Subcontractor risk and the protections you need

With great manpower comes great responsibility and risk

Subcontractors are invaluable in bringing specialist expertise and manpower to different stages of construction. But they also come with risks that can affect a project’s performance—its quality, cost, schedule, and safety—and your ultimate liability. 

Industry studies have shown that insurance claims in construction are largely attributed to subcontractors. Indeed, subcontractors are responsible for most defective workmanship claims, scope disputes, and safety-related incidents.* In some cases, the consequences can be catastrophic—and the fallout lands with you.

In this guide, we look at the risks associated with using subcontractors, and things you can do to mitigate your exposure.

Get your due diligence right

Before hiring subcontractors, it’s essential to carry out thorough vetting. This means checking their qualifications and reliability. It also includes understanding their financial stability, safety performance, regulatory compliance, and insurance coverage. Use a standardized process so you’re consistent in your methods.

• Ensure they have the required skills, experience, and equipment for your project’s scope, size, and complexity. Speak to their previous employers.

• Find out about their cash flow or history of bankruptcy. Ask to review recent financial statements, tax returns, and banking references.

• Check their regulatory compliance and experience modification rate (EMR), and confirm that they have safety programs and training in place. Use publicly available resources, such as OSHA and FMCSA, to uncover any violations.

• Verify that they hold the necessary state-and trade-specific licenses and certifications.

• Ask for proof of adequate insurance, including general liability, workers’ compensation, and commercial auto coverage. Check the certificate of insurance and see that it’s in date.

• Contact past clients, suppliers, and sureties to get independent confirmation of the subcontractor’s reputation and quality of work.

Avoid these common insurance pitfalls 

It’s a common misconception that commercial general liability insurance covers all risks; in fact, it often excludes costs related to subcontractor performance. If subcontractors have inadequate insurance coverage, you may face the financial repercussions when they fail to deliver or perform as expected.

Possible shortfalls in subcontractor insurance include:

• Insufficient limits: Maximum payouts must cover loss potential for the subcontractor’s work.

• Missing endorsements: These include additional insured, primary and non-contributory, waiver of subrogation, and notice of cancellation endorsements.

• Additional insured for ongoing and completed operations: This covers liability arising from the subcontractor’s work both while it’s being performed and after it’s finished.

• Primary and non-contributory endorsement: the subcontractor’s insurance must be primary.

•Waiver of subrogation: This prevents the subcontractor’s insurer from pursuing recovery against you after paying a claim.

• Notice of cancellation endorsements: These require the insurer to notify you if the subcontractor’s policy is canceled.

• Lapsed or fraudulent insurance documents: All policies and certificates of insurance must be genuine and valid.

When things go wrong, what is your contingency plan?

A robust risk management plan is critical for dealing with unexpected disruptions to your project, and to ensure a smooth wrap-up.

• Have a list of pre-vetted back-up subcontractors (and suppliers) in case one of yours defaults or is delayed.

• Include contract provisions that define the conditions and processes for ending a contract prematurely.

• Ensure that all final payments, lien waivers, and project documents are correctly managed. This minimizes the risk of late claims or litigation.

• If a project is high risk, insist on bonds that protect you and the project owner in case a subcontractor fails to perform or pay their suppliers.