Contractors Insurance

Hi Carl,

Great website. I’m spending a lot of time reading your pages. Thanks for providing the information. I’m emailing you since I have some questions I didn’t find answers to using search.

About my situation: I’ll be doing a remodel on my house in a few months and I’m searching out General contractors to do the work. I recently got a bid for the job by one contractor who has done good work in my local neighborhood so I’m favoring him at the moment.

He included a cost breakdown of the amenities. One of the costs was overhead at 7.2% of the total cost. He explained this is “coverage for items like gasoline, Workmans comp insurance, liability insurance and supplies”.

This “overhead” is cost in addition to his “supervision” costs of 13.9% of the total cost. I’m assuming he is already covered by Workmans comp and liability insurance but he wants his overhead cost covered.

I do need to check on his certificate of insurance and have him explain what “gasoline and supplies” are. Yes, I want my General Contractor to be insured and covered by Workmans comp.

Q1. Is it appropriate for the home owner to pay for the General Contractors costs of Workmans comp insurance and liability insurance?

Q2. If yes to Q1 then how can I figure out the reasonable cost of Workmans comp insurance and liability insurance for a project that will take 2 months to complete? I live in California if that makes any difference.

Q3. If my General Contractor has Workmans comp and liability insurance, then can the subs he hires be covered under his insurance umbrella? Or must his subs carry their own Workmans comp and liability insurance?

Thanks in advance for your time.

Regards, Tom

Hi Tom,

Q1. You are going to pay for a contractor’s insurance one way or the other, whether he tells you about it or not. Insurance is part of a builder’s overhead, as it is part of any company’s overhead.

Q2. You don’t need to figure the cost of either Workmans compensation insurance or General Liability because your contractor has to purchase and pay for all his insurance a year at a time.

Here’s a quote from my Contractors Insurance page:
These commercial policies are paid in advance for a whole year, and can’t be canceled. So, check the dates on the certificate.

All builders have to cover all their overhead as a percentage of every job during the year. If, for example, all my business insurance policies (there’s more than just Liability and WC) total 5,000 per year and I build or remodel 5 jobs, each job would theoretically be responsible for 1/5 of the total.

Your contractor is actually low on his overhead costs for if you read my Cost Estimating page you will see that all builders must constantly juggle costs to balance their cost estimating.

The typical breakdown of cost for a builder, per house, is 25% material, 25% labor, 25% land cost, 12.5% builder profit, & 12.5% builder overhead.

Q3. His subcontractors will actually be contractors working for a General Contractor.

They will provide their own insurance and of course, pass that cost along to the General Contractor . Read Subcontractors Are Not Employees.

I think the most important underlying question you seem to be asking is, can I trust this builder?

He appears to me to be a straight shooter, but you have his references right there in your neighborhood. Check them!

Hope this helps,
Carl Heldmann