Construction Subcontractor
Consultant develops an invaluable risk assessment tool for a non-profit association
Business Issue
Subcontractor default insurance (SDI) is a risk mitigation tool for general contractors to manage subcontractor default risk. It protects general contractors and upstream parties from subcontractors who may default on contracts because they’re unable to finish their work, go out of business, or perform work so poorly that it must be redone. SDI is an alternative to surety bonds that contractors use to manage these risks.
Action Plan
In 2017, Rob Harrison and the Houston Construction Team picked up a large general contractor client out of south Texas. In the RFP, the Construction Team advised the client to buy SDI, which they did not carry at the time. The team continued to tout the benefits of SDI to the reluctant client for five years. Once they were finally persuaded, the client moved from 0% enrollment to 100% in less than a year. Now they use SDI on almost every project. Their comfort level increased significantly once they realized they not only have a great SDI program, but also a substantial profit center.
To manage the deductible, McGriff helped the client set up a trust to hold funds. While using a trust was an innovative way to build up an SDI program, Rob still wanted to find a more efficient way to utilize the funds. On April 1, 2024, the Construction Team introduced the client to Bud Curtis from McGriff’s Captive Resource Solutions Team. Bud met with the client’s senior management and ownership group to discuss their business plan and provide captive education. The SDI program is a significant expenditure with a substantial deductible.
A focused discussion revealed that the company was pre-funding that deductible using their trust account. Bud recommended forming a single-parent captive to insure a significant portion of the SDI deductible (deductible buydown). And instead of funding the trust, pay some of that money as premium into the captive. After extensive client education and discussing other risks that could be placed in a captive, the Captive Team asked a captive manager to discuss their program, financial model, domicile, and the overall impact of the captive on the client’s operations. The client then asked the captive manager to conduct a feasibility study.
Results
Now, the client's risk management program addresses risks that had not been efficiently priced in the market. The client is using financial tools that improve its TCOR and IRR. As an added benefit, the premium the client pays into the captive is a deductible expense. That allows the client to build up strategic surplus that could be used to take more risk, pay claims, and improve the already successful contractor's IRR.
The client's captive was formed in November 2024. Individual results will vary.