When preparing for your Premium Audit, materials and labor* are important considerations that can have an impact on the outcome of your audit. Depending on the documented amount of each, you may be able to reduce your exposure for some of the material costs paid to uninsured subcontractors. During your policy term, maintaining solid business records and managing the way invoices are provided to you by uninsured subcontractors (including having charges separated to show specific amounts for materials versus labor) is ideal.

Keith Perry and Steven Blinsink, premium audit field managers, contribute their knowledge to explain best practices for managing invoices and records for materials and labor and the ways they may be reflected on your Premium Audit.

Workers’ Compensation

During your Workers’ Compensation audit, no materials or labor documentation is needed when reporting your employees’ payroll or reporting properly insured subcontractors. However, you do need to maintain current insurance certificates for insured subcontractors.

Materials and labor costs really come into play with uninsured subcontractors and 1099 laborers (which we will refer to as subcontractors). Although the best practice is to use only insured subcontractors, this can be difficult to do all the time. If you must use uninsured subcontractors, the rule is simple. Your auditor can remove material costs up to 50% of the total paid to that subcontractor, if you have original invoices breaking out material and labor cost.**

Example 1: You have an original invoice for $1000 that is broken down to show $750 in labor and $250 in materials, your auditor includes $750 of exposure (for the total labor amount) on your audit.

Example 2: You have an original invoice for $1,000 that is broken down to shows $750 in materials and $250 in labor, your auditor includes $500 of exposure. (The maximum deduction allowed for material is 50% of the invoice)

The most common obstacle in taking advantage of the materials rule is documentation. A best practice is to specifically track materials and labor costs on each uninsured subcontractor as you progress through the year. Maintain original invoices, clearly separated into materials and labor costs as documentation for your audit and to protect yourself.

General Liability

Your General Liability Premium Audit follows a process similar to that for Workers’ Compensation. The materials cost only comes into play with uninsured subcontractors and the rule is the same. The actual cost of material, up to a maximum of 50%, will be removed if the original invoices clearly separate material and labor cost.

The only difference in a General Liability audit is that insured subcontractors are included in the audit at 100% of what they were paid and charged at your General Liability insurance rate for the contractors-subcontract classification code (which is much less expensive, than the uninsured subcontractor rate).

Documentation is always key when preparing for your Premium Audit. When possible, use insured subcontractors and be sure to keep track of insurance certificates. When you must use uninsured subcontractors, make sure your invoices clearly split out materials and labor costs so your company is able to take advantage of the materials rule and minimize your exposures.

If you have any concerns about your records or the way you are receiving invoices, your auditor is available to assist and answer any questions you may have. Feel free to reach out to our audit team at any time.

*Application of the materials and labor rule differs in Florida from the explanation provided in this blog.  If you are a Florida customer, please reach out to your agent or premium auditor with questions.

**Note: Uninsured subcontractors that provide mobile equipment to do all of the hired work will be included at one-third of the total gross paid to that subcontractor (examples: bulldozers, backhoes, and cranes).