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Guide to FHWA Funded Wrap-Up Projects
The hazards and resultant risks associated with major construction projects challenge both the owner and the contractors to develop risk management strategies. Traditionally, owners have relied on contract provisions designed to transfer risk to the contractors and specific insurance requirements to address these risks. While the liability and control is transferred to the contractor, the ultimate cost is transferred to the owner. The cost is added to the bid, and burdened with loading for profit, overhead and contingencies. The impact on the project cost is significant with cost ranging from 4 percent to 10 percent of project cost depending on the type of project and the coverage required.
In addition to the direct impact on the bottom line, the effectiveness of the risk management and insurance program can affect other issues including the safety, potential delays, and the necessary protection of the owners' assets.
While many larger contractors maintain insurance programs that address the exposures and significant limits of liability necessary to address these risks and comply with contract provisions, many smaller, disadvantaged or minority firms that may be otherwise qualified to perform the work find the insurance requirements create an exclusionary barrier.
To balance the need for adequate protection, reasonable cost and requirements that do not exclude minority participation, many owners, contractors and public entities have taken "control" of the insurance from each contractor and use an approach that typically provides broadened coverage at a reduced cost for all site contractors. Project owners being the principal parties when the approach was developed, it became known as a Wrap-up or, more commonly, an Owner Controlled Insurance Program (OCIP). In more recent years, the basic concept has been adopted by contractors and is referred to as a Contractor Controlled Insurance Program (CCIP). The Partner Controlled Insurance Program (PCIP), in which the owner and the contractor share any savings, is the newest entry into the field. Regardless of the acronym, each comes under the umbrella of Wrap-up program. Under any type of wrap-up, the key elements, advantages and disadvantages remain the same.
A wrap-up does not transfer liability, but offers a potentially more cost efficient method of securing risk protection. The wrap-up shifts control of the purchase from each contractor to maximize buying potential and assure the effectiveness of the coverage. The use of a wrap-up does not shift the chain of liability. If the negligent party is the owner or contractor, the responsibility for claim payments remains with the owner or contractor. The difference under a wrap-up is that the owner or contractor procures the specified insurance coverages for its contractors and subcontractors at all tiers.
While wrap-ups have been used successfully for more than 30 years, they are not without their risks and drawbacks. For owners-the term used throughout this document to refer to the controlling entity-perhaps the chief drawback is the increased administrative responsibilities. For prime and upper tier contractors, perhaps the major criticism of wrap-ups is the potential for increases in insurance premiums for coverage that must be purchased for non-wrap-up work. These and other issues are discussed more fully in the Q & A section and throughout this document.
In October 2002, the Federal Highway Administration issued its policy on wrap-up Programs. Under this policy, in addition to costs associated with the establishment of a wrap-up, premiums and claim payments, contributions to reserve accounts also are eligible for payment with Federal funds. Reserves are eligible, however, only if they meet certain guidelines and if any excesses in those accounts are returned to the Federal-aid account. The full policy is included in the Appendix.