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Guide to FHWA Funded Wrap-Up Projects

IV. FAQs

Q. What is a federally funded project?

A. 23 CFR 1.2 defines a federal project as "An undertaking by a State highway department for highway construction, including preliminary engineering, acquisition of rights-of-way and actual construction, or for highway planning and research, or for any other work or activity to carry out the provisions of the Federal laws for the administration of Federal aid for highways." A project is generally defined by specific geographic and/or temporal limitations.

Q. How are project "hard costs" calculated?

A. Hard costs include the costs of project labor and materials. Certain projects with major single equipment procurements (by the owner) generally deduct this cost when determining feasibility.

Q. What are "eligible " wrap-up contractors?

A. Eligible contractors are contractors in all trades performing work on site except those involved in specific activities such as:

  1. Hauling and delivery to and from the project site
  2. Material supply
  3. Environmental remediation
  4. Fabrication off-site
  5. Architects, engineers and other professional service providers

Even contractors who are otherwise eligible are not covered for their off site activities such as shop work, office support, etc.

Q. Can architects and engineers be covered under a wrap-up?

A. Although typically excluded due to their limited time on site and the minimal bid reduction (vs. high claim potential), they can be included in the basic wrap-up (workers' compensation and general/excess liability) Program. This program does not provide coverage for resulting from their errors or omissions. A separate but related Project Professional Program could be designed to cover Architects & Engineers Errors and Omissions (A&E E&O).

Q. What insurance coverages are not included in a wrap-up?

A. The basic wrap-up program typically does not provide pollution liability (Environmental Impairment Liability) or professional liability (Architects and Engineers Errors and Omission) coverages. It is not uncommon, however, to have separate EIL and/or A&E E&O policies added to a wrap-up program. Virtually never are automobile liability or physical damage coverages provided in a wrap-up program. In addition a wrap-up provides no coverage for off-site activities and contractors are still required to provide workers' compensation and general liability protection for these exposures.

Q. Is surety bonding included in a wrap-up?

A. For a variety of reasons, including cost to the project owner and administrative requirements for the owner and the surety, typically surety bonds are not included within a wrap-up program. Unlike insurance carriers, surety bond issuers do not pay losses, they guarantee contract completion and then seek recovery from the defaulting contractor. However, a surety bond component or a subcontractor's default insurance policy can be designed to work in conjunction with a wrap-up

Q. How do wrap-ups improve the safety of operations when the contractors don't pay for their own insurance?

A. Safety is a key ingredient of a successful wrap-up and, thus, several methods are used to control site losses. Contractually, contractors are required to comply with the site safety program. The on-site safety agent provides additional resources to supplement the Construction Manager's (CM) or General Contractor's (GC) basic program to insure such compliance. Many larger projects also offer the OSHA 10-hour and other safety seminars to assure that even the smallest contractor receive the safety education necessary. In addition, the contractors' individual loss experience is reported to the Compensation Bureau (in the same manner his non-wrap-up losses are reported) - these loss reports form the basis for the contractor's Experience Modifier. All bid documents should state that premium and loss experience incurred by each wrap-up contractor and/or Subcontractor of any tier will be reported to the NCCI (National Council on Compensation Insurance) in the normal manner used to calculate future contractor experience modifications. Poor experience results in a higher modification, which directly impacts their overall workers' compensation costs. In addition, a debit modification may result in the contractor being precluded from bidding jobs for certain owners or general contractors.

In addition, some wrap-ups use incentive and disincentive (with less predictable results) programs. For example, Wrap-up contractors may receive incentives for completing jobs with fewer-than-expected losses or no lost-time accidents. These incentives can be effective when extended to the employees and may be relatively modest in actual cost.

Contractors with less than exemplary safety records, however, may win contracts under a Wrap-up that would be unattainable if each contractor had to pay for its own insurance. This unfair advantage is a criticism of Wrap-ups that owners may want to address by including thresholds for safety records in bid documents.

Q. Who pays Wrap-up premiums and related expenses?

A. The owner pays all premium costs and related expenses for the design, marketing and administration of the wrap-up. It is important to remember that even under the traditional contractor provided insurance approach the owner pays the cost of insurance - it is included in the overall bid.

Q. Is the Owner's outlay for the Wrap-up premium plus related expenses less than its outlay under a non-wrap-up construction project?

A. Yes, on well designed and managed wrap-ups. The elimination of insurance costs from contractor bids combined with the savings related to safer work sites and dividends for reduced frequency of accidents typically more than compensate for the owner's outlay for wrap-up premiums and expenses. As a rule-of-thumb, the owner can expect to save from 10 percent to 25 percent of contractor-provided-insurance costs or 1 percent to 3 percent of project construction costs.

Q. When does the Wrap-up decision have to be made?

A. If a project is going to be built under a wrap-up, the decision should be made before the owner selects prime contractors by including wrap-up enabling language in the bid proposal documents for design-bid-build projects or in the Request for Proposal document for design-build projects. Although this is the preferred method, the owner can retain its options by including wrap-up enabling language in the bid documents or RFP. This language states that the owner has the option to implement a wrap-up and requires the contractor to isolate insurance costs when bidding. Collecting the information and conducting a feasibility study on the viability of a wrap-up can take from two weeks (very fast track) to two months. See Exhibit A.

Q. How long before construction is scheduled to begin does the design of a Wrap-up have to begin?

A. There is no set rule. The owner should allow sufficient time to evaluate feasibility, choose a broker and provide the broker with sufficient time to develop an underwriting submission, negotiate with the insurance markets and present results. All parties then must develop the necessary procedures and manuals to support the program. Depending on insurance market conditions, the process typically takes three to six months, however, in many instances work can be accelerated to accommodate the owner or project schedule.

Q. Are Wrap-up premiums less than prime contractor premiums plus mark-up?

A. Sometimes. Generally, large regional and national contractors pay very small increases in their existing premiums to add coverage for another project. Consequently, even when those amounts are marked up for profit, the cost included in a large contractor's bid on a non-Wrap-up job may be less than a smaller contractor's bid for the same work.

Q. How are reserves treated by the FHWA?

A. Owners may use federal funds for reserve accounts, however, the reserve account balance may not exceed the actuarially projected value of incurred claims and the reserve amount for any future payout, for such items as disability claims, may not exceed the present value of the expected payout. The interest earned on the account should pay any difference between present and future payouts. The reserve account must be adjusted every year and if the account balance is greater than the projected amount and any eligible program costs, the excess must be paid to the State's federal-aid account immediately. See the Appendix for the FHWA policy.

Exhibit A

Exhibit A describes the steps followed in doing an OCIP Implementation Feasibility Study on an Accelerated Schedule. Feasibility Studies can take from two weeks to two months. Exposure Analysis is done during the first three weeks. A review of contract language is performed during Weeks 1 and 2. During Week 2, reestablish the feasibility of the OCIP and make decision to proceed. In Weeks 2 and 3, there is preparation of Market Submission and establishment of Service Requirements. Carriers are prequalified from the Week 2 'go forward' point to Week 4. From the 'go forward' decision into the beginning of Week 6, an OCIP Manual is prepared and a Project Safety Program is developed. In Week 4, the OCIP is submitted to prequalified Carriers and Carrier site visits are completed. Program Negotiations are on-going from Week 3 into Week 6. An evaluation of the proposals is begun in Week 5 and concludes early in Week 6. Upon presentation of program options in Week 6, a Carrier is selected. Claims & Loss Control plans and an Enrollment Package is developed in the final two weeks so that the Program is implemented by the end of Week 6.

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Contact

Jerry Yakowenko
Office of Program Administration
202-366-1562
E-mail Jerry

 
 
Updated: 04/07/2011
 

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