OCIP Feasibility Studies are Critical to Determine Viability

Is an OCIP the most viable risk management approach to use for your construction project?


That depends! To answer this question, it is critical that you prepare an OCIP Feasibility Study.



First – What is an OCIP?


An owner controlled insurance program (OCIP), aka a “Wrap-Up Insurance Program” is a highly efficient risk financing mechanism and an increasingly popular alternative to using traditional insurance coverage techniques on many construction projects. With an OCIP, the interests of the project owner, construction manager, contractors and subcontractors are covered by one consolidated and controlled insurance arrangement, or “wrapped up.”


An OCIP also provides a single point of focus for safety and claims management offering a project owners and the OCIP participants a coordinated approach specifically tailored to the project. This eliminates disputes among contractors and their insurers, reduces disruptions at the project jobsite, and can minimize potential delays attributed to accident investigation. In addition, an OCIP can facilitate in boosting small business opportunities for disadvantaged or minority contractors by eliminating some insurance cost and coverage barriers.


In a traditional insurance program, contractors, subcontractors, engineering consultants, construction managers and project owner all provide their own separate insurance coverages. By having the project owner control the insurance procurement, broad and uniform coverage with high liability limits can be provided for all contractors and subcontractors under a master insurance and risk management program. The total premium to cover the project owner and contractors under an OCIP tends to be significantly less than the total premium charged if each contractor buys its own insurance and includes this cost, plus any mark-up, in its bid.


By using an OCIP, the potential cost savings on large construction projects can range between 1% – 3% of a project’s total construction value or cost, depending on several variables including the coverages included in the OCIP, location, insurance market conditions, etc. On project with large TCVs this can be a significant potential cost savings. Additional cost savings can be achieved by implementing contractor deductible charge-backs, which is an effective risk-transfer method for passing responsibility for insurance policy deductibles to contractors.



Second – What is an OCIP Feasibility Study?


An OCIP Feasibility Study is a document that is prepared to perform a risk assessment and serves as a decision tool to evaluate risk factors for deciding on using or not using an OCIP for a program or project under consideration. It is a detailed review of the specific idiosyncrasies of the project. It provides a substantive risk management assessment to determine if an OCIP is a viable option to be used and validates the reasonableness of an OCIP prior to the placement of project insurance coverage and the start of construction.


The feasibility study should be prepared taking a holistic approach to ensure that all attributes of designing and implementing a successful OCIP are addressed. It should address all the phases of an OCIP, including a project’s risks & exposures, location, critical mass, type of construction, and insurance program structure. It should cover formation, implementation, and administration, as well as management during the course of construction, project close-out, and final audit.


A feasibility study is designed to provide more than a cursory risk assessment for a Go/No-Go decision for a wrap-up insurance program. A well-formulated OCIP feasibility study should provide an overview of primary issues related to the viability and practicality of using an OCIP as a risk financing program strategy on the specific project being “studied”.


The OCIP feasibility study is also used to identify any “make or break” issues that could prevent a project owner from being successful in the implementation of an OCIP on the specific project. So, the OCIP feasibility study basically validates whether this risk management approach for the project under consideration is viable and makes economic sense for a project owner (sponsor).


The specific purpose of an OCIP feasibility study is to achieve one critical thing. To determine if the program or project(s) under consideration is a viable candidate for implementing an OCIP. The feasibility study starts the OCIP process. It basically evaluates if an OCIP approach makes sense for a project owner to utilize on one construction project, a group of projects, or program.


Let me reiterate, an OCIP feasibility study is a conceptual document that provides an educated assessment of the pros and cons of the insurance & risk management approach for a specific project or program under consideration. It is just that, i.e., a “feasibility study.” It is a tool prepared to start the OCIP process. The OCIP decision is the project owner’s.



OCIP Feasibility Study – Process


An OCIP feasibility study should address a number of risk factors about the project or program. In addition to the type of project in terms of the physical work location or the type of construction operations required, factors that are typically addressed in most OCIP feasibility studies include the following:

  1. Risk
  2. Potential for catastrophic loss
  3. Construction costs (high payroll component of project costs)
  4. Extended schedule
  5. Safety/loss control
  6. Disadvantaged, Minority contractor participation


These six risk factors are important considerations, but should be expanded to the following list of ten risk factors to address additional elements to be considered for an OCIP project:

  1. Legal capability
  2. Project owner commitment
  3. Project size and duration
  4. Type of construction
  5. Number of contractors
  6. Project site / location
  7. Funding source
  8. Timing of Decision
  9. Small/disadvantaged/minority contractor participation
  10. Risk potential for catastrophic loss


Let’s make a more detailed review of these ten risk factors. As you know, every construction project is different and every OCIP should be structured to meet the specific requirements of each construction project under consideration. The following risk factors are summarized to provide some additional clarity for why they included as part of an OCIP feasibility study.


1. Legal Capability

The widespread popularity of OCIPs has caused most states to remove legal barriers for such programs. In addition, numerous public agencies throughout the United States have passed state-specific legislation to use OCIPs on multiple projects. Since every state has enacted their own legislation and legal requirements for wrap-up insurance programs, it is advised to check with the specific state in which an OCIP is being considered for use on a project in that state.


2. Project Owner Commitment

An OCIP requires a clear project owner commitment to the contractor and to the stakeholder communities that it will: 1) design a comprehensive program for all participants, 2) negotiate and procure broad coverage with high limits and a completed operations period, 3) administer the OCIP efficiently, 4) recognize contractors’ concerns, 5) handle claims fairly, and 6) invest in project safety.


3. Project Size and Duration

The minimum size for a single project or rolling OCIP is generally thought to be $100 million.  The reason this metric was established was that a project should generate at least $3 million in premiums to be attractive to insurers. This was a good rule of thumb, but it has changed. The criteria that is being evaluated is whether the project has the critical mass to justify an OCIP.


4. Type of Construction

Complex, labor intensive projects are good candidates for OCIPs. Most OCIP savings come from the worker’s compensation premiums driven by 1) contractors’ payroll and 2) contractors’ rates for worker’s compensation classifications. Other exposures such as general and excess liability, and builders risk, with transferring a significant portion of the deductible responsibility to the contractors, create additional potential savings opportunities. Most OCIPs have labor costs of approximately 20% of total construction hard costs. The greater the percentage of labor costs, the greater the potential OCIP savings.


5. Number of Contractors

An OCIP should involve a significant number of subcontractors of all tiers. A minimum number of constructors is within the range of 20 to 50 contractors. Combining contractors’ payrolls generates the premium volume and loss control environment necessary for a successful OCIP. Contractors awarded more than one contract on a project (for example, on a rolling OCIP for projects at many locations) must be enrolled separately for each new contract. The administrative work to enroll a contractor for its second and subsequent contracts is considerably less than for its first OCIP enrollment.


6. Project Site / Location

Projects confined to a single location are good OCIP candidates. Single project OCIPs benefit most from the insurer’s safety consultant and claims handling. The definition of ‘single location’ can be broad. “For instance, OCIPs have been used in the construction of highways, with construction activities spread across miles of right-of-way. OCIPs may also be used within a defined geographic area, involving several different construction sites.” Such off-site construction activities as staging, dedicated fabrication, warehouse or transportation can usually be insured under an OCIP if they are clearly defined and dedicated to the project.


7. Funding Source

The project owner needs a mechanism within its construction program to fund an OCIP.  OCIP costs are a direct cost to the project owner, rather than an indirect cost through the contractors’ bids.  The project owner’s direct costs will include:

  • OCIP insurance premiums (payable in advance by installments)
  • Letter of credit/collateral costs (if required by the insurer)
  • Safety personnel and consultants’ fees (which can be included in the premiums)
  • Funds for losses within the OCIP deductible (if such a plan is chosen)
  • Broker/administrator fees


8. Timing of Decision

The OCIP team must be formed and the OCIP coverages purchased before the project owner can issue its request for bids to eligible contractors. Contractors must clearly understand the OCIP scope of coverage, and their contractual and insurance obligations, and be allowed to bid accordingly. Project owners in a few cases have delayed the OCIP decision and asked contractors to bid under two different scenarios: OCIP and traditional. Such a method may encounter contractor resistance and may increase the bidding costs.


The process for determining the OCIP feasibility, preparing OCIP coverage and service specifications, interviewing and selecting the OCIP administrator, marketing the insurance program to carriers, binding and issuing the coverages and establishing the on-site administration could take four to six months. Therefore, it is critical that if an OCIP is used there is adequate time allotted to complete these tasks to implement the OCIP in a timely manner.


9. Small / Disadvantaged / Minority Contractor Participation

The project owner’s commitment to enhanced opportunities for small or disadvantaged business enterprises is an intangible but important OCIP criterion. Due to their small size and lack of a risk history, such contractors often have difficulty purchasing the insurance coverages and limits project owners require. Under an OCIP all contractors and subcontractors (with few exceptions) are covered by the controlling entity (sponsor’s) OCIP program.


10. Risk potential for catastrophic loss

Projects with a catastrophic loss potential (e.g., structure collapse or accidents involving multiple vehicles or workers) require very high limits of liability insurance coverage. An OCIP assures all participants that dedicated limits are in place for the project term. The limits will not be reduced or eroded by contractor losses on other projects. The OCIP project owner can usually purchase such liability coverage (with completed operations) more economically than contractors. The OCIP project owner protects its own exposure for active and sole negligence that cannot be covered by the contractors’ policies. By controlling insurance risk, an OCIP will help mitigate overall project risk for the construction of the project.



An OCIP is an Investment of Time and Money


Because the cost of insurance and the decision to implement an OCIP is an investment of time and money, a project owner should make sure that there are no major impediments facing their project and the use of an OCIP is the best option available before they make the investment. This is the most compelling reason why an OCIP feasibility study is imperative in making a formal risk analysis and assessment to determine the viability of an OCIP.



OCIP Feasibility Study – Analysis


Project owners need to be objective when evaluating the findings in an OCIP feasibility study. Some project owners may want to overlook or minimize deficiencies in project management within their organizations. However, without an effective project management team that can enforce contracts and mandatory compliance with the OCIP administrative requirements, it will be a formula for failure on a project OCIP. This can be a fatal flaw in the process because no matter how good of a project plan you may have, or how complete a OCIP feasibility study is, it will never compensate for ineffective project management on a construction project OCIP. Success on an OCIP is directly dependent on enforcement of the OCIP requirements by project management, in collaboration with risk management and the OCIP insurance broker.


An objective and realistic evaluation of a project owner’s prior track-record with the enforcement of construction contracts, and more importantly contractor compliance, will determine if an OCIP can be effectively managed by a project owner’s project management team. This requires doing a thorough evaluation of all stakeholders in the OCIP, i.e. all departments directly responsible for enforcement of the contract terms and conditions of the OCIP. Specific contract provisions stipulating the OCIP requirements are an integral part of all construction contracts is required. This is a critical success factor, and probably the most important factor for any project owner who is considering using a project OCIP on their capital construction project.


Enforcing contractor compliance with construction contract provisions starts with crafting stringent contract language for both indemnification provisions and for the OCIP insurance requirements. It also includes being very clear on the other required contractor-provided insurance coverages, e.g. auto liability, outside of the owner-furnished coverages.



OCIP Feasibility Study – Administration


Another critical success factor is OCIP administration. Who will manage the OCIP? There needs to be a definitive contractual risk-transfer mechanism for all, or a portion of, the OCIP insurance policy deductibles. Deductible responsibility should be transferred to the enrolled contractors so the contractors have some “skin in the game”. Integration of the construction contract provisions with the OCIP insurance requirements is key. The OCIP insurance policy(s), safety and claims manuals, and OCIP administration procedures, need to be explicit. The comprehensiveness of the OCIP documents is a required best practice. However, it is imperative that a project owner makes sure that the OCIP requirements are adhered to ensure a successful OCIP.



OCIP Feasibility Study – Closing Thoughts


An OCIP feasibility study only starts the OCIP process. Planning is a critical component of a successful OCIP. And remember, planning alone won’t guarantee success. The plan must be strategic, realistic, and based on reasonable expectations for the OCIP.


There are many ways to structure an OCIP. A project owner can significantly increase the probability for success on an OCIP by having an experienced risk management advisor on their team who has the practical knowledge and capability to structure an effective OCIP program design, implementation, and administration. Successful OCIPs also require the ongoing commitment of everyone that is involved with the OCIP, from executive management to project management, contract management, financial management, risk management, and insurance broker who placed the OCIP coverages. And, a damn good OCIP administrator who can effectively manage the collection, processing, and reporting on the status of the OCIP construction project(s) for contractor bid documents, enrollments, bid credit calculations, etc.


Hope you enjoyed this post. I will look forward to your comments. I will share more Insights in future posts.

Thank you for visiting and reading C-Risk Insights.

Until next time…




David Grenier is the Managing Director and Principal Consultant at C-RISK, LLC.

C-Risk is a risk management consulting company that provides strategies and insights on construction insurance programs and risk financing for project owners in the public and private sector who are involved with large capital construction projects.


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