically charge a sizeable premium upfront, often in the range of 1-2% of the bond value. This can add up quickly for large projects. Additionally, bonding can be difficult to secure for smaller or less experienced contractors who may not have the financial strength or credit history to meet the surety company`s requirements.

SDI, on the other hand, offers an alternative option that is often more flexible and cost-effective. With SDI, contractors purchase insurance policies that protect against losses caused by subcontractor non-performance. The policies are often customizable to suit the specific needs of the project and can cover a range of non-performance issues, such as insolvency, default, or abandonment.

One of the key advantages of SDI is that it allows contractors to avoid the traditional bonding process altogether. Instead of going through a surety company, contractors work directly with an insurance carrier to purchase their policies. This can save time and money, as insurance carriers may have more flexible underwriting requirements and may be willing to work with contractors who may not qualify for bonding.

SDI can also offer broader coverage than traditional bonding. Bonding typically only covers losses caused by the subcontractor`s failure to perform their work. SDI, on the other hand, can cover losses caused by a range of non-performance issues, such as failure to pay suppliers or subcontractors, or even poor workmanship.

Of course, like any insurance product, SDI has its limitations. Policies may have coverage caps or exclusions, and the cost of the policy will depend on a variety of factors, including the size of the project and the subcontractor`s level of risk.

Despite its limitations, SDI can be a valuable tool for contractors looking to mitigate subcontractor non-performance risk. By offering greater flexibility and broader coverage than traditional bonding, SDI can help contractors protect their projects and their bottom line.