Order Your Survival Guide


Tips for Bidding a Wrap-up Project

Contractors must understand the program or risk losing money.

By Duke Mills -- Construction Bulletin, 4/20/2009

With President Barack Obama's stimulus package going ahead, major infrastructure projects will come on line and many - if not most - of these projects will be covered by wrap-up insurance programs.

Wrap-ups are often used in large government projects such as roads, bridges, prisons, post offices, and school districts. Some municipalities will cover several projects, such as elementary schools, in one "rolling" wrap-up program. Wrap-ups are also common in large private developments including sports stadiums, entertainment venues and shopping centers.

Wrap-ups, also known as CCIPs (Contractor Controlled Insurance Programs) and OCIPS (Owner Controlled Insurance Programs), enable the project sponsor to purchase workers' compensation, general liability, builders' risk and excess/umbrella coverage for the majority of contractors on the job.

Wrap-up RFPs ask bidders to participate in these projects with assurances that common goals and objectives are shared by all. For the contractor who understands wrap-up projects, this may be true. However, there are hundreds of ways for contractors to lose money by participating in wrap-up programs. Uninformed contractors risk losing the bid, profit in the job, and even their companies.

What you don't know will cost you. Here are four common mistakes contractors make when bidding wrap-ups and ways to avoid them:

1. No knowledge of cost of deductibles or the amounts of safety fines and penalties.

Contractors and major subcontractors typically receive a copy of the wrap-up contract before making the bid, but they don't usually see the wrap-up plan documents or the wrap-up insurance policy until after they have won the bid. These contain compliance information, describe fines and penalties, and point to details on the insurance coverage.

A plumber may have only a small percentage of profit in the job, and one leaky pipe or a few safety violations could result in thousands of dollars in fines, penalties or deductible costs.

The key to a profitable wrap-up program for the project sponsor is claims prevention, so wrap-up programs tend to have very strict safety programs.

Contractors typically need to comply with higher standards than OSHA, and may be surprised to find themselves slapped with hefty fines, ranging from $500 to $5,000 per incident, over minor safety violations

Complying with additional safety training and return-to-work programs also takes more time and money. Most likely, more safety meetings and drug tests than usual are required And, once a construction company exceeds a certain number of employees on the site, it may be required to place its own safety manager on site at its own expense. These costs need to be considered during the bid process.

Tip: Make an informed decision. Request and study copies of the wrap-up plan documents, including all fines and penalties before bidding the job and consider them when preparing the bid. The job may not be worth the risk.

2. Insurance deduction forms are not completed accurately.

Wrap-up insurance deduction forms are not standardized; they can vary dramatically from project to project, and they are almost always confusing. The big problem is these forms do not always allow contractors to deduct their discounts, deductibles and self-insured retentions (SIRs) to arrive at their lowest net cost of insurance.

Contractors can inadvertently overstate their insurance costs or fail to include their favorable experience modification, stock discounts, deductible and safety credits in their insurance costs. Some contractors use the state's standard workers' compensation rates on these forms, but that doesn't reflect the company's actual cost of insurance premiums.

The insurance deduction process can also create an unintended consequence. Contractors with poor claim experience and high experience modification rates can win projects away from competitors with better safety records. Poor safety and bad hiring practices translate into higher experience modification factors and higher insurance premiums.

Backing out the higher premium means the contractor gets to deduct more money for insurance costs and produce a bid that is lower than competitors with a good safety record and lower premiums. While most wrap-up administrators will watch for this, the forms typically don't provide space to explain lower costs.

Tip: Verify that you are using your actual net cost of insurance. Use a bid form that explains a low insurance deduction and gives the company credit for a good safety record.

3. How will the wrap-up affect traditional insurance programs?

Employers move payroll out of their traditional policies into the wrap-up. It appears that action would reduce the premium of the traditional policy. However, some insurance companies have a flat rate or minimum premium, so the contractor may pay the same amount for traditional insurance even though fewer people are covered.

Sometimes contractors have a retrospective rated workers' compensation program based on a payroll dollar volume. This is comparable to a rate discount and moving payroll out of the traditional comp policy can negate the discount and cause the cost of the traditional comp policy to go up.

Tip: Contact your insurance agent and let them know you're considering a wrap-up and ask about the impact on your existing insurance.

4. Wraps-ups require the extra administrative and accounting time.

Contractors need to keep a set of payroll records for each wrap-up project plus a set for its traditional programs. In addition, each insurance program needs to be audited, which involves more time from administrative and bookkeeping staff.

Tip: Factor additional administrative costs into the bid.

Wrap-ups are here to stay and will likely grow in popularity as more public projects are bid. Wrap-up administrator George Shank estimates that half of the country's largest contractors are already participating in OCIPs/CCIPs and rolling wrap-ups. Prime and subcontractors would be well served to identify wrap-up experts and keep their insurance brokers and other professionals involved as they work through wrap-ups.