Good Workers' Comp Records Can Save Big
Make Subs Part of the Team
Use the 80/20 Rule to Improve
Good Workers' Comp Records Can
Save Big Bucksby Shawn McCadden,
Before I had my own remodeling business, I worked for someone
else. Every year, when my boss's workers' comp audit came
around, he would be in a bad mood before the audit and an even
worse mood afterward because he always ended up owing more
money. He reminded me of that whenever I asked for a raise,
complaining about how much more it cost than he had
When I started my company, I was determined not to repeat that
pattern. So I would know what to charge before I sold my first
project, I put together a budget to predict what it would cost
to get the business up and running. Because I planned to have
employees, workers' compensation insurance would be one of the
How Premiums Are Determined
My insurance agent explained that, for the most part, my costs
would be based on the total payroll for the employees insured.
I should be able to watch the payroll and predict the total
cost. This would allow me to carry the true cost of labor in my
estimates and know in advance whether I would owe money or get
a refund at audit time.
The yearly premium for workers' comp is based on the estimated
payroll for the year (see Figure 1).
Calculating Expected Annual Comp
Contractor — executive supervisor or
Carpentry — detached one- or two-family
Clerical office employees
Office staff 1
Office staff 2
Figure 1.The author uses a spreadsheet to
accurately predict his annual workers' comp premiums. Rates are
applied as a percentage of total payroll for each job
In most states, business owners can negotiate the payment
schedule with their insurance carrier. Insurance companies
typically require a substantial down payment and bill the
remainder monthly or quarterly. At the end of the year the
insurance company will audit your books to determine whether
your estimate was high or low. If it was low, you will owe an
additional amount for the excess hours. If it was high, you
should get some money back — as long as you have the
records to prove it.
The lion's share of my premium is based on payroll, but the
policy also includes miscellaneous fees, like taxes,
surcharges, service charges, and state assessments. Some are
fixed charges, while others are based on total premium or
yearly sales volume. The amounts vary from state to state; the
examples described in this article are for Massachusetts.
Classifications and Rates
Some jobs are more dangerous than others, which is why
insurance companies charge different amounts for different
positions. Each job position is given a classification rate.
Your office manager will get a low rate, while field employees
such as carpenters will get a high rate. My carpenters fall
under code 5645, "Carpentry, detached one- or two-family
dwellings." Their rate is $9.93 per $100 of payroll.
The total payroll for all employees doing a particular job is
called the exposure for that classification. You can calculate
your insurance cost (premium) by multiplying the exposure
(total payroll) by the rate for that classification. For
example, if my carpentry payroll is $10,000, the premium for
carpentry would be $993 ($10,000 x .0993).
The total premium is determined by adding the premiums for
each job classification. As you can see from the rates in
Figure 1, you can save a lot of money by putting employees in
the lowest correct job classification.
My premium includes the following three discounts, which give
me another way to save (Figure 2). These discounts apply only
to exposure costs, not to miscellaneous fixed fees.
Applying Discounts to the Experience
Experience Modification Factor
Final Discounted Rate
Companies with a good safety record
receive a favorable experience modification factor. The
author's experience rating is .85, which means he gets a 15%
discount off published rates for all labor classifications.
After applying additional credits, his final discounted rate is
76% of the book rate for any job class.
factor. The modification rate depends on the company's
safety record. If your record is good, you get a discount; if
not, your premium will rise. My company has very few comp
claims, so we enjoy a .85 modification factor. That means we
pay only 85% of the standard premium; in other words, we get a
15% discount. If your rate is higher than 1, you're paying a
Premium discount. This is
set by the state. Its premise is that it costs the insurance
company the same amount of overhead to write and manage a small
policy as it does to write and manage a big one. I have a
relatively high premium, so I get a discount.
SMP credit. This is a
discretionary discount given by the insurance carrier.
Auditing the Auditor
Workers' comp is expensive to begin with, but it can be even
worse if you take the insurance company's word for what you
owe. I've been through 14 years of audits, and there have been
very few when the auditor didn't make a math error, put an
employee in the wrong classification, or put every employee in
the most expensive classification.
Early on, I created a spreadsheet to predict and track my
actual workers' comp exposure (Figure 3). It has saved me
countless hours of frustration and unjustified expense.
Monitoring Comp Premiums Through the
Estimated Annual Payroll
Actual Payroll Through 6/30
Reprojected Annual Payroll
Figure 3.Comparing budgeted payroll hours, or
exposure, with actual hours allows the author to predict
whether he will owe additional premiums or can expect a
year-end refund, as in this example.
Every year I send a copy to my insurance agent. As a result,
he now gives me the benefit of the doubt when there's a
discrepancy and tells the insurance carrier to correct its
audit. My agent told me that nine out of ten businesses do not
review their insurance audits closely and are most likely
If you want to check your audit, you need to understand how
your policy works. Terms and coverage vary from state to state.
In Massachusetts, an employee can be assigned to only one
classification, usually the most expensive one that he or she
works in. In other states, employers are allowed to break out
the hours employees spend on tasks that fall into different
classifications. This can save a lot of money if the
classifications have very different rates.
When my company was small, it was easy to do my own audit.
There were only two classifications, and the payroll was not as
big as it is today. It's more complicated now, but it's been
worth it — particularly the year the insurance company
said I owed an additional $10,000. I figured the insurance
company owed me about $1,500, but the agent wouldn't believe
it. That's when I created the spreadsheet. Once he saw it, he
conceded that I was right.
Since then, I always do my own audit before the insurance
company does it. When the auditor shows up, I give him my audit
and supporting documents from the insurance company. We go over
the figures together, and I insist that he point out anything
he takes issue with before he leaves my office. It's much
easier to sort things out in person — it saves me from
spending hours on hold or having to re-explain the situation to
a different auditor later on.
Tracking Comp Premiums
Keeping good records allows me to check my financial status
periodically and make necessary adjustments. Doing regular
workers' comp "self-audits" has been very helpful. If I find
that I will owe additional premiums at the end of the policy
period, I have time to accumulate cash for what might otherwise
have been an unexpected bill. I also have time to pass that
cost on to clients, since unexpected payments typically end up
coming out of profit.
If my self-audits indicate that I've actually overpaid my
premiums, I have time to gather the necessary records to prove
my case to the insurance company auditor.
Shawn McCaddenis president of
Custom Contracting in Arlington, Mass., and cofounder of the
Residential Design Build Institute
Make Subs Part of the
In my work as a custom home builder, every day comes with its
share of problems. Running from job to job to put out fires can
be a full day's work in itself. The last thing I need is
trouble with my subcontractors. So I've learned to apply a few
simple rules, based on the notion that subcontractors are part
of my team. It sounds simplistic, but it works. And though
we've all heard it before, it still surprises me how often the
team approach is ignored.
A team that works together stands a better chance of producing
a successful project and satisfying the homeowner, which
Hire the best subs. I want
subs on my jobs who are as interested in the success of their
businesses as I am in mine. In large part, our jobs are only as
good as our subcontractors, so I try to make sure they're
serious about what they do. How many times have you told a
homeowner that a sub will start on Tuesday only to have no one
show up? This makes a bad impression on the homeowner and
delays the work of other subs.
Put the right people in the right
places. Would you have a 300-pound offensive lineman go
down the field for a long bomb? Of course not, so why would you
let your mason do your flashing? I try to pay attention to
every subcontractor's strengths and weaknesses and put them in
a position to succeed.
Keep every sub apprised of the
job's progress. Is it fair to tell the painter one week
in advance that the inside of the Miller house is ready for
paint and the carpets will be installed in two weeks? Even if
the painter could pull it off, you'd probably get a sloppy job,
and the painter would be annoyed. Subs have every right to be
kept abreast of the project's progress so that they can arrange
their schedules accordingly.
Motivate subs. The project
may have our company sign out front, but the subs need to be
just as enthusiastic about it as we are. This is often as
simple as paying a compliment. I let our subs know that we
value the good work they're doing, and that because of it "we"
just landed another job.
Communicate your company's job
policies. We have certain guidelines for behavior on our
job sites, and we want our subs and their employees to follow
them. I make sure they all understand what's expected. For
example, we make it clear that it's unacceptable for them to
discuss matters like pricing and scheduling conflicts directly
with the customer. They often have no idea of the
misunderstandings they can cause.
Treat subs the way you like to be treated. Although I
may be the "boss" on the job, we are all professionals working
toward a common goal. Some of my subs tell me about "big time"
builders who don't even bother to say hello. It's important to
always convey a feeling of inclusion, that this is a team
project that can't be done well without great subs.
Fred Seifertand his brother John operate Seifert
Construction in Mattituck, N.Y.
Use the 80/20 Rule to Improve
Efficiencyby Judith Miller
Contractors suffer a deluge of information, much of it
valuable and some of it vital, all of which must be sorted
through to run a successful company.
When your company is just starting out, you barely have a
moment to step back and analyze. You're constantly juggling
your time — time on the job producing the work, time in
the office pricing the work and billing for it, and time with
new clients lining up the next project. As your company
matures, you begin to oversee the efforts of others who perform
the tasks you used to do. Hopefully, this frees up time for you
to step back and look at the big picture.
Unfortunately, that is not usually the case. Peter Feinmann,
of Feinmann Remodeling in Boston, once told me that he was
surprised to find that as his company grew and he began to
delegate, he had even less time to focus on strategy and
growth. His days were increasingly spent helping other people
deal with the requirements and problems of their own
As your company grows, so does the volume of information, as
well as its complexity. Finding a way to determine what's
important can overwhelm even the most organized
Enter a Cliché
The old adage "Separate the wheat from the chaff" describes
the process of determining what information is essential and
what is nonessential. In business lingo, this is sometimes
referred to as the 80/20 rule. It states that 80% of the value
derives from 20% of the effort, and that that relationship
holds across everything you do. Although you may quibble about
the exact ratio, you can use this simple principle to focus on
the "vital few" — those people, activities, and job types
that make the greatest impact on your business — rather
than squandering precious time on the "meaningless many."
For example, this means that 80% of your job referrals come
from 20% of your clients, and that 20% of your jobs produce 80%
of the profits. Conversely, 20% of your jobs also produce 80%
of the losses. When applied to employees, the rule predicts
that 20% of your employees are responsible for 80% of job
success and client satisfaction. A different 20%,
theoretically, are responsible for bad morale and missed
Putting the Rule to Work
The challenge is to see the patterns in all the information
coming your way, then to determine which 20% provides the 80%
In Managing the Small Construction Business (jlcbooks.com),
remodeling contractor John Sylvestre describes how his
company's time card evolved from having over 70 item codes to
having just 10. The card with 70 codes took field staff far
more time than it was worth to fill out, and the extra level of
detail wasn't really useful back in the office. Applying the
80/20 rule to time tracking, Sylvestre determined that only 10
cost codes could give him the vital information he needed for
Look at Labor
In all the remodeling companies I've worked with over the
years — mostly companies that sub out everything but
carpentry and job supervision — labor management provides
the 20% when it comes to controlling costs. And only a few
labor categories consistently run over budget: supervision,
setting up and taking down the job, material handling, trim
carpentry, and punch list.
As an example, owners of a busy kitchen and bath remodeling
company I worked with noticed they were chewing up valuable
time at the beginning and end of every job, as well as setting
up and cleaning the site daily. Focusing on those two areas,
they developed a mobilize-demobilize checklist, on both a per
job and a weekly basis, which listed every task and every piece
of required equipment. By following the checklists, they
reduced their typical job setup time from most of one day to
half a day. Daily setup and takedown were reduced from 1 hour
(30 minutes morning and afternoon) to 30 minutes total.
Multiplied through the year, that reduction gave them back more
than three weeks of billable production time.
Where to Start
Although you juggle many balls simultaneously, the big picture
looks the same for every contractor, in every state, at every
stage of growth: Your three goals are to satisfy clients, to
have satisfied employees, and to make a profit.
To put the 80/20 rule to work, dig more deeply into whichever
area currently distresses you most. Even though the three areas
function together, choosing one on which to focus can help you
to achieve the most good most quickly. You will be able to
focus on the others in turn after resolving the first.
Judith Milleris a financial management consultant for
builders and remodelers, and a frequent speaker at