Managing Workers’ Compensation Costs in the Construction Industry

Posted on 09.20.13

construction workersBy Abbie Ceneviva, CPA | Business Assurance & Advisory Services Manager

Virginia law requires every employer who regularly employs three or more full or part-time employees to purchase and maintain workers’ compensation (“WC”) insurance. For many industries, particularly construction, WC insurance accounts for the largest insurance expense item. While overall cost control and management is often a top priority and subject of conversation for those in the construction industry, managing WC costs is routinely under-emphasized or altogether ignored. There are several common solutions that can go a long way in helping construction companies manage their workers’ compensation costs.

A 2012 study by Valen Analytics showed that the construction industry has the largest percentage of misclassified payroll resulting from misclassified payroll class codes. These classifications influence the insurance rates employers pay for their WC coverage. For construction workers, multiple class codes may be assigned to a single employee, depending on the work performed. For example, an employee may participate in carpentry as well as clerical work, the class codes for which bear significantly different premiums. Grouping both categories of work under a single class code may result in paying signficiantly higher premiums than necessary.

In a separate study conducted by the Construction Industry Institute (CII), many contractors treat WC costs as an overhead expense and do not directly assign the responsibility, accountability, or allocation of the costs to specific managers, supervisors, or projects. The CII also found that when owners do attempt to manage their WC expenses, they are placing too much emphasis on the experience modification rate ("EMR") as a measure of contractor safety performance. It is looked upon as the sole indicator in the carrier selection process, when the study actually found that Occupational Safety and Health Administration ("OSHA") incidence rates for companies who do not track safety results by project are twice the rates of companies who do.

By following a few best practices, construction companies can realize significant savings and directly reduce their WC insurance costs. Most improvements can be made in the area of proper record keeping. Maintaining accurate payroll records as well as incidence and safety results is crucial in a company's ability to negotiate rates with insurance providers and actively manage their WC policies. Doing so helps prepare a company for its annual WC audit by creating audit efficiencies, but if significant issues are found it can lead to and avoid coverage gaps or increased rates by preventing any significant audit findings. In recent years the annual WC audit has also been focusing in on the roles of subcontractors. Uninsured subcontractors usually have the same rights as employees to file a claim under a company's policy. As a result, maintaining adequate and accessible information for all subcontractors, in addition to internal records discussed above, can result in significant cost savings.

In a time of squeezed margins and increased focus on cost controls throughout the construction industry, implementing a few best practices can have significant impact on controlling workers' compensation expenses.

Questions on this topic? Contact your Keiter representative or aceneviva@keitercpa.com.