Jim Ralston
Construction and Surety Practice Director
Of the five major trends currently reshaping the construction industry, two stand out for subcontractors: the rise of mega projects and an unprecedented backlog.
As projects grow larger, subcontractors such as mechanical engineers, electrical contractors, and other specialized trades often face more complex jobs and increased operational demands. While this growth may create new opportunities, it also introduces financial and operational risks in a volatile backlog environment. These risks include resource strain, scope expansion, and greater exposure to default allegations that can disrupt timelines and budgets.
The average construction backlog stood at 8.3 months at the end of 2024. Although this marked a two-year low, subcontractors remain concerned about scheduling unpredictability caused by the backlog. Additionally, total construction starts were down 6% in January 2025 compared to the previous year, with nonresidential construction starts declining 18% during the same period.
Subcontractors' ability to manage these risks often depends on having appropriate contracts and insurance structures in place. These tools can help reduce the risk of default declarations or losses tied to project disruptions.
Steps to stronger contracts
A solid subcontractor contract can help keep projects on track and reduce financial risk. While a certificate of insurance (COI) shows that coverage exists, it doesn’t define the terms, limits, or exclusions of the policy. This can leave subcontractors vulnerable if contract requirements aren’t clearly outlined. To help avoid coverage gaps and better protect your business, contracts should explicitly define insurance expectations, risk allocation, and liability protections.
Here are six key contract and subcontractor contract insurance considerations that can help support subcontractors in managing their risk throughout a project’s life cycle:
- Exit ramp clauses: Where feasible, contracts with clear off-ramp or termination provisions provide options if the project's scope changes significantly or if the partnership becomes problematic. These clauses allow subcontractors to exit the agreement in an orderly way if terms no longer align with project expectations.
- Written contracts for insurance coverage: Many insurance coverages depend on written contract terms being in place before a loss occurs. Informal agreements may not provide sufficient protection. Written contracts help ensure that all parties understand and agree to the coverage terms, making enforcement easier if a claim arises.
- Active and completed operations coverage: Coverage should include both active work and completed operations. Completed operations coverage offers long-term protection for claims that may arise after a job is finished—for example, a roofing job that causes a leak years later. Ensuring completed operations limits and duration align with contract requirements is an important step.
- Include all upstream parties as additional insureds: Insurance policies should include upstream parties—such as the project owner and general contractor—as additional insureds. This reduces reliance solely on the general contractor’s insurance for indemnification and increases the likelihood that coverage will be available if a claim involves upstream parties. Coverage should be provided where required by the subcontractor contract and supported by appropriate policy endorsements, rather than assumed solely based on certificates of insurance.
- Insurance limits based on scope of work: Subcontractor contract insurance limits should be determined by the scope and risk of the work, rather than just contract value. Even small projects can carry significant exposure. Coverage limits may need to be increased for specialized or higher-risk tasks, such as electrical or mechanical installations.
- Difference in conditions (DIC) and excess coverage: Owner-controlled insurance programs (OCIP) and contractor-controlled insurance programs (CCIP) often provide basic coverage but can leave gaps. Adding DIC or excess coverage may help bridge these gaps, depending on the structure of the owner-controlled and contractor-controlled programs and policy terms.
Avoid coverage gaps with the right insurance.
Insurance needs vary depending on the nature and scope of each project. Typical policies may include general liability, auto, umbrella, workers’ compensation, and subcontractor insurance. Depending on the work, specialized coverage such as professional liability, pollution insurance, or a rigger’s policy may be necessary—especially when operating heavy equipment like cranes.
Regardless of your subcontractor contract insurance program, consider these best practices to help reduce risks and avoid coverage gaps:
- Review insurance annually and before new projects: Insurance needs can change as your business evolves and project risks shift.
- Consult a construction attorney and insurance broker: Industry-specific expertise can help ensure your contracts and insurance address the unique risks of your projects and role.
- Negotiate deductibles with downstream contractors: Deductible terms can significantly affect your financial exposure and should be carefully negotiated.
- Include administrative costs in your agreements: Administrative and compliance tasks often impact profitability but may be uninsured. Consider including related costs in your contracts.
Marsh McLennan Agency offers risk management solutions designed to support subcontractors in managing these challenges. Learn more about our construction risk management offerings.
