Subcontractor defaults are becoming more expensive as larger trade contracts, costly rework and specialized replacement labor drive up losses.
According to The Baldwin Group’s midyear 2026 Surety and SDI report, while claim frequency has remained relatively stable, rising severity is sharpening the focus on contractors’ ability to identify and address problems before a trade partner fails.
AXA XL construction specialists urged insurance brokers and their contractor clients to look beyond a subcontractor’s financial position when a contract is awarded. Jim Richert (pictured on the right) and Ricardo Miramontes (pictured on the left) warned that missed milestones or staffing shortfalls may reflect pressures developing elsewhere in the business, including commitments to other projects.
Richert, AXA XL’s head of subcontractor default, said the insurer’s tracked experience frequently showed that a concern had been identified before the default occurred.
“In the majority of our defaults that we track the data in, it’s not that a red flag wasn’t noted upfront,” said Richert, “It was that they were either ignored or not adequately addressed.”
Earlier research illustrates how widely subcontractor distress has affected construction firms. A 2024 AGC/FMI study found that 70% of surveyed risk managers reported increased subcontractor distress or defaults compared with the previous year, while nearly half reported resulting project disruptions. The findings reflect respondents’ experience, rather than a national default rate.
The pressures are developing across an uneven US construction market. Census Bureau figures released November 2 put September construction spending at a seasonally adjusted annual rate of $2.186 trillion, down 2.7% from a year earlier. However, private non-residential spending increased 1.1% from August to an annualized $790.6 billion.
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Against that backdrop, a subcontractor’s growing order book deserves scrutiny alongside its financial strength. Richert said AXA XL commonly sees the same trade contractor referred for its largest-ever subcontract several projects in succession.
A year-end statement can quickly become outdated as new work changes the business. Quarterly reviews and direct conversations about future bidding plans can help contractors understand commitments beyond their own projects, he said.
“It’s more than just what they’re doing for you, and it’s more than what they have on the books when you look at them,” Richert said. “It’s understanding what are they going to pursue?”
Miramontes, a construction risk engineer at AXA XL, said an initial prequalification assessment only captures a snapshot of the risk. Contractors need to keep monitoring whether subcontractors have the labor, staffing, and financial resources to support their work programs.
He described a general contractor whose project team noticed staffing problems and slower responses. The team asked its prequalification colleagues to reassess the subcontractor, uncovering additional contracts that helped explain underperformance on its own project.
The connection between site teams and those reviewing financial health can help reveal changes that might otherwise go unnoticed. Miramontes said some AXA XL partners were expanding their risk management teams to gain more frequent visibility into subcontractor performance.
The competition for resources also extends beyond individual jobs. Richert said data centers were attracting established trades, leaving opportunities for smaller subcontractors to move into other sectors, including healthcare, where their ability to handle the work required scrutiny.
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That’s as the industry is still experiencing a significant labor shortage. Associated Builders and Contractors estimated in January that the industry would need to attract 349,000 net new workers in 2026, rising to 456,000 in 2027, to meet demand.
“(Data center) projects are pulling in so much focus, so much staffing, and so much labor,” Miramontes said. “Everybody’s got their eye on the big work, and justifiably so. But are we getting the right amount of focus and the right skilled labor for (other) work?”
Drawing on the specialists’ observations, brokers and contractors should investigate the following warning signs, particularly when several appear together:
These indicators should prompt further investigation rather than an automatic assumption that a subcontractor will default. Miramontes suggested comparing projected and actual workforce numbers alongside schedule performance and the quality of installed work. “Gradual revenue growth is fine,” he said. “But all of a sudden, if you start to see drastic increases or dips in financial statements, those are signs as well.”
Before awarding a major package, Richert urged contractors to consider how they would recover if the subcontractor failed. Splitting work among several firms may sometimes help, but the arrangement needs to suit the project. “If you haven’t at least contemplated some of the scenarios, you’ll be caught flat-footed every time,” he said. “Time truly is money on these projects.”
