CDI: Subcontractors’ & Suppliers’ Dilemma (and Owners’ Jeopardy)

Contractor default insurance (CDI) policies are issued by one carrier and cover only the largest general contractors against the default of major subcontractors. The advantages for GCs include greater control and the ability to “manage” subcontractors.

For subcontractors, this control can lead to serious problems if disputes arise. CDI allows its “Insured” (the GC) to be judge and jury in the issue of subtrade default. The subcontractor is at the mercy of the GC and may find its contract unilaterally terminated with no recourse beyond litigation.

Compare to a bonded job: if a default is declared, the bonding company must objectively investigate the claim in accordance with the terms of the contract. It must verify the default before acting under its bond. This objectivity protects a subcontractor from arbitrary actions.

What about payment assurance? CDI provides no payment protection to subs or suppliers. Payment protection is available only if a labour and material payment bond is provided by the GC to the owner. CDI GCs often avoid the payment bond with a “cost saving proposal”: adding the owner as an insured under its CDI policy, sometimes with a “gap” bond. A gap bond only narrowly protects the owner from a default of the GC’s CM responsibilities – not subcontractors at all.

Owners are told that they are protected by this combination while saving the premiums for full performance and payment bonds. Not only is the owner not protected should the GC default, but the subs do not have the protection of a payment bond. And, the “savings” are minimal as the GC marks up the CDI premiums heavily to account for its costs of underwriting and its additional risk.

There are other reasons to be wary. CDI GCs must prequalify subcontractors – so subs are asked to provide confidential information including their financial statements. Under a bonded job, the subcontractor provides this information in confidence to their bonding company.

A relationship with a bonding company provides subcontractors a competitive edge, helping to root out the “lowest common denominator” by ensuring that they are bidding against similarly prequalified competition. Remember: bonding is worth it, as performance and payment bonds don’t just protect owners – they work for subcontractors and suppliers.

Working with allies like VICA/BCCA, the Surety Association of Canada is getting the message to owners: the best route to construction procurement is a fair, open and transparent bidding process backed by bonding at the bidding and contract award stages.

For more information or assistance – contact Bob Sloat, SAC’s western staffer: 778-995-6585 or bsloat@suretycanada.com .