How to Properly Deduct from Uninsured Subcontractors

Workers' Compensation for subcontractors

Making deductions can be complicated and one mistake can be costly.

Doing things right from the get go is the key when making deductions or withholdings from uninsured subcontractors. I can’t stress enough the importance of this function as one small error discovered by your insurance auditor can be very costly.

Uninsured subcontractors pose risks

An uninsured sub is one who can’t provide a certificate of insurance for Workers’ Compensation, General Liability, or both. It is recommended that you don’t contract uninsured subs. However, few builders are successful in completing a project where 100% of their subcontractors are insured.

Insurance carriers don’t usually don’t take issue with uninsured subs, but exceptions exist. Many carriers won’t insure a builder who uses an uninsured roofing sub because of the high risk nature of this line of work. Likewise, never use an uninsured mechanical sub, such as electricians, plumbers or HVAC workers, because they pose high risks for occasional large liability losses.

What to deduct and what not

Much higher fees are charged for Workers’ Compensation than for General Liability when using an uninsured sub.  Some builders make the choice not to deduct for General Liability for uninsured subs. However, not doing so leaves a lot of money on the table and offers those subs no incentive to buy their own policies.

Your insurance auditor may only apply classification code rates to the subcontractors’ labor costs, not the cost of materials they provide. You should request that subs breakout labor and materials on their invoices and base your deductions solely on the the labor charges.

Once the labor charges for each uninsured sub have been established, the type of work that each sub performs requires classification. Because this can be a complicated task, particularly for residential carpentry, we invite you to view our video which offers more detailed information on this subject.

Money in the bank

You might want to charge uninsured subs an administrative surcharge to offset administrative expenses and motivate them to get their own policies.

Never combine deductions with your operations account. It’s best to deposit them in an escrow account to be held until which time the funds can be used to pay your audit bill.

You’re invited to learn more about dealing with uninsured subcontractors and other important topics in our risk management training videos for builders.

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