Don’t Let Insurance & Labor Costs Eat Your Profits
As a contractor, pricing out a new project isn’t just about materials and labor. One critical factor that often gets overlooked is insurance costs, specifically General Liability (GL) and Workers’ Compensation (WC). These costs increase as your business grows, and if you’re not factoring them into your project estimates, you could be cutting into your own profits.
And if you’re working on government-funded or public works projects, you also need to account for prevailing wage rates—which significantly impact labor costs and insurance premiums.
Why Insurance Costs Increase with New Projects
Every new project you take on affects your total payroll, revenue, and risk exposure—all of which impact your insurance premiums. Here’s how:
- Workers’ Compensation is calculated based on payroll. The more labor you need, the higher your premium goes.
- General Liability is often based on revenue or subcontractor costs. As your workload grows, so does your risk profile.
- Audit Adjustments – Insurance companies audit your payroll and revenue at the end of the year. If you didn’t account for rising insurance costs, you could get hit with an unexpected bill.
The Impact of Prevailing Wage on Your Costs
For contractors working on government projects, prevailing wage laws require you to pay workers a set wage that is typically higher than standard market rates.
How this affects pricing:
- Higher Payroll = Higher Workers’ Comp Premiums
- Workers’ Comp rates are based on payroll dollars. If your labor costs go up due to prevailing wage requirements, so do your insurance costs.
Burdened Labor Costs Increase
- Along with base wages, you must account for fringe benefits, which may need to be paid in cash or toward benefits programs.
Certified Payroll Compliance
- Reporting requirements add administrative costs that should be factored into your project pricing.
How to Price Your Projects Correctly
To avoid surprises, contractors should bake insurance costs and prevailing wage factors into every bid. Here’s how:
1.Understand Your Insurance & Wage Rates
- Workers’ Comp is assigned by classification codes with different rates per $100 of payroll.
- General Liability is typically a percentage of revenue or labor costs.
- Prevailing wage rates vary by trade and location—check state and federal guidelines.
2.Estimate the Impact on Insurance & Payroll
Example:
- If your Workers’ Comp rate is 8% and you’re paying a laborer $50/hr under prevailing wage, your true labor cost is $54/hr ($50 + 8%).
- If your GL rate is 2% of revenue, for every $100,000 in labor costs, you must factor in an additional $2,000.
3.Build It Into Your Pricing Model
- Add a line item for insurance costs in your estimates.
- Apply a percentage markup to cover premium increases and compliance costs.
4.Account for Subcontractors & Certified Payroll
- Require subs to carry their own insurance to avoid being charged for them.
- Factor in administrative costs for certified payroll reporting on prevailing wage jobs.
5.Review & Adjust Regularly
- Insurance rates, prevailing wages, and fringe benefits change. Review your costs quarterly and update pricing accordingly.
Bottom Line: Protect Your Profitability
Failing to factor in insurance and prevailing wage costs can erode your margins. By proactively including GL, WC, and prevailing wage requirements in your pricing strategy, you ensure that your projects remain profitable while covering all expenses.
Need help calculating the right insurance and labor burden for your bids? Talk to your insurance broker, accountant, or prevailing wage compliance expert to get the most accurate estimates.
Stay ahead, price smart, and protect your bottom line!
By strategically offering fringe benefits on prevailing wage jobs, contractors can enjoy significant tax advantages while also boosting employee satisfaction and retention. It’s a smart financial move that pays dividends in the long run.
Stay informed and proactive about your benefits strategy, and watch your business thrive!
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