News & Insights

THOUGHT LEADERSHIP

Managing risk through the right protections

Risk management is essential in any major capital project. Owners, contractors, and designers all bring different risk exposures to the table, and protecting against those risks through bonds and insurance is both a contractual and financial necessity.

Many insurance and bonding requirements are dictated by law or funding sources, especially for public institutions. But where requirements are flexible, such as at private universities or in P3 partnerships, B&D can help shape those requirements and extract the most value for our clients. By aligning insurance and bonding strategies with your institution’s goals, B&D helps you balance protection, compliance, and cost efficiency.

Insurance: Transferring risk

An insurance policy is a contract between an insured party and an insurer that provides financial protection against defined losses, and this is a common way to manage project risk. The insured pays a premium, and if a covered event occurs, the insurer pays the claim (up to the policy limit) and absorbs the loss.

Types of insurance in design & construction

Just as individuals may purchase different insurance policies for their car, home, or health, the design and construction process rely on a suite of specialized policies. The table below summarizes the types of insurance commonly encountered, as well as who they protect and when they apply.

Understanding the purpose of the policy and who is protected can help determine whether the cost of the policy is justified as a separate, project-specific line item in project pricing (e.g., Builder’s Risk, CCIPs/OCIPs), or if it should be characterized as an overhead cost that should be absorbed in the contractor’s or designer’s fee (e.g., CGL or automotive liability).

How insurance costs are priced

Both bonds and insurance are typically “below the line” costs in a contractor or developer’s proposal. This means that they are not direct or “hard” costs associated with the materials, equipment, and labor necessary to physically construct the project. Rather, they are indirect or “soft” costs that are essential to the work but not part of the physical construction.

Insurance premiums are often expressed as a percentage of hard construction costs (typically 1-3% in total). Actual rates depend on factors such as:

• Project size and risk profile (e.g., a power plant vs. a classroom building)
• The contractor’s claims history and safety record
• Deductibles and limits for the policy (defined per occurrence and in aggregate)
• Whether the coverage is firm-wide (e.g. CGL) or project-specific (e.g. CCIP or Builder’s Risk)

Bonds: Guaranteeing performance

Bonds are another form of risk management, but they function differently from insurance. A bond is a financial guarantee from a surety company that the contractor will meet its contractual obligations to the project owner.

Every bond involves three parties:

• Principal: The entity performing the work (contractor, design-builder, or developer) and who purchases the bond (although those costs are rolled into project costs that are ultimately paid for by the owner).
• Obligee: The project owner who requires the bond and who benefits from it.
• Surety/Guarantor: The third-party company that guarantees the principal’s obligations.  Typically these are large, financially secure institutions (often affiliated with major insurers).

The surety’s liability is capped by an amount called the “penal sum,” usually equal to the contract value.

Types of bonds in design & construction

Common bond types encountered during the construction procurement process include:

• Bid bonds: Ensure that the principal (bidder) will enter into a contract and provide performance/payment bonds if awarded the job. If they do not, the surety may cover the owner’s cost to rebid, or the increased cost to award to the next qualified bidder, up to the penal sum. For bid bonds, the penal sum is typically 10% of the total project cost.
• Performance bonds: Guarantee completion of the project work per the contract. If the principal (contractor) defaults, the surety may provide financial support to help them complete, or work with the obligee (owner) to replace them with another contractor.
• Payment bonds: Guarantee payment to subcontractors and suppliers, protecting the owner from mechanics’ liens or claims against project funds.

Payment and performance bonds are often statutorily required on public projects. In private or P3 settings, project owners may still choose to require them to protect against non-performance or lien exposure.

Note: These construction-related bonds differ from the municipal or revenue bonds that institutions may issue to finance projects. Those are debt instruments and fall outside the scope of this article.

How bonds are priced

Like insurance, bond premiums are typically expressed as a percentage of the contract value.  The exact rate depends on factors such as the type of bond, the size of the project (and thus the size of the penal sum), and the contractor’s financial strength, credit rating, and performance history, but typically range between 0.5%-1.5% of the contract value. Larger, financially strong contractors typically secure lower rates. Because the surety’s guarantee is based on the contractor’s credit and reputation, the contractor’s bonding capacity is often seen as a proxy for a contractor’s financial stability.

Comparing bonds vs. insurance

Simply, insurance covers losses while bonds guarantee performance. With insurance, the insurer assumes some portion of the risk in exchange for a premium. If a claim occurs, the insurer absorbs the loss, up to the policy limit. The owner is an indirect beneficiary because the funds recovered by the contractor through insurance claims are used to help the project recover, eliminating or reducing the need to dip into project contingency.

In comparison, if the principal/contractor defaults on a bond, the surety must step in to make things right—either by financing completion, hiring another contractor, or reimbursing the obligee/owner (up to the bond’s penal sum). Unlike with insurance, the surety does not expect to absorb the loss. Rather, the surety will pursue the contractor for reimbursement.

Contractors have a strong incentive to avoid bond claims because they must reimburse the surety and risk losing future bonding capacity. For this reason, the surety can be a powerful ally if the contractor defaults. The surety has both the means and motivation to intervene early when problems arise. This leverage doesn’t exist with insurance—the insurer’s obligation is only to pay for covered losses, not to complete the project.

Insurance compensates for losses, while bonds enforce accountability. These are both valuable risk management tools, with different nuances to how money flows and how behavior is shaped when challenges arise.

Avoiding redundancy and aligning coverage

Avoiding redundant coverage

In complex projects, multiple instruments may unintentionally cover the same risk. These overlaps can add unnecessary cost and even slow down claims when insurers dispute which policy should apply.

Examples of potential duplications include:

• A Performance Bond already protects the owner against non-performance; requiring SDI on top of that duplicates protection and drives up costs.
• A CCIP or OCIP typically includes general liability and workers’ comp, making separate standalone policies redundant.

• Builder’s Risk and property insurance can duplicate coverage for the same physical damage—particularly on renovations, during turnover, or when owner-furnished equipment is insured under both.

B&D can review proposed coverage frameworks to identify where potential duplications exist and help institutions pay for the right protections once, not twice.

Aligning coverages with contract responsibilities

Construction contracts are fundamentally risk-allocation tools. Provisions on indemnity, warranties, force majeure, and others determine which party is responsible for which types of losses. However, even well-negotiated contracts can fall short if the required insurance does not match each party’s assumed risks. Those contractual obligations only function as intended if the responsible party’s insurance policies cover the risks they’ve agreed to bear.

Common misalignments include:

• Professional vs. general liability: A design-builder’s indemnity for design errors might fall under professional liability (E&O), not general liability (CGL). If their CGL policy excludes professional services, and they don’t have a separate E&O policy, the owner could be left without coverage.
• Pollution and cyber risks: Contracts that require a contractor to protect the owner against environmental or data-related incidents won’t help if the contractor doesn’t carry pollution or cyber liability insurance.
• Inadequate limits or aggregate caps: Even when coverage types align correctly, the dollar limits can be insufficient — especially for large or multi-phase programs. Policies typically have both per occurrence and aggregate limits, meaning repeated small claims can erode coverage for later events.

B&D can help project owners verify that policy requirements reflect contractual intent, and that policy limits and exclusions are sufficient and appropriate. This alignment helps make sure that risk transfer mechanisms actually work as intended, protecting both the owner and the contracting parties from surprises when a claim occurs.

Strategic Choices: Who should carry Builder’s Risk?

Builder’s Risk can be purchased by either the owner or the contractor/developer. The parties should coordinate to ensure that Builder’s Risk coverage is obtained but not duplicated.

• Owners choose to carry the policy when they:
  • Want claims paid directly to them.
  • Have access to more favorable institutional or state insurance programs.
  • Are renovating existing facilities and want coverage under the same insurer that carries their property policy.

• Contractors carry the policy when they:
• • Want direct control over claims and risk administration

B&D can help your institution evaluate the pros and cons of each approach, based on relevant project-specific factors such as financing structure, delivery method, and scope.

Takeaways for project owners

A strategic understanding of bonds and insurance tools can help institutions strengthen their project delivery, minimize disputes, and ensure dollars spent on risk management deliver the most value.

While our guidance as trusted advisors should never replace formal legal or insurance advice, B&D can help institutions:

• Flag duplicative protections and right-size requirements.
• Ensure fees align with actual risk transfer.
• Structure conversations early so that the allocation of risk and coverage responsibilities is transparent to all parties.

Effective use of bonds and insurance is not just about compliance. By engaging with risk management early, B&D helps institutions strategically protect their investments, safeguard project continuity, and deliver facilities that serve their mission for decades to come.