WORKERS COMP AUDIT: WHY GROWTH MEANS A BILL AFTER YEAR END.
Workers comp is billed in advance on an estimate of payroll by class code. After the policy expires, the carrier audits the payroll that was paid and sets the final premium. If actual payroll came in above the estimate, additional premium is due. If it came in below, the carrier returns premium. A subcontractor that grew during the year usually owes, because the estimate was written before the new crews were hired. The bill comes after the work is done and often after the cash is spent, so it has to be budgeted before it comes.
The audit is a true up, and the premium paid during the year was only a deposit. This page covers what changes at renewal, what the auditor reads, and how to budget the bill so it doesn't surprise the owner. The class code page and the experience mod page cover those two inputs in depth, and this page links to them without repeating them.
WHAT IT MEANS.
A workers comp premium audit is the carrier's review, after the policy ends, of the payroll the contractor paid in each class code, used to replace the estimated premium with the final premium.
Rules differ by state and by carrier. A few states operate their own system, and carriers set their own audit schedules, billing terms and forms. This page describes how the audit works in general, and the policy, the audit notice and the carrier's billing terms are what apply to you. A licensed broker places the coverage and can tell you what your carrier does.
WHY THE BILL COMES LATE.
The premium you pay all year is a deposit
At the start of the policy the carrier estimates payroll for each class code. The premium is the payroll divided by 100, times the rate for that class, times the experience mod, added up across classes. You pay that estimate, often in installments. The final premium is set by the audit, which happens shortly after the policy expires. Additional premium is due when actual payroll is higher than the estimate, and a return premium is due to you when it's lower.
Growth is what creates the bill
The estimate is written from last year's payroll and what the owner expects. Win two large jobs in month four, add a crew in month six, and payroll finishes the year well above the estimate. The carrier doesn't see that until the audit unless someone tells it. The same rate then applies to every added payroll dollar, so 40 percent more payroll in a class means about 40 percent more premium in that class. Some carriers will revise the estimate during the term and spread the added premium over the months left, and some audit mid-term when payroll changes a lot. Ask your broker what your carrier does.
What changes at renewal
Five things can move the new premium. The payroll estimate is reset. Class codes can change if the audit or the carrier finds the work belongs in a different class. The experience mod is replaced with a new one, which the mod page covers. The carrier's rate changes, because each state approves new loss costs with an effective date and the carrier applies its own multiplier on top. Last, many carriers apply a schedule credit or debit for things like safety program and management. State plans set the limit, 25 percent either way is common, and carriers decide whether to use it. A credit that shrinks at renewal raises the premium with no change in the work.
What the auditor reads
The auditor asks for the payroll records that support the policy period. Carriers commonly ask for quarterly payroll tax returns or state unemployment reports, the payroll journal showing overtime by employee, the general ledger and check register, subcontractor payments and 1099s, and subcontractor certificates of insurance. Officer payroll is also reviewed. If the payroll records don't split time between class codes, the classification rules, as quoted in state decisions, assign the highest-rated class at that job to the unsplit payroll. A blended payroll report can cost money here.
Subcontractors without a certificate become your payroll
When a subcontractor has no workers comp coverage on file for the period it worked, carriers add the cost of that work to the contractor's payroll for rating. A certificate that expired before the work was done doesn't help. If the auditor can't see a certificate for the work period, the payment is treated as payroll. Practice on materials differs. One carrier says it will remove up to 50 percent of the payment as materials when the original invoices split labor and materials, and without the split the whole amount is treated as labor. Another carrier may do it differently. If a records request goes unanswered, some states let the carrier bill on a higher estimated figure.
Overtime and officers are two places to lose money
Where the state allows it, the extra half in time and a half is left out of the premium payroll, but only if the records show overtime pay separately, by employee and by class code. Without that, the full amount is counted. Executive officer payroll is also treated separately. It's counted between a state minimum and a state maximum, and those amounts differ by state and change over time. Check what your state does before assuming any of this applies.
WHAT IT LOOKS LIKE IN DOLLARS.
Say the estimate was $1.5M of payroll in one class at a rate of $9 per $100, with a mod of 1.00. The deposit is $135,000. Payroll finished at $2.1M, which is 40 percent growth. The final premium is $189,000, so the audit bill is $54,000. Nothing went wrong with the policy. The estimate was just written before the growth.
If $60,000 of the $2.1M was overtime premium pay and the payroll records show it separately in a state that allows the exclusion, premium falls by $5,400. If $80,000 was paid to a subcontractor with no certificate for the work period and the invoices don't split materials, it adds $7,200. The final premium becomes $190,800 and the bill becomes $55,800. The small items are why the audit is worth reading line by line.
On $7M of revenue, $54,000 is 0.77 percent of revenue. On a 7 percent net margin that is about 11 percent of the profit. Booked as $4,500 a month, $54,000 reads as a normal labor cost. Booked once after the year ends, it reads as a bad quarter.
WHAT WE CHANGE.
SPM books workers comp expense each month from actual payroll by class code times the rate and the mod, and charges it to the jobs as part of labor burden. The installments paid are compared to that expense, and the difference builds as an accrued audit liability on the balance sheet. The audit then trues up an amount the books already show. SPM does not handle payroll, so the payroll provider's report by class code is the input.
The expected audit bill goes in the forecast as its own line, in the week the bill is likely to be due, and it's updated when the audit notice comes. The monthly accrual tells the owner how large the bill is. The forecast line tells the owner when the cash leaves. The 13 week page covers how the forecast is built.
When the audit worksheet comes, SPM compares payroll by class to the payroll journal, checks the class splits against job time, matches the subcontractor list to accounts payable and the certificate file, confirms overtime pay was excluded where the state allows it, and checks the officer payroll amounts. Errors go to the broker and the carrier with the support attached. Some states set a deadline for the carrier to finish the audit and some have an appeal process, so SPM notes the dates when the notice comes.
SPM gives the broker a payroll forecast by class code built from backlog and the labor forecast, so the renewal estimate reflects the year ahead and not the year behind. During the term, payroll by class is compared to the estimate each month. When it passes a threshold agreed with the owner, SPM asks the broker to request a revised estimate if the carrier allows it. A higher deposit costs more each month, and it avoids a large bill later.
FLAT MONTHLY FEE. NO SURPRISES.
Three tiers, priced by your trailing twelve month revenue. Which one you're in depends on how much of the work you want off your desk. No hourly billing. No payroll. The one-time onboarding fee is right here in the table.
| Last 12 months revenue | Monthly fee | One-time onboarding |
|---|---|---|
| Up to $1M | $1,900 to $2,900 | $1,000 |
| $1M to $3.5M | $2,600 to $3,900 | $1,500 |
| $3.5M to $6.5M | $3,800 to $5,700 | $3,000 |
| $6.5M to $9.5M | $5,100 to $7,100 | $4,500 |
| $9.5M to $12.5M | $6,100 to $8,500 | $6,000 |
| $12.5M to $15.5M | $7,400 to $11,000 | $7,500 |
| $15.5M to $18.5M | $9,400 to $13,500 | $9,000 |
| $18.5M+ | Quoted individually | Quoted individually |
The onboarding fee covers migrating your books back to the start of your last taxable year and getting you fully operational in 60 days. It's billed once, with your first invoice. It's the same for all three tiers. Your first month is prorated, and your monthly engagement starts on the first of the first full month.
Range reflects the three tiers below. Which one you're in depends on how much of the work you want off your desk. No payroll. No hidden line items. The onboarding fee is right here in the table.
You stop guessing.
You get the CFO work. Job costing built against the way you estimate, a 13 week cash forecast, monthly WIP, and a meeting every month that ends in decisions and never in a report.
Your bookkeeper still does the books.
You stop touching the books.
Everything in Core, and we do the bookkeeping and the controllership as well. Your office stops answering coding questions and stops fixing a reconciliation that will not balance on the last day of the month.
We do the books. No payroll.
Every job shows its margin while it is still open.
Everything in Executive, plus the job costing and WIP platform set up, loaded with your cost codes, and managed for you every month. You never have to learn it.
We do the books, the job costing, and the software. No payroll.
FREQUENTLY ASKED.
