While wrap-ups help project owners save money and handle insurance more efficiently, they are fraught with unanticipated expenses for contractors and subcontractors, this expert says. 

Hopefully, the $787 billion stimulus package’s emphasis on shovel-ready construction projects will quickly bring work into HVAC, sheet metal and similar firms.

Many of these large construction projects will be covered by “wrap-up” insurance programs, which are often present in large construction projects such as schools, prisons, entertainment and sports facilities, hospitals and military institutions.

While wrap-ups help project owners save money and handle insurance more efficiently, they are fraught with unanticipated expenses for contractors and subcontractors.

Also called contractor-controlled insurance programs (CCIPS) or owner-controlled insurance programs, wrap-ups enable the project sponsor to purchase insurance for most contractors on the job. Requests-for-proposals ask HVAC and other subcontractors to deduct the cost of workers’ compensation, general liability and excess/umbrella coverage when bidding the job. Once engaged in the project, the cost of insurance per payroll dollar is deducted from contractor’s bill. The contractor still ends up paying the insurance, just not directly.

Successful participation in a wrap-up starts with providing the true and lowest net insurance costs on the insurance deduction worksheet. However, bid worksheets are confusing and often do not allow space for deducting discounts or showing deductibles, self-insured retentions or factoring in favorable experience modification ratings and safety credits.  Subcontractors frequently overstate their insurance costs, an expensive error resulting in a higher than necessary insurance deduction from their payments.

There are numerous other ways for HVAC and other subcontractors to lose profit and incur costs in a CCIP. Each wrap-up project requires its own audit, representing more bookkeeping, administrative and management time. A firm working on three wrap-ups needs to do three audits, in addition to the audit of the company’s traditional insurance programs. These additional audits contain a high rate of errors usually favoring the insurance companies both for the wrap-up and traditional policies.

During the audit, the subcontractor needs to ensure that the percentage of deduction used in the bid remains the same as the end-of-the-year deduction.  In addition, companies need to verify that the payroll they moved to the wrap-up was removed from their traditional insurance program so they aren’t paying that portion of the premium twice. This doesn’t happen automatically; management needs to inform insurance agents for traditional policies when getting involved in a wrap-up project and make sure they aren’t paying for payroll on the wrap up that is also covered under the regular policy.

The main thing HVAC contractors need to understand is that the wrap-up administrator is all about saving money on the insurance. Here is how it works: if all the subcontractors and contractors on a project were paying for their own traditional insurance and the total insurance cost was $10 million, the wrap-up administrator might negotiate a $2 million premium by offering to pay any claims that may occur on the job.

This gives the administrator an $8 million incentive to prevent claims through stringent safety programs, heavy-handed fines and deductibles. Contractors are often surprised to learn that some wrap-ups’ safety guidelines exceed Occupational Safety and Health Administration standards. There are more drug tests, more safety training and more meetings, and if the company has enough workers on a job, it may be required to put a full-time safety officer on site. These are costs to consider when bidding the job.

Plus, stiff fines are levied for relatively minor safety infractions and even heftier fines for things like not reporting a claim within 24 hours. Not reporting an injury can really cause fines to soar. While this practice is discouraged, some contractors opt to pay out of pocket for “first aid” type injuries to avoid an increase in their future experience modifier.

If an employee cuts his of her finger and needs a butterfly band aid, the sheet metal company may think it’s easier to pay a doctor direct rather than dealing with the multiple insurance company representatives. However if the finger gets infected or other problems ensue and the insurance company eventually gets involved, the contractor can be subject to a fine from the wrap-up administrator. For example, under a wrap-up project at Yale University, contractors pay $5,000 for not reporting a claim within 24 hours.

Return-to-work is mandatory in most wrap-up contracts. While this is a sound injury management practice, there are times when a contractor can’t find transitional duty or just doesn’t want the employee back at work. \In an extreme example, one of my clients faced a situation in which a doctor released an injured construction worker for light duty, recommending clerical work.  My client protested this vehemently, saying, “I can’t let that guy work in the office, he got my 16-year-old daughter pregnant.” 

Because the claim was under a wrap up, the client had no recourse but to assign the injured employee to office work. Under the contractor’s traditional insurance program clerical duty would be recommended but not required.

The wrap-up administrator may issue a fine for every day that the employee is out of work after being released for light duty. These fines can be as high as $1,000 a day.

Compliance, audit regulations, and safety programs with their fines and penalties are covered in the wrap-up documents the subs receive after “winning” the job. During the bid process, they usually receive a copy of the wrap-up contract, but it does not usually spell out the details contractors need in order to make an informed decision.

In some cases, it doesn’t make financial sense to even participate in a wrap-up. In all cases, subs need to be aware of the potential costs, prepare for them and protect their profits. When bidding, subs should request and study the wrap-up manual, wrap up insurance policy with all its forms, insurance binder, and contract documents. Then they need to confer with their insurance agents to see how participating in the wrap-up may affect their traditional insurance policies and how to calculate their real cost of insurance.

It’s wise to keep the insurance agents involved throughout the entire process. Their industry knowledge is invaluable during the audits and at the end of the contract. Wrap-up consulting is time consuming and requires a great deal of expertise and great attention to detail and agents need to be fairly compensated for this, typically 15% of the insurance deduction is fair. Some will work on an hourly rate and some will work on a contingency basis, splitting the savings from errors they find.

If your agent is not comfortable consulting on wrap-ups, it is in your financial best interest to find one who is. You do not necessarily have to change the agency of record, but you should deal with a wrap-up expert who can help you navigate the nuances, make informed decisions and adequate bids and help ensure that the audits are completed correctly.