Paying for insurance is all part of the cost of being in the construction business. But that doesn’t mean contractors can’t take a closer look at their coverage and find ways to save.
Like many contractors, you may have noticed that workers’ compensation premiums are your single highest insurance cost. Knowing the predictable cycle of premium calculation and adjustment can help you gain more control over these outlays.
Choose codes carefully
Worker classification codes are a direct determinant of workers’ compensation premium costs. As you may know, these codes are numerical classifications for different types of employees. Office workers have one code, while field workers have various others. Field supervisors have a worker classification code that’s different from the one for executives.
How insurers apply these codes is best explained by example. The worker classification code for office workers may translate into a premium of 0.005 (half a cent) per payroll dollar, while a field supervisor might cost 0.012 per payroll dollar. So, an office worker in this example who receives a $100,000 annual salary would cost the company $500 for workers’ compensation insurance per year. Meanwhile, a field supervisor who earns $100,000 would cost the business $1,200 a year for coverage.
Worker classification codes are inherited; the same groups of workers are, by default, classified with the same codes year after year. It’s difficult to justify changing the code for a given position, so it’s important to create company positions and fill them carefully, because the applicable codes directly impact your total premium cost.
Forecast postaudit adjustments
Because planning for cash flows is so important to contractors, it’s wise to know and anticipate workers’ compensation premium postaudit adjustments. They can be substantial. Some contractors provide insurers with arbitrary estimates of annual payroll at the policy renewal time. But doing so can lead to large premium adjustments at the end of the policy period.
How? Think of it this way: Construction jobs are estimated initially because a construction business doesn’t know exactly how much money it will cost to complete the project (including profit margin) until the actual job costs are totaled upon completion. In the same way, workers’ compensation premiums are estimated initially based on an estimate of payroll dollars that the company provides the insurer. Then, at the end of the policy period, the actual policy premiums are calculated based on actual payroll dollars spent.
This postaudit adjustment causes a construction business to either:
- Owe money (to make up for a low estimate of total payroll dollars for the year), or
- Receive a refund (if the total payroll dollar figures come in less than the estimates used to calculate the premiums up front).
As mentioned, many contractors leave these adjustments to chance and hope they’ll receive a refund. But by more accurately tracking and forecasting payroll costs throughout the year, you’ll have a better idea of how your postaudit adjustment will turn out. You may even be able to increase the chances you’ll receive a refund and not owe additional dollars.
Beware of OCIPs
Another often-overlooked factor in workers’ compensation costs is owner-controlled insurance programs (OCIPs). Sometimes OCIPs are negotiated into the contract so the owner pays workers’ compensation costs for field workers. If you’re paying your insurer premiums for those same employees, you’re paying twice and may not even know it!
Take an example of a construction business with a steel fabrication shop where girders are brought in, welded and partially assembled to take to the jobsite. If an owner provides an OCIP for the project, all employees working on that job are covered by that policy.
Therefore, to avoid being charged twice for the same type of insurance, the construction company’s financial controller must first remove those field employees from the workers’ compensation calculations of its insurance provider. (This applies to only the workers on that job and only while they’re working on the project in question.)
But what about the workers in the fabrication shop? The conditions of an OCIP may vary but, generally, employees in the shop for that OCIP-covered job would have their workers’ compensation premiums covered while fabricating materials for that project.
Keeping accurate time sheets for employees in the fabrication shop should allow the construction company in this example to avoid paying its own insurance provider for workers’ compensation coverage for the hours those employees worked on that job. Ultimately, this would create a substantial cost savings — or, more accurately, avoid a costly overpayment of workers’ compensation costs.
Find ways to save
Workers’ compensation costs can quickly overwhelm a construction company — especially if it turns out to be a rough year with many claims. And, of course, the last thing you want to do is pay twice for the same coverage. Work with your CPA to conduct an insurance audit and find ways to save.
Are you getting paid enough to cover insurance costs?
One way to reduce the true cost of insurance is to build reasonable allowances for workers’ compensation coverage into your bids. It’s better to know these costs and factor them into the total price of a job than to underestimate them and be surprised when your company can’t keep sufficient funds in the bank to meet payroll because premiums are much more than you expected.
During the estimating process, forecast how many workers of each classification type you’ll need for the job and how many hours they’ll likely have to work. Then multiply those hours by the premium factor(s) that your insurer will use to calculate workers’ compensation costs. In this manner, you can anticipate how much workers’ compensation insurance will cost you on that project. Be sure to later compare your estimate to the actual cost.