Properly Deducting from Uninsured Subcontractors

Workers Comp for Building Contractors

There’s a lot to know about how to properly deduct or withhold from uninsured subcontractors.

It’s critical that you properly administer this important function because one small mistake can be costly. What’s worse is that if you make a mistake, you may not realize it until your audit and by that time it will probably be too late go back to the sub and ask for more money.

We highly recommend that you don’t use uninsured subs because doing so places your own insurance loss record at risk. This can result in future rate increases or non-renewal by your carrier. It also results in an administrative hassle and expense. Most builders intend to only use insured subs. But the reality is that most end up with at least several that are uninsured.

Insurance carriers that write Workers’ Comp and General Liability usually don’t have a problem with builders using uninsured subs. However, there are some exceptions. Many carriers won’t insure builders who intend to use uninsured roofing subs because of the high-risk nature of their work. And from a General Liability perspective, you’d never want to use an uninsured mechanical sub, such as an electrical, plumbing, or HVAC. These areas are also considered high risk for occasional large losses.

An uninsured sub is one who can’t provide you with a valid certificate of insurance for Workers’ Compensation and/or General Liability for the period they’ll perform work for you. We’ve strongly recommend visiting our page on how to properly collect certificates of insurance. A lot that can go wrong in this area.

Preparing for the annual audit

You’ll be audited at the end of your Workers’ Comp and General Liability policy year. You’ll have to provide the auditor with a valid certificate of insurance for each of your subs. If you do this, you won’t be charged extra for the use of uninsured subs. If you can’t provide a valid certificate of insurance, the auditor will make a charge as if the uninsured sub is your employee.

This extra insurance charge upon audit is a cost of doing business that should be accounted for. It’s standard within the industry for builders to deduct or withhold from their payments to uninsured subs to offset this extra insurance charge.

Uninsured Sub Rates per $100 of Amounts Paid for Labor*

The charges for the use of an uninsured sub are significantly higher for Workers’ Comp than for General Liability.  For this reason, some builders choose not to deduct for uninsured subs on their General Liability. However, if you don’t deduct for General Liability, you’re leaving a lot of dollars on the table and not giving your sub incentive to get his own coverage.

A real-life example

The table below is a comparison of rates in South Carolina from a carrier that specializes in insuring builders. The rates per $100 also translate into the percentage that you would need to deduct. For example, the Workers’ Comp rate per $100 of payroll for residential carpentry is $19.51. You can also think of this as having to deduct 19.51%.

Classification                 Workers’ Compensation      General Liability

Residential Carpentry             $19.23                             $ 5.86

Masonry                                      12.14                                2.42

Concrete Foundations                 7.14                                5.30

Roofing                                       19.23                               14.93

Land Clearing                              8.41                                 3.76

* Rates based on a carrier in South Carolina

Labor vs. Material

Upon audit, your insurance carrier will only apply the classification code rates to the labor cost provided by the uninsured sub. The rates are not applied to the cost of materials provided by the sub. Therefore, only base your deductions on sub labor charges when deducting from the uninsured sub..

Hopefully, the sub’s invoice will break out labor vs. materials and simplify the process. If not, ask for a revised invoice that breaks out the labor and materials charges. If you can’t get a revised invoice, your auditor has wide discretion in estimating the labor percentage. There are two rules of thumb that are commonly followed when there is no break out on the invoice and when the sub provides all materials. The first assumes that the labor charge will be for 50% or more of the invoice total. The second is when the sub uses heavy equipment, such as for land clearing or excavation, most auditors will assume that only 33.3% of the invoice is allocated to labor.

Rules for Deducting the Proper Amount


Once you’ve determined the labor charge for each uninsured sub, you need to properly classify the type of work that each performs. The classification rules for builders can be complicated, especially as concerns the use of the residential carpentry classification.

Residential Carpentry is an expensive classification code for a builder. For example, in South Carolina, one carrier’s current rate Workers’ Comp rate  is $19.51 per $100 of payroll and  $11.26 per $100 of payroll for interior trim. According to the technical rules published by the National Council on Compensation Insurance (NCCI), which most insurance carriers follow, all framing, siding, roofing, interior trim, wallboard, and floor installation, when performed by a general contractor at a worksite must come under the residential carpentry class code. Furthermore, the governing classification rule is responsible for dumping inside cleaning and yard debris removal into residential carpentry as well in most cases.  However, some carriers or self-insurance funds follow what I call common sense rules and will allow a breakout of the less expensive class codes to be used such as interior trim, wallboard, janitorial, and debris removal. You need to be aware of how your carrier handles this situation to properly deduct.

Applying proper rates

Once you know the proper classification code, you apply the appropriate rate per $100 of labor paid to the uninsured sub The proper rate for each classification code can be obtained in a variety of ways. You can find it on the rate page of your insurance policy which is a page near the front of the policy that breaks out the rates for each classification code. These rates are based on per $100 of labor for Work Comp and per $1,000 of labor for General Liability. Or you can ask your insurance agent to provide a withholding rate sheet that lists the rates for each class code for both Workers’ Comp and General Liability.

It’s important to note that the pure rates per $100 of labor may not reflect your true cost of doing business. The reason is your policy may reflect additional credits and surcharges  applied after the specific classification code rates. For example, if your Work Comp policy has an experience modification of 1.2, your actual cost will be 20% higher than the classification code rates. You might want to refer to Workers’ Compensation – Part 2 for information on experience modifications.

Some builders add an administrative hassle surcharge on top of the normal rates in order to offset admin expenses and provide incentive for the subs to get their own policies.

And finally…

Don’t commingle amounts you deduct should with your operations account. Instead,  place them in an escrow account  to make sure that you have funds available to pay your audit bill