Risk Management
Death by a Thousand Claims: Why Small Losses Can Cause Bankruptcy
Michael Reich | December 12, 2025
Footnotes
1 "Slow Steps Forward: Gradual Acceleration in Activity as Build Costs Stabilize," International Construction Market Survey, Turner & Townsend, June 2024.
2 ISO: Highlights of Commercial Inland Marine Experience. This ISO periodical is not available to the public.
3 Turner & Townsend.
4 "Bid Cost Survey Blog 1—Bid Cost as % of Project Value," Constructing Excellence, 2014.
In the cutthroat world of construction, where profit margins in the US sit between 3.5 and 5 percent and preliminaries are 10 percent or less, 1 every dollar counts. With increased competition, labor shortages, and ever-tightening deadlines, it is easy to focus on the more immediate dangers. Hidden underneath those major problems, and exacerbating budget shortfalls and construction risk, is the small claim.
These small nuisance claims, often either overlooked or considered part of the job, cause immediate effects and can cascade into larger problems—not only on a construction project but throughout the company, leaving many buildings at risk of bankruptcy with no clear cause.
However, there are a myriad of safe, effective, and low-cost technologies that can help avoid—if not alleviate—these silent killers of profitability.
Reality Check: "Small" Claims Have Large Collective Price Tags
Analyzing data from the Insurance Services Office, Inc. (ISO), 2 between 2018 and 2023, theft accounts for 22.8 percent of claims in the apartment space and 21.4 percent in the office space. Respectively, the average claim size for those thefts is $26,000 and $21,000, respectively. This means that, for most projects, 1 out of 5 claims is being primarily funded by the general contractor via the per-occurrence deductible. Even if the deductible is low on the project, the compounding delay will have an outsized effect.
Water damage is the leading cause of loss on construction projects, both by frequency and severity. Accounting for almost 1 in 3 claims across the builders risk space, they carry much higher average claim values of $300,000 to $400,000 per claim. Although insurance payments are nearly guaranteed for those sized claims, our analysis shows that more than 60 percent of water damage claims are below $50,000, which in many cases can be below the deductible entirely.
Beyond the financial impact of higher deductibles are the costly implications of excluded claims. Insurance companies do not cover claims that are either too frequent, too small, or feel like they are a business risk, again forcing general contractors to cover the cost of the loss. The following are among (but not limited to) the standard exclusions.
Small Claims Do Not Equal Small Delays
There is never a good time for a claim, yet one that occurs during the final months of a project is by far the worst. In the case of water damage in the final phase, the claims often involve the work of multiple subcontractors, many of whom have completed their portion of the project and moved on to the next. Sourcing the appropriate work may not be as easy as it once was; at the start of 2025, Associated Builders and Contractors estimated a shortfall of 439,000 workers to meet demand for construction services this year. The Bureau of Labor Statistics shows an aging workforce (42.5 years on average, versus 36 years old in 1985) with more than 20 percent of current workers over 55.
Beyond finding competent workers is procuring replacement materials. According to a study by Turner & Townsend, 3 76.2 percent of contractors felt that skilled labor shortages were a large or major impact on their business; 52.4 percent have the same concerns about excessive lead time for materials. This data collectively reinforces the point that a relatively small claim by dollar value can easily have an outsized effect on a project's burn costs. A simple $50,000 water leak could involve drywall removal, remediation, plumbing, electrical, and supervision. All of this work takes time, human capital, and resources. With delay deductibles often measured in weeks, these costs are taken out of preliminaries and profit, which can quickly evaporate.
Small Claims, Indirect Costs, and Financial Risk
In Rabbet's 2024 Construction Payments Report, 95 percent of general contractors and 75 percent of subcontractors surveyed indicated they "float" payments while waiting for developers to pay. That same survey reports that general contractors averaged 73 hours per month managing payments to subcontractors, and 98 percent incurred additional fees while waiting for payments.
With time and money at such a premium, any small claim can quickly trigger an avalanche of issues. Regarding the payment of money, an analysis of 250 water damage claims showed that only 20 percent of claims are paid within 60 days. For large claims up to $1 million, there is a 40 percent chance that it will take over 6 months to get a claim paid—time and money that contractors cannot afford to lose.
Systemic Risk of Small Claims
While there are no long-term studies on the effects of small claims on construction projects, several have been done on the effects of change orders on productivity in a project. It can be argued that these are at least correlated: continuous rework, idle labor, and an atmosphere of change that harms productivity.
The Revay Report (released in 2007) detailed the effect of change orders.
Still widely relevant today, this study shows a proxy of how consistent small changes caused by water damage can add up to large issues by the end of the construction project, leading to a continued stress on budgets, personnel, and relationships.
The Bid Process and Its Effect on Profitability
A 2014 survey by Constructing Excellence 4 that still applies today showed the average cost of a bid at 0.10 percent and 0.30 percent of the total cost of the project. With many of these bids taking tens if not hundreds of hours to complete, the cost of losing bids is one of the largest contributors to the razor-thin margins on those that are won. With common bid-win rates ranging from 4:1 to 10:1, it is not hard to see how a 0.2 percent cost per lost bid adds up against a 5 percent profit margin on those won. For example, increasing your bid-win ratio from 1:6 to 1:5 would result in 5 percent greater profitability.
The best contractors know this, and those at the top of the industry rely almost exclusively on repeat customers, with numbers as high as 98 percent repeat business. Keeping or losing a customer should not be seen as part of the business; it should be a top priority and concern throughout the project life cycle.
Claims, even small ones, wind their way into construction projects and produce large results that stress a fragile system. Although these claims do not get the attention of, say, a large fire or hurricane, they are the everyday losses that can bankrupt even the best general contractor. The only way to increase profitability is through the avoidance of claims altogether, both small and large.
How to Stop Claims—The Age of IoT Tech and Claims Avoidance
While smaller claims certainly have the potential for outsized impacts on projects, the good news is that they can be addressed by a combination of risk mitigation strategies that are enhanced by technology. Risk management initiatives—such as jobsite audits, data-backed prevention plans, security surveillance, and Internet of Things (IoT) monitoring systems—can save contractors millions of dollars by addressing death-by-attrition losses.
Jobsite Audits
Jobsite audits typically involve walking the site at regular intervals (e.g., daily or weekly), taking pictures, and documenting all observations. These frequent, simple checks create a strong layer of protection by identifying small issues that could indicate larger potential problems: areas not properly closed off, loose materials or tools that should be locked up, standing water, or open doors and windows.
The information can also be analyzed after the walk by human overview or artificial-intelligence-powered tools and provides additional insights into the progression of the project or day-to-day changes that signal the need for further investigation.
Data-Backed Prevention Plans
While comprehensive prevention plans outline how to mitigate risks on each jobsite, keeping both projects and employees safe, augmenting those plans based on operational data adds an additional layer of risk management.
By combining and analyzing employee-generated data, such as reports, notes, and meeting comments, with information from IoT technology deployed on-site, patterns can emerge that can help enhance prevention plans for current and future jobs. Photos and documentation from daily or weekly audits can reveal changes from one period to the next, much like tracking weather trends to anticipate what's coming. For example, shifts in temperature, humidity, or site conditions (as well as weather forecasts) can signal future risks.
The positive effect compounds as data collected across multiple projects are reviewed together, further driving data-driven insights. This collective effort improves the master prevention plan with every project, gaining from the experience and wisdom shared.
Security Surveillance
Site security combined with a proactive risk management strategy can prevent common losses, such as those arising from theft, vandalism, or arson. The level of security should be matched to the risk and value of the project; for example, a small office renovation may require only a few cameras, while a multibillion-dollar data center complex spanning hundreds of acres may require advanced solutions like drone-based perimeter monitoring.
IoT sensors can augment security systems, monitoring for motion, open/closed doors, or glass breakage. Thermal cameras and thermal radar systems can add a higher level of fire prevention/detection to address what often leads to large losses.
Surveillance is often passive, meaning it records and alerts but doesn't stop an intruder. In some areas, waiting for law enforcement or security personnel can take time, so active deterrents do matter. Strobes, sirens, and loud alerts can make intruders aware they're being watched, while roving guards or rapid-response teams provide an extra layer of protection. The right solution combines technology, physical security, and budget alignment to reduce risk without incurring unnecessary cost.
IoT Monitoring Systems
IoT-enabled monitoring and detection systems are proven highly effective in preventing or minimizing non-flood-water events when deployed strategically on construction sites. Solutions now on the market have demonstrated up to 90 percent effectiveness in eliminating water damage losses when properly installed and managed.
These systems detect leaks, monitor temperature and water flow anomalies, and provide real-time alerts so that project managers can intervene before a minor incident becomes a major claim. The result is fewer large losses, lower aggregate loss ratios, and greater confidence in managing portfolios through soft cycles.
Nonetheless, the use of IoT in construction is still in the early stages. The 2023 Global Construction Survey by KPMG shows only 14 percent of contractors are deploying sensors across all their projects; 49 percent have piloted some, and 37 percent have not done any work.
It's worth pointing out that IoT solutions can continue to deliver value to owners beyond the construction phase. Integrating permanent IoT infrastructure positions the completed building for better insurability under property policies. Properties that retain monitoring systems for water, humidity, and temperature anomalies may qualify for enhanced insurance program endorsements or reduced water-damage-related deductibles, especially in high-risk geographies or for mixed-use properties. This continuity of protection offers developers and owners a long-term risk management advantage.
Conclusion
As the construction industry navigates its way through challenging times, contractors need to sharpen their focus on risk management that goes beyond catastrophic and safety exposures to address smaller, higher-frequency loss events. As described, neglecting or overlooking these risks can have serious consequences. Fortunately, by adopting and implementing proactive approaches, many of these risks can be eliminated or mitigated before they have material impacts on a project's performance and profitability. These measures can make a big difference in how effectively contractors can protect their margins and weather the current economic climate.
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