OCIP – Frequently Asked Questions (FAQs)
In Part 13: Wrapping up the OCIP, we reviewed what is required to increase the probability for success on an OCIP. In this section, we will review a collection of FAQs that have been collected over the years, as respects OCIPs and all the debate about OCIPs, i.e. are they good or bad, yes or no.
This list of FAQs is not exhaustive by any means. I’m hopeful that the answers to some of these questions will provide some additional perspective about the use on an OCIP.
Project owners thinking about implementing an OCIP may receive questions from their internal management. The general contractor (GC), who a project owner may transfer a significant portion of responsibility for administration of the OCIP may have questions, as well as other contractors or subcontractors who will be considering participating in the OCIP. There may also be inquiries from regulatory agencies, union officials, or local trade associations. Here are some of the more common FAQs, and related answers:
Q. What’s the difference between an OCIP and a Wrap-Up?
A. The terms “OCIP” and “wrap-up” are frequently used interchangeably. That’s because the underlying premise is basically the same. You have the same core insurance coverages (typically, workers’ compensation, general liability, excess GL or an umbrella policy), which are wrapped-up into a portfolio of coverages to establish a project-specific risk financing program structure.
There can be one major difference. The wrap-up originated as a type of consolidated insurance program that could be viewed as a contractor controlled insurance program (CCIP). However, please remember that on a CCIP, responsibility for providing project insurance for contractors and subcontractors resides with a GC. With an OCIP, the project owner is the sponsor who provides the insurance for all parties. The project owner also has total responsibility for the insurance procurement, which includes having direct responsibility for payment of premiums, along with management and administration of the entire program throughout the duration of the project.
Q. How does an OCIP benefit a project owner?
A. The primary advantage of an OCIP is increased control (hence the name, owner controlled insurance program). A project owner benefits in many ways, including:
- Potential Cost savings
- More efficient project management and administration
- More effective safety and loss control programs
- More opportunities to hire MBE/WBE/ DBE/SBE contractors and subs
- Direct control of insurance coverage exclusions
- Ability to obtain higher insurance limits
- Ability to mitigate insurance claims and disputes
Other benefits to a project owner include a lower cost of risk (resulting from other cost reductions) and protection from catastrophic loss by obtaining higher limits of liability insurance coverage, and dedicated limits for a project-specific risk financing program.
Q. When does the decision to use an OCIP need to be made?
A. If a project’s risk financing is going to include an OCIP approach, the final decision should be made before the project owner selects a general contractor (GC), or the prime contractors under a joint-venture (JV) arrangement. The RFP and contract documents should include OCIP-enabling language in the bid proposal, whether for a design-bid-build project, or with modified language in the RFP if it will be a design-build project.
Regardless of the project delivery method used, it is imperative that the project owner retain its options by including OCIP-enabling language in the bid documents and RFP. This language should stipulate that the project owner has the option to implement an OCIP at its discretion, and it should require the contractor to isolate their insurance costs when bidding. (Note: The level of effort and time involved for the collection of project information and for conducting a formal feasibility study on the viability of using an OCIP on a project can take several weeks, if not a couple of months.)
Q. How long before the start of a construction project does the OCIP program structure need to be completed?
A. The timeframe will depend on who is developing the OCIP program structure and all the fundamental OCIP components. A project owner should allow sufficient time to; 1.) evaluate the OCIP feasibility, 2.) choose an insurance broker, 3.) select a consultant (e.g. risk management consultant and/or wrap-up consultant, if objectivity is required), 4.) provide insurance broker (in collaboration with risk management consultant) with ample time to develop a detailed insurance specification and underwriting submission, 5.) negotiate with the insurance markets, 6.) present the insurance market’s proposal results to the project owner, and 7.) develop the necessary OCIP procedures and OCIP manuals to support the program. (Note: The level of effort and time involved is dependent on the insurance market conditions and the responsiveness of underwriters, as well as the broker. This process could take anywhere between three to six months. Although, this timeframe could be potentially accelerated in order to accommodate a project owner’s specific construction project schedule requirements.)
Q. Who pays the OCIP premiums and related expenses?
A. On an OCIP, the project owner pays all OCIP insurance premium costs and related expenses for the insurance program structure design, insurance spec & underwriting submission preparation, marketing to insurance/reinsurance markets, and the OCIP administration costs. Remember, the cost for project insurance is going to paid by the project owner whether under a traditional contractor-provided insurance approach or under a project owner-furnished OCIP. One way or another, the cost of insurance will be included in the contractor’s overall bid as a project cost.
The main difference is that the premium for the OCIP insurance coverage(s) is a finite cost to a project owner, where a contractor’s traditional insurance costs can be more intangible. Especially, on lump-sum contracts because even though the coverage for the builder’s risk insurance cost are typically delineated in a contractor’s bid as a separate line item, the other insurance costs for coverages, such as the workers’ compensation, general liability, and excess liability, may be allocated in a contractor’s bid tab with their broker’s commission, and contractor’s overhead & profit added to this cost.
Q. How much additional time and level of effort will an OCIP require from a project owner’s management staff?
A. On a typical OCIP, the estimated time expenditure will be more significant in the initial stages of the OCIP design and implementation. However, once the OCIP is up and running, the time and level of effort required for administration will be minimal. It will consist mostly for responding to coordination questions and reviewing periodic OCIP status reports with the insurance broker, OCIP administrator, and the insurers.
Q. Is a project owner’s cost for the OCIP premium plus related expenses less than the cost under a non-OCIP project?
A. That depends! Maybe yes, if the OCIP insurance program structure is designed and managed properly. But, it also depends on the market condition at the time of the OCIP insurance coverage(s) are marketed and procured. Typically, eliminating the insurance costs from contractor bids, combined with the potential savings related to maintaining a safer worksite, plus any dividends received for reduced frequency of jobsite accidents, could compensate for the project owner’s direct cost for OCIP premiums and expenses. A good rule-of-thumb that has been used over the years, is that a project owner could expect to save approximately 10% to 25% of contractor-provided-insurance costs, or 1% to 3% of the total construction cost. (this is an approximation is for a typical OCIP with workers’ compensation, general liability, and excess liability insurance coverages. The margins for a GL-only OCIP would be significantly less. More like, .5% to 1.5% of TCV.)
Q. Are OCIP insurance premiums less than a general contractor’s insurance premiums plus mark-up?
A. There are no finite answers; yes, that depends, sometimes. Many large national and regional contractors pay very small increases for their existing insurance premiums to add incremental coverage for including one more project onto their annual policy(s). Based on this reality, even if a GC’s premiums are marked-up for the GC’s overhead and profit, the insurance cost included in a large GC’s contract bid on a non-OCIP project could be less than a small contractor’s bid with insurance costs on the same project.
As we have discussed, the economies of scale from the volume purchasing of the OCIP insurance coverage(s) typically are more financially viable for a project owner. However, for large GCs, the cost of insurance could be comparable depending, how much leverage the GC has in the insurance marketplace. Another consideration is if losses are kept to a minimum, and the OCIP administration processes are efficient to control expenses, the cost of the OCIP can be less for a project owner than just insurance premiums alone.
Q. If a project owner commits to an OCIP, can they switch back to a traditional insurance program?
A. What’s the saying, “an ounce of prevention is worth a pound of cure.” It’s a difficult process, but it can be done, at times. There are several reasons why a project owner may want to dissolve an OCIP. The main reason is usually driven by economic factors that result from changes in the insurance market conditions. For example: If an OCIP is implemented in a hard market, then the market softens, the OCIP will cost less than projected. Conversely, if an OCIP is implemented in a soft insurance market, then the market hardens, the OCIP cost will increase, coverage may also be reduced, and limits could be lowered. (Note: an option would be to request the broker to specify to the insurers to include annual “reinstatement of limits” , “non-cancellation”, and “break & review” provisions in the insurance coverage policies, if the insurers are agreeable to these terms.)
Given potential market swings and economic-cycle volatility, it can make it difficult for a project owner to provide the necessary OCIP insurance coverage, which is contractually stipulated as a requirement on all construction projects. In the event the OCIP insurance is compromised, or coverage becomes unavailable or unaffordable, the OCIP may need to be dissolved. Consequently, this entails the negotiation of contract cost adjustments, including change order increases, with all enrolled contractors and subcontractors. The magnitude of these increased construction costs could have a negative financial impact on the project’s overall potential profitability.
Q. Do all contractors and subcontractors who perform work on the project need to be enrolled in the OCIP?
A. Contractors or subcontractors who perform the majority of their work away from the project site may be excluded from an OCIP. The primary reason for this exclusion is that their limited project site exposure results in limited risk and exposure to jobsite injuries, claims, and liability.
In addition, contractors and subcontractors may also be excluded due to consideration of practicality from an administrative standpoint, if their contract value is less than a certain amount, or their scope of work is minimal or of short duration. Depending on the total construction cost of a project, a rule of thumb that has been used is to exclude contractors and subcontractors with contract values less than $25,000 to 50,000. Although, these figures are examples. Being selective of who is in and who is out of an OCIP is basically at the discretion of the project owner, and the OCIP administrator.
Q. What contractors are ineligible for an OCIP?
A. Most contractors in all trades performing work on the project jobsite are eligible to be included in an OCIP, except those involved in certain activities, such as the following:
- Haulers or delivery services transporting to and from the project site
- Material suppliers who make infrequent deliveries to the project site
- Environmental remediation contractors and/or consultants
- Contractors or vendors for the fabrication of materials or equipment off-site
- Architects, engineers, and other similar professional service providers
Even contractors who would typically be eligible (if work was done on the project site) are not covered for their offsite activities, such as shop work, office support, etc.
Q. Can architects and engineers be covered under an OCIP?
A. Typically, architects and engineers are excluded due to their limited time on the project jobsite. In addition, the minimal bid reduction (in lieu of the high claim potential), for architects and engineers, is another factor. However, architects and engineers can be included in the basic OCIP coverages (e.g. workers’ compensation, general liability, and excess liability) if required. Although, the OCIP does not provide coverage for claims resulting from an architects’ and engineers’ errors or omissions. If A&E E&O coverage is required, a separate project professional liability program could be designed to be incorporated into the OCIP to cover architects and engineers E&O exposures, but this is at the discretion of the project owner and project requirements.
Q. What insurance coverages are not included in an OCIP?
A. The basic insurance coverages typically included in an OCIP do not include and provide for environmental/pollution liability or professional liability coverage for any A&E E&O exposures. However, it is not uncommon to include these types of coverage with a separate CPL and/or project-specific PL insurance policies on an OCIP project.
The insurance coverages that should never be included in an OCIP are automobile liability and auto physical damage coverage. In addition, an OCIP should not provide any coverage for certain off-site activities. But remember, contractors are still required to provide their own workers’ compensation and general liability protection for their automobile liability and auto physical damage exposures. The project owner should also be named as an additional insured on the contractor’s auto policy(s).
Q. Are surety bonds included in an OCIP?
A. Not recommended. There are several reasons why surety bonds are not typically included with the OCIP coverages, including additional cost to the project owner and the administrative requirements for the project owner and the surety. Sureties, (i.e. surety bond issuers) do not pay losses. Sureties guarantee contract completion and then seek recovery from any defaulting contractor(s). This is very different than the coverage that insurance carriers provide that are associated with the actual project work. As an alternative to surety bonds, subcontractor’s default insurance (SDI) can be designed within the insurance program structure to work in conjunction with an OCIP.
Q. Do OCIPs provide an unfair advantage to contractors with poor safety records and loss experience when bidding against contractors with good safety records?
A. Logically, it would seem that contractors who have poor loss experience would expend a greater percentage of their revenue on the cost of insurance than contractors who have good safety performance and low loss experience. Therefore, contractors with poor loss experience should have higher insurance costs, higher total costs, and this would result in higher contract bids than contractors with favorable loss experience.
By removing the insurance costs from construction bids, contractors with favorable loss experience may lose a cost advantage. However, the difference in the contractors’ bids created by differences in loss experience is marginal when measured as a percentage of the total construction bid. The logic behind this thinking is by making the insurance cost a neutral factor, the bid competition is focused on more substantive issues such as the project management operations performance, quality of workmanship, as well as safety.
Furthermore, a contractor develops the lowest bid because of lower labor, material, or other costs. Not because of having lower insurance costs. This should be an advantage to a project owner. To eliminate any advantage to contractors or subcontractors who have poor safety records or poor loss experience, some project owners will not accept bids when workers’ compensation experience modification rates (EMRs) that exceed a set level (e.g. an EMR of 125%). Eliminating this unfair advantage can also be achieved by using an alternate deduct or straight deduct (bid deduct) methodology for the insurance cost extraction approach on the OCIP project.
Q. How can OCIPs improve safety on a construction project when the contractors and subcontractors don’t directly pay for this insurance?
A. Safety is a key attribute for a successful OCIP. There are several methods used to control jobsite losses. Contractors are contractually required to comply with the site safety program. An onsite construction safety representative also provides additional resources to supplement the general contractor’s (GC) or construction manager’s (CM) basic safety program to ensure project safety compliance. On many large construction projects that utilize OCIPs, contractors complete OSHA 10-hour training and attend jobsite safety seminars prior to starting their contract work. This ensures that enrolled contractors receive the proper safety training and education necessary to prevent jobsite injuries and lost time accidents. Safety and loss prevention is important on all OCIPs.
In addition, for workers’ compensation insurance coverage, contractors’ individual loss experience is reported to the compensation bureau (in the same manner a contractor’s non-OCIP losses are reported). These loss reports are used to calculate a contractor’s experience modifier rating (EMR). It should be stipulated on all bid documents that the loss experience incurred by each contractor or subcontractor of any tier on the OCIP will be retained and reported to the National Council on Compensation Insurance (NCCI), which is the normal process used to calculate contractor EMRs. Poor loss experience will result in a higher EMR, which directly impacts contractor’s workers’ compensation costs. In addition, high EMRs may result in a contractor being precluded from bidding construction contract work for project owners or general contractors on future projects.
Q. Are contractors’ loss-sensitive insurance programs impaired by an OCIP? (i.e. Will an OCIP negatively affect a contractor’s leverage with their own insurers?)
A. Loss-sensitive insurance programs, such as dividend plans and retrospective rating plans, have two main components: 1) a fixed charge and, 2) a variable charge, which is based on the frequency and severity of losses.
When a contractor’s or subcontractor’s projected payroll (i.e., the predominant rating basis used by workers’ compensation underwriters for determining premium) is moved from its own insurance program to an OCIP, the fixed charge may increase marginally as a percentage of premium because of this reduction in payroll. If a substantial portion of the premium is moved to an OCIP, the effect on a contractor’s or subcontractor’s own insurance premium may ultimately result in a slight increase in premium, depending on the size of the contractor’s or subcontractor’s account and whether the insurers minimum premium threshold has been met for certain lines of coverage.
As we noted at the beginning of this section on FAQs about OCIPs, this list of questions and answers are not exhaustive, but will provide you will some examples of the FAQs that have been addressed. More importantly, we hope they provide you with a better perspective about OCIPs and for building a better wrap-up.
This is the final post in the series: OCIP 2.0 – Building a Better Wrap-Up.
If you need a review of all fourteen (14) of the OCIP 2.0 – Building a Better Wrap-Up series, you can access them below:
It’s a Wrap!
Hope you enjoyed this post. I will look forward to your comments. I will share more Insights in future posts.
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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 wrap-up insurance programs to help project owners in the public and private sector who are involved with large capital construction projects.
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