DEFINITION of 'Bid Deduct'

Bid deduct is a feature of an owner controlled insurance program (OCIP) in which contractors' bids include the cost of providing workers' compensation, general liability, and excess liability insurance. The bid deduct methodology will reduce the final amount awarded on the contract based on these insurance deductions.

Also known as insurance credit.

BREAKING DOWN 'Bid Deduct'

In many cases. a contractor or subcontractor purchases insurance that covers injuries to its employees while they are on the jobsite. In some cases, especially with larger projects, the company managing the project will purchase the necessary insurance through an owner controlled insurance program (OCIP). The coverage provided by this insurance applies to all subcontractors and contractors on the project.

How Insurance Credit Works

Companies may purchase insurance through OCIP because it can reduce the cost of bids from contractors. This is because the company will require the bids made by the contractors to be adjusted to take into account the insurance coverage that it is being offered by the project management company.

In OCIP, the project management company requires the contractor to follow a bid deduct methodology, in which the costs of providing the insurance coverage are deducted from the bid that the contractor makes for the work. If the project management company is able to secure a lower premium from OCIP providers it will be able to realize cost savings. Bid deductions reduce the mark up that contractors apply to their bids for things like overhead and profit that specifically relate to the contractor providing its own insurance coverage.

Project management companies that require bid deduction could stand to benefit even more if they are able to obtain a favorable loss experience. The company can accomplish this by reducing the risks that contractors face while on the worksite, and ensuring that contractors are following all of the required safety procedures.

Drawbacks to using bid deduct include the increased complexity associated with managing complicated bids, as well as having to negotiate with insurance companies. 

In addition, noted ConstructionBusinessOwner.com, "Some OCIP sponsors seek to maximize reductions in contract price while providing minimal insurance coverage under the program, leaving contractors underfunded and underinsured. Several states have responded to this issue by enacting protections for OCIP participants and defining parameters, such as minimum project size, coverage standards and rights of participating contractors." 

But, a well-constructed OCIP, the publication added, "provides many benefits including :broad coverage and uniform limits for contractors of every tier; claim adjustments by a single insurer, and coverage stability for completed operations through the applicable statute of repose."

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