General Liability

[GregoryDesignGroup]

Alot of you have preached on the necessity of having the GL right from the get-go. As a relatively new startup I have had trouble even finding an agency that will take on a "paper contractor" (General) which I have told them is my intention. Currently I do most of the work coming my way though I would like to be covered if I were to general my jobs.

Is their a different approach to getting coverage for a corporation as opposed to a sole proprietor?
Should I not mention that my intentions are to hang up the tools and try to general everything in the near future?

Thanks for your help
Greg

[Dick Seibert]

Re: General Liability

Greg:

It all depends on the state your are located within, in California nobody is insuring paper contractors, in even Texas Allan gets insurance, the quintessential paper contractor.

Don't even think about defrauding them, if you have a claim (that's what you buy it for isn't it?) they will not cover you.

Insuring corporations is no different than insuring individuals.

[GregoryDesignGroup]

Re: General Liability

Dick, thanks for your response. I ad my corporation are in Illinois. Do you have any further advice?
Greg

[Dick Seibert]

Re: General Liability

Greg:

Yes, since you are apparently still working with the tools find a good insurance broker that specializes in Contractors' GL insurance. Buy an "Artisan" policy, you should qualify, and don't tell him your future plans. When he finds you a carrier they will tell you what percentage of your gross receipts you will be allowed to subcontract. When, and if, you get to the point that you want to subcontract more work, approach him again and tell him what you want to do, and take his advice. You will be working with him from then on, and he can help you.

[Ode...]

Re: General Liability

Greg:
The carriers do not offer GL in GA if you are new. Follow Dick's advice

[stasek]

Re: General Liability

Greg - we're in as similar situation (new in the business) but we DO perform some of the work (paint/trim carpentry/tile/etc...). We were able to get GL coverage without any problems. I don't want' to mention names here, but you can email me and I'll give you the name of our broker (located in Roselle).

[David V]

Re: General Liability

Dick,

Do I understand you correctly that I could perform some of the work myself and more importantly purchase all of the materials and then only sub out only the labor. It would seem to me that this would reduce the percentage of gross receipts I am subcontracting.

For example a $100,000 remodel if I self perform $20,000 then purchase 40,000 in materials, the final $40,000 in labor only would be subed out. Thus only 40% of gross receipts to subs.

Verses:

self perform $20,000 purchase $20,000 in materials and sub out final $60,000 to subs with them purchasing required materials. In this case it would appear that I have subed out 60% of the job.

Am I completly off base?

[Dick Seibert]

Re: General Liability

David:

Correct, the only thing the insurance companies check is the percentage of gross receipts that your books say you subcontract. They realize that the problem lies in subcontracting carpentry, but the "head office" (as the underwriters call it) has dictated limiting subcontracting to certain percentages (mine was 40% last year, and 25% this year). However you play the game, all they look at is percentages subcontracted, so you could actually have a $100,000 job that had $40,000 in overhead and profit, $20,000 in materials, and subcontract the entire balance of $40,000 in labor, even the carpentry (assuming you are allowed to subcontract 40%).

One way to get around this is to raise your overhead and profit to a much larger percentage of your gross receipts, that's what I am doing, and it's kind of nice! In fact, it makes estimating pretty easy, just figure your subcontract amounts and divide by .40, so if you have the above job with $40,000 in subcontracts, $40,000 divided by .40 equals a sales price of $100,000! If you were competing against me you would have a big advantage with your allowable 40%, because I would have to divide by .25 and would come up with a sales price of $160,000! (assuming I was going to subcontract $40,000 also) The 40% limitation was doable last year, the 25% isn't really doable this year; however, they don't look at any individual job, they merely look at your yearly accounting, so I mix some jobs that are high profit and all carpentry and materials, with some normal jobs to keep my percentages of subcontract work down.

Another thing you can do is to talk to the underwriter when they call you; after buying the policy (usually within a few weeks you always get a call, at least I have), and this year I pointed out to the underwriter that the 25% limitation was a real problem for me, he acknowledged that the subcontracting of carpentry was the real problem, but their hands were tied by the "head office", he said that when he did the year-end audit he would "look the other way" if my books showed a payroll with a significant number of employees on it, he said they were really looking for lots of salaried employees to control the subcontractors.

What this has led to is a two tiered contracting system, cheap uninsured little contractors (GL isn't mandatory in California, but the consumer has to be put on notice with a state approved form), and more expensive insured contractors, the public has the choice. Obviously, I check out my competition, it would be a waste of time to bid against an uninsured contractor subcontracting everything to low bidders, themselves uninsured.

BTW, commercial contracting has no such limitations. I have an electrician who will only do commercial work, his policy is much cheaper and specifically excludes all residential work. To date, 25 insurance companies have gone broke insuring contractors in California, almost all of the losses have come from new homes, some from remodeling residences, and very little from commercial.

[ChrisP]

Re: General Liability

FYI- when you do your bookkeeping be sure to separate labor from materials on all invoices.
I don't care what the split is as long as they are separated for bookkeeping purposes. Example - a few years ago I would have entered:
Plumbing complete 11,000.

Now I enter :
Plumbing Materials and Fixtures 6500
Plumbing labor 4500

All of my subs are required to give me a breakdown.

I also class all of my transactions either labor or material related.

Your insurance rates are based on the amount of subcontactor labor. They generally don't care where you get materials.
(We need all the help we can get).

[Dick Seibert]

Re: General Liability

Chris:

I've copied and pasted your post into an E-mail to my insurance broker and asked him to check it out, and I certainly hope you're right, we really do need a lot of help on this issue, it would make me a lot more competitive, since the amount of subcontract classified work actually sets the prices we have to charge now.

I have to wonder about all these threads about the amount of profit percentage you can/should charge, when in actuality the amount you charge is driven by the insurance companies with their subcontract limitations. As I said before, if I've got $100,000 worth of subcontract work, I've got a $400,000 sales price, no matter what the market is, or how much other labor and materials I have in the job. It's that way with all insured contractors, around here anyway.

[Dick Seibert]

Re: General Liability

It won't work, at least here in California. The insurance companies look at subcontractors like a dreaded disease, they'd like us to do everything ourselves, which is crazy.

I'll post his response:

Dick,

In the California market for the pricing of general liability insurance, carriers are concerned about the entire subcontract exposure, which includes both materials and labor. I think your guy is dead wrong.

Matt

What gets me so mad is that the paper contractors have ruined it for the legitimate contractors, and their lousy construction has caused us to all to not only pay way more money, but they have forced a change that has changed the entire way we build!

[Bob Kovacs]

Re: General Liability

"their lousy construction has caused us to all to not only pay way more money, but they have forced a change that has changed the entire way we build!"

I still don't get it, Dick. You tell everyone how subcontracting has ruined the market for "legitimate contractors" (read: those who do everything in house, in your eyes), and then you bitch that you can only subcontract a certain amount of your work. Make up your mind- you can't have it both ways- the way I see it, you have the following choices:

1. Self-perform all of your work. You'll get the high quality that you want (supposedly), and you won't be accused of being a slip-shod paper contractor.

2. Go the un-insured route, like everyone else is, and do whatever you damn-well- inhouse, subs, a combination, whatever.

3. Pay the damned insurance premiums, sub as much as you can per your policy, and create value with your customers that'll allow you to charge the prices you need to charge to cover the insurance premiums.

4. Retire, so you can spend even more time on the forums driving Allan insane- then you wouldn't have to deal with it at all. Hell- maybe you'd even have enough time to fly out to Houston and show him how houses are supposed to be built in person. That's assuming that they'd even let you off the plane in Houston wearing those silly sandals, white socks, and a Stanford sweatshirt.....lol.

Bob

[Dick Seibert]

Re: General Liability

Bob:

Because I (and every other "legitimate" contractor I know) just want to do what I have historically done, that is hire my own carpenters and laborers, and subcontract everything else. Now I can't do that, I am being told that we have to perform trade work in-house that I am unqualified to do.

1. Self-perform all of your work. You'll get the high quality that you want (supposedly), and you won't be accused of being a slip-shod paper contractor.

I am incapable of doing, and don't want to do things like plumbing, electrical, tile setting, etc. All I want to do is carpentry, but the insurance companies are forcing me to do these things in-house.

2. Go the un-insured route, like everyone else is, and do whatever you damn-well- inhouse, subs, a combination, whatever.

I refuse to work without insurance, we are in the lawsuit capital of the world, most of my competition has chosen this route, including my former foreman (he's got several million in assets now and figures that he can pay any damages and the cost of defending himself, but he has given up his contractors' license, only builds as an owner/builder, and holds each house for two years to sell only "used' houses.

3. Pay the damned insurance premiums, sub as much as you can per your policy, and create value with your customers that'll allow you to charge the prices you need to charge to cover the insurance premiums.

That's what I am doing, and it severely limits what I can do because the uninsured paper contractors are considerable cheaper. This does affect the younger contractors, and that's what this thread is all about, I am semi-retired.

4. Retire, so you can spend even more time on the forums driving Allan insane- then you wouldn't have to deal with it at all.

I am thinking about it, a roofing contractor friend of mine has moved into nothing but expert witness work, is making over a half million a year testifying against other roofing contractors, and is making more than he ever made as a commercial roofing contractor (he did the waterproofing on the San Francisco Embarcadero Center (five high-rises) as a contractor, didn't Turner build that? He just billed out several hundred thousand on the lawsuit against Perrini on the leaking dormitories at San Francisco State). Also, if I retire I can't buy Hummers, fancy computers and things like that, and make the government pay for them. Allan is retiring (or semi-retiring) after this batch of houses, and can the JLC stand to see us two old geezers sitting at home on our computers fighting all day long?

Furthermore, why don't you take a stab at answering Greg's question that started this thread, instead of attacking me for trying to help? I thought Chris's solution had some merit, but it turns out that it doesn't (at least here in California). Three of my former competitors (that I know of) are now working at Home Depot. How is a young guy going to start out if he's faced with a $35,000 to $75,000 GL bill, and then told that he has to do things himself that he doesn't even know how to do?

[Bob Kovacs]

Re: General Liability

Dick-

I'm not trying to "attack" you- I just don't understand where your line of thinking goes sometimes.

As far as Greg's original question is concerned, I think there's really only one "right" choice if he plans on owning a construction company in his present location. That choice is to do whatever the insurance company requires of him regarding % of subcontracting. I know that your insurance company looks at the combined labor and material on sub billings to determine % of subcontracting- Greg's insurer may not, so that's something he needs to investigate.

I'd then look at purchasing materials directly rather than having the subs supply them, if this would allow more sub labor $$ to enter the equation. It's a PITA for many trades, but it actually may work to Greg's advantage, since it may allow some smaller subs to bid his work, who maybe couldn't afford the carry costs of the material. These smaller subs may have lower rates, thereby reducing Greg's sub $$ amount even more. I know of a lot of subs that refuse to buy materials whether it's because of bad credit, or just the unwillingness to front the money and finance the GC. They're still great craftsmen, so they stay busy working that way.

Over time, hopefully the insurers will start relaxing the percentages of subbed work, and Greg will be able to get to where he wants to be, as a proverbial "paper contractor". Until then, he's either got to play the cards the insurance company deals him, or move to a more lenient state like Texas.

BTW- the Home Depot route isn't half-bad for those who can't cut it in construction due to an inability to sell at a high enough rate to cover their GL and other overhead costs. Lord knows HD and Lowes need knowledgable staff, the benefits are great, and the wages are better than what some contractors end up taking home at the end of a project. There's another avenue for you to think about....lol.


Bob

[Dick Seibert]

Re: General Liability

Bob:

I've had some success with purchasing materials for subcontractors, the tile subs love it, because of all the crazy things people sometimes pick out; however it can take maybe 8 hours running back and forth ordering things, picking them up, and then running back for short items. They just love to tell me they need one more eagle beak, or they are short one liner bar that took three months to get, I soon learned to way over-order everything, then just tell the customer to keep the extra in case they ever need to repair it. I have a plumber that actually calls his supply house in advance and tells them to give me his discount, so he doesn't have to fool with picking up the fixtures, but I sure wouldn't want to be buying his pipe fittings! But again, between ordering and picking up, there is over half a day blown. I haven't had any luck with other subcontractors' materials, even though I tell them in advance that they won't be supplying them, so don't figuring on making any profit on them, so to be sure to add whatever profit they normally make on the materials to their base bid. It's only fair to inform them of this in advance. I've talked to some subs about putting them and their employees on my payroll (that's what the insurance companies really want), but they don't like that.

I'm with you, I think that in time the insurance companies will come to their senses on this, and realize that we are not all "production" builders, and take a more realistic approach to the problem. I sympathize with their problem, 25 insurance companies going broke in California alone is enough to make them panic, but they wouldn't entertain my proposal that all subs go on T&M contracts to alleviate any incentive to "rush" a job and do inferior work. To me, that's the ideal solution, we can hire whomever is best qualified to do the work, and pay them whatever it takes to do it right. That would get rid of the unconscionable competition of paper contractors that grind down subs to the point that they have to cut corners to eat!

I'll think about your idea of going to work for Home Depot, can't you just see me driving up in the Hummer with a $50,000 Patek on my wrist, slipping on an orange apron, and punching in on their time clock? On second thought, I think I'll just occupy myself sitting here fighting with Allan ---- Hey, it's a dirty job, but somebody's got to do it!