For most construction companies, workers' compensation is one of the largest overhead costs after payroll itself. The premium is not a mystery number from the insurer. It follows a formula driven by your payroll, the type of work your crews do and your claims history. Contractors who understand that formula can lower their premium, price it correctly into bids and avoid a painful bill after the annual audit.
In this article
The premium formula
Premium = (payroll / 100) x class code rate x experience modification rate, then adjusted for credits, discounts and fees. Each piece is something you can manage.
Class codes
Every type of work has a class code with its own rate per $100 of payroll. Office staff can cost well under a dollar per $100, while roofing and some framing and steel codes can cost many times more, depending on the state. Assign each employee and each hour to the correct code. Putting a project manager who never touches tools in a field code overpays; putting a carpenter in a clerical code is a problem at audit.
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Experience modification rate
The EMR compares your claims history with similar companies in your state. An EMR of 1.0 is average, 0.80 means you pay about 20% less and 1.25 means about 25% more. The EMR is based on several past years of claims, so a good safety record today lowers premiums for years. Many owners and general contractors also use the EMR to decide who can bid.
The year-end audit
The premium you pay during the year is an estimate. After the policy ends, the insurer audits your actual payroll and subcontractor payments. If payroll grew, or if you paid subcontractors who had no insurance of their own, you receive an extra bill.
Uninsured subcontractors
If a subcontractor does not have its own workers' comp, your insurer can charge premium on what you paid them. Collect certificates of insurance before work starts and keep them current for the whole job.
Ways to lower the premium
- a written safety program, training and toolbox talks;
- return-to-work programs that bring injured workers back on light duty;
- correct class codes and payroll split by code;
- certificates of insurance from every subcontractor;
- pay-as-you-go billing tied to payroll, which avoids big deposits and audit surprises;
- shopping the policy with an agent who specializes in construction.
Price it into bids
Calculate workers' comp as a percentage of field labor by trade and include it in your labor burden. A bid that ignores it is underpriced from day one.
An example
A framing contractor in Colorado with $1.4 million in field payroll had an EMR of 1.18. It started weekly safety meetings, a return-to-work program and certificate tracking for every sub. Three years later, its EMR dropped to 0.86, and with the same payroll its premium fell by more than $40,000 a year.
Common mistakes
Wrong class codes, paying uninsured subs, ignoring the EMR, no return-to-work program, skipping workers' comp in the labor burden and being surprised by the audit every year.
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Frequently asked questions
How is workers' comp premium calculated for a contractor?
The basic formula is payroll divided by 100, multiplied by the rate for each class code, multiplied by your experience modification rate, minus any credits or discounts. A roofing crew and an office manager are rated very differently, so each employee's payroll must be assigned to the right class code.