What Is Bid Deduct?

Bid deduct refers to when contractors' bids for a project exclude the cost of providing workers' compensation, general liability, and excess liability insurance because insurance is already provided by the owner of the project through an owner controlled insurance program (CIP). The bid deduct methodology will reduce the amount a contractor bids for a project as they no longer have to include the cost of insurance.

Bid deduct is also known as insurance credit.

Key Takeaways

  • Bid deduct is an owner controlled insurance program (CIP) feature that deducts costs included in a bid, such as workers' compensation and general liability, before making the final payout.
  • Generally, bid deductions reduce the costs that contractors apply for items such as overhead and profit.
  • Several states have established guidelines, such as minimum project size and coverage standards, in order to protect participants in owner CIP programs.
  • Bid deducts usually allow companies to realize cost savings by providing their own insurance coverage for contractors in a project.

Understanding Bid Deduct

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

This means that subcontractors will be able to deduct the cost of insurance that they would otherwise include in a bid because they will already be insured under the owner controlled insurance program. This makes their bid less expensive and allows them to be more competitive in pricing.

It also benefits the company running the project as purchasing insurance via an OCIP will usually end up costing less than hiring contractors that have to purchase their own insurance, including the insurance cost in their bids.

Advantages and Disadvantages of Bid Deduct

Advantages

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

In an 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 project.

If the project management company is able to secure a lower premium from OCIP providers then it will be able to realize cost savings. Bid deductions reduce the markup that contractors apply to their bids that relate to the contractor providing its own insurance coverage.

Project management companies that require bid deduction can stand to benefit even more if they are able to obtain a favorable loss experience. A 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.

Disadvantages

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

Companies must do their due diligence on OCIPs before embarking on a relationship with one. Companies can be underinsured if less than honorable OCIPs offer significantly low prices while providing minimal insurance coverage.

Regulatory bodies have sought measures to protect companies through such practices, by stipulating details for all variables, including minimum project size, coverage standards, and the rights of the contractors.

A legitimate and well-organized OCIP provides many benefits, which include coverage that covers a wide array of areas, tiering of coverage limits for all contractors, dealing with one issuer for claims, as well as a statute of repose.

Example of Bid Deduct

Suppose a construction project has estimated hard costs of $100,000. Using traditional practices, the cost estimate for insurance is $10,000, meaning 10% of the overall cost.

The project management company can reduce overall costs by providing its own insurance plan at an estimated price of $6,000 as opposed to hiring contractors that would have to buy their own insurance, including it in their bid for the project, in which it may amount to higher than $6,000.

The plan consists of two components: fixed expenses (including overhead expenses, commissions, and taxes) and retained losses (in the form of deductibles paid by contractors and subcontractors). The project management company's reductions are achieved by ensuring a safe work environment and reducing costs associated with workers' compensation and commercial general liability (CGL). Thus, the project management company can save on overall insurance costs through bid deductions in an OCIP.