Every general contractor eventually runs into some version of the same problem: a subcontractor who can’t finish the job, whether because they ran out of money, walked off the project, or simply weren’t capable of the work they bid on. When that happens on a job with real schedule and budget pressure, the cost of finding a replacement sub and absorbing the delay can land squarely on the general contractor. Two very different tools exist to manage that risk — subcontractor default insurance and performance bonds — and they work in meaningfully different ways.
Performance Bonds: The Traditional Approach
A performance bond is typically purchased by the subcontractor (or required of the general contractor on larger projects) and guarantees to the project owner or GC that the bonded work will actually get completed. If the sub defaults, the surety company generally steps in to either find a replacement to finish the work or pay out up to the bond amount. Because a bond is underwritten based on the individual subcontractor’s financials and track record, getting every sub on a project properly bonded can be slow, and smaller or newer subcontractors sometimes can’t get bonded at all, which can limit who a GC is able to hire.
Subcontractor Default Insurance (SDI): A Different Structure
Subcontractor default insurance, often called SDI or sometimes known by the brand name Subguard, is purchased by the general contractor rather than the sub, and it typically covers a whole portfolio of subcontractors across a project or even across multiple projects rather than requiring a bond for each one individually. Instead of a bond-by-bond underwriting process, the GC generally qualifies its own subcontractor base, and the policy responds if a qualified sub defaults, covering the cost of completion and related delay expenses, subject to the policy’s terms and a retention the GC typically carries.
Why Larger GCs Often Prefer SDI
SDI tends to appeal to general contractors running multiple subcontractors across one or more large projects, because it can be faster and more flexible than chasing individual bonds for every trade. It also typically gives the GC more control over the default-management and replacement process, since the GC — not a surety claims adjuster — is often the one directing the recovery. The tradeoff is that SDI usually comes with a retention the GC absorbs before the policy responds, and it requires the GC to take on more of the underwriting and subcontractor-qualification work themselves.
Why Smaller GCs and Public Projects Often Stick With Bonds
Performance bonds remain the standard on public and government-funded projects, where statutes like the Miller Act or state equivalents often require them outright, and SDI generally isn’t a substitute in those situations. Smaller general contractors with fewer, lower-volume projects may also find individual performance bonds simpler to manage than qualifying for and administering an SDI program, which tends to make more financial sense at a certain project volume and size.
Neither Tool Replaces Vetting Your Subs
Both bonds and SDI are backstops, not substitutes for actually qualifying the subcontractors you hire — checking financials, references, bonding capacity, and current workload before signing a subcontract. A sub who shouldn’t have been hired in the first place is a problem that’s cheaper to avoid than to insure against, no matter which risk-transfer tool sits behind the contract.
Whether performance bonds, subcontractor default insurance, or some combination of both makes more sense for your projects typically depends on your project size, volume, and how much of the qualification process you want to own yourself. An independent agent who works with general contractors can walk through which structure fits your current pipeline of work.