One of the most common mistakes contractors make when bidding a job is underestimating the true cost of their insurance.
A job may look profitable when you compare the contract price to your labor and material costs. But if you fail to properly account for your General Liability and Workers’ Compensation insurance costs, that profit can disappear quickly.
At Insurance Incorporated, we frequently see contractors who know what they pay for materials and labor but do not know what their insurance actually costs them on each job.
Insurance Is Part of Your Cost of Doing Business
When you prepare an estimate, you probably calculate:
-
Materials
-
Employee wages
-
Subcontractor costs
-
Equipment
-
Fuel and transportation
-
Overhead
-
Profit
But what about your insurance?
Your Workers’ Compensation and General Liability premiums can represent a significant percentage of your labor or gross receipts. If those costs aren’t built into your bids, you may unknowingly be paying the insurance expense out of your profit.
For example, suppose you estimate a project will generate a 15% profit margin. If you did not account for several thousand dollars of insurance expense associated with that work, your actual margin could be substantially lower.
Workers’ Compensation Rates Matter
Workers’ Compensation insurance is generally tied closely to payroll and employee classifications.
Different types of construction work can have very different Workers’ Compensation rates. A contractor performing relatively low-hazard work may have a very different insurance cost than a contractor performing roofing, framing, concrete, excavation or other higher-hazard operations.
That means contractors should understand approximately how much Workers’ Compensation insurance costs for every $100 of payroll.
If your true Workers’ Compensation cost is $15 for every $100 of payroll, for example, a $20,000 labor component doesn’t really cost you only $20,000.
The Workers’ Compensation component alone could add approximately $3,000 before considering taxes, benefits, General Liability insurance and other overhead.
If that expense wasn’t included when you bid the project, it comes directly out of your expected profit.
General Liability Can Affect Your Job Cost Too
Contractors can make a similar mistake with General Liability insurance.
Depending on the policy and type of contractor, General Liability premiums may be based on factors such as:
-
Payroll
-
Gross sales or receipts
-
Subcontracted costs
-
Type of work performed
-
Classification of operations
Many contractor policies are also subject to an annual audit.
That means the insurance company may review your actual exposure after the policy expires. If your payroll, sales or subcontractor costs were higher than originally estimated, you could receive an additional premium bill.
A contractor who does not account for this while bidding projects can have a very unpleasant surprise at audit time.
The Cheapest Bid Is Not Always the Most Profitable Bid
Contractors naturally want to remain competitive. But continually lowering your price without understanding your actual operating costs can result in doing more work while making less money.
Consider a contractor who bids a project at $100,000.
After materials, payroll, subcontractors and other expenses, the contractor expects to make $15,000.
But suppose the contractor failed to include:
$5,000 in Workers’ Compensation costs
$2,500 in General Liability costs
$1,500 in other insurance-related overhead
That anticipated $15,000 profit could effectively become only $6,000.
The contractor didn’t necessarily price the construction incorrectly. The contractor simply failed to calculate the true cost of performing the work.
Know Your Insurance Rates Before You Bid
Contractors should have a basic understanding of their insurance costs before estimating projects.
Ask your insurance agent:
What is my Workers’ Compensation rate?
What classifications apply to my employees?
How is my General Liability premium calculated?
Is my policy auditable?
How are subcontractors treated at audit?
What documentation do I need to maintain?
Once you understand these numbers, they can become part of your estimating process instead of an unexpected expense later.
Proper Payroll Records Can Make a Difference
For contractors performing different types of work, proper payroll records can also be extremely important.
Depending on applicable Workers’ Compensation classification rules, payroll may sometimes be divided between classifications when the required contemporaneous records are maintained.
Poor recordkeeping can potentially result in payroll being assigned differently at audit than the contractor expected.
Accurate timecards and payroll records aren’t simply bookkeeping. They can have a direct effect on your insurance costs.
Your Insurance Agent Should Help You Understand the Numbers
Your insurance agency should do more than simply send you a policy once a year.
At Insurance Incorporated, we work with contractors to help them understand how their insurance program affects the actual cost of doing business.
As an independent insurance agency, we have access to multiple insurance markets and can help contractors evaluate:
Workers’ Compensation
General Liability
Commercial Auto
Tools and Equipment / Inland Marine
Commercial Property
Umbrella and Excess Liability
Before you bid your next large project, make sure you know what your insurance is really costing you.
A contractor who understands his or her true costs can price jobs more accurately, protect profit margins and avoid unpleasant insurance audit surprises.
Need help reviewing your contractor insurance costs?
Contact Insurance Incorporated at 877-898-9333 or visit www.insuranceinc.com to discuss your coverage and available insurance markets.
