How to Calculate Insurance Credits for Time and Material Contracts

Calculating OCIP/CCIP credits can be challenging for lump sum contracts; however, there are set procedures that can be followed and are universally accepted when calculating these credits. Calculating accurate insurance credits when a contractor is paid on a time and materials basis can be much more challenging and confusing. This is especially true on GL-Only Programs or other wrap-up programs where on-site payroll is not tracked throughout the project.

Here are a couple approaches to successfully tackling this issue.

Using a set contract value of $1,000, you can determine a payroll estimate % associated with the $1,000. Using the payroll estimate and the contractor’s policy rating pages, you can calculate the insurance cost for a $1,000 contact. This will give you an insurance cost % to use going forward.

Example: Initial Contract Value = $1,000, Insurance Cost = $30 (3%);

Final Contract Value = $25,000, Final Insurance Cost = $750 (3%)

Another approach is to acquire a breakdown of the contractor’s labor rate. On the labor rate sheet, you can identify what the contractor is actually charging the job for the insurance coverages that are being provided by the wrap-up. Once the charges of insurance are identified, they will be removed from the contractor’s labor rate. The new rate will be net of the insurance costs that are provided by the wrap-up. The net rate will be used for all billings.

Example: Initial Labor Rate = $31.30, Insurance Cost = $0.79 (2.531%);

New Net Labor Rate Value = $30.51.  The final cost avoidance (or insurance cost amount) can be calculated by tallying the total hours worked and multiplying this amount by $0.79 per hour.

Identifying and extracting insurance credits from contractors enrolled in wrap-ups should be motivated by one objective, accuracy. These two suggested methods provide accurate alternatives for time and material contracts.

Have you found any other approaches that work? Leave us a comment below.

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