OCIPs: a Strategy for Safety and Savings
By Safety Management Group
As construction costs escalate, building owners and developers are in a constant search for ways to trim project budgets. While some cost factors — such as the price of materials, fuel, and other components — are the result of basic supply and demand, others can be controlled to some degree. Insurance is an excellent example.
One of the most effective strategies for achieving greater control over insurance costs has actually been around for half a century. It’s called the Owner Controlled Insurance Program (OCIP), and it gives project owners greater control over cost than traditional approaches. In addition, an OCIP can also have profound impacts upon the quality of the work performed and safety standards at the site.
What are OCIPs?
An OCIP reflects a fairly simple concept. In traditional construction approaches, the owner expects all contractors and subcontractors to maintain their own insurance coverage and build the cost into their bids. OCIPs depart from that by putting the responsibility for insurance in the hands of the owner. Most OCIPs encompass acquiring, funding, managing, and administering workers’ compensation, general liability, and umbrella coverage.
While it might seem counterintuitive for an owner to take on so much extra responsibility, the benefits can be impressive. A well-designed and carefully managed OCIP may lower an owner’s total project costs by 1 to 2 percent, representing significant savings on the overall cost of projects that stretch into tens and hundreds of millions of dollars. In addition, having an OCIP may also allow the owner to obtain broader insurance coverage with higher liability limits.
Another important benefit is the ability to exert greater control over the project’s safety. OCIPs usually include a comprehensive safety program coupled with a continuous field presence. That brings professional safety advisors to work directly with the owner’s and contractor’s teams to integrate safety from the initial hazard assessment planning stages through project completion.
Additionally, OCIPs reduce the number of insurance companies involved in the project, which can limit the likelihood of multiple insurers battling over legal actions or contract issues when a mishap occurs. Coverage disputes and subrogation issues disappear, and claims handling becomes substantially simpler.
In simple terms, the biggest benefit of an OCIP is that it allows the owner to assume and maintain control over many aspects of the project by giving the owner leverage to ensure that contractors and subcontractors meet the standards and costs.
That said, OCIPs do have their drawbacks. For owners, the primary risk is an unfavorable insurance market, in which rates climb and erase the potential savings. For contractors, bidding under OCIP rules may require new skills and careful analysis of how the contractor’s own insurance coverage compares to the project’s requirements.
Elements of successful OCIPs
The key to an effective OCIP is a comprehensive safety program. Whether that program is operated by the owner or subcontracted to a safety consulting firm, it will normally result in sufficient workers’ compensation insurance savings to fund itself and still provide additional savings to the owner.
A typical part of the OCIP safety process is a contractor prequalification program that enforces standards contractors and subcontractors are required to meet before being considered. Requirements might include all contractor personnel attending safety orientations before setting foot on the site, random drug screenings, and being able to document that past safety practices have been effective.
Savvy owners recognize that safety goes hand-in-hand with quality and productivity. Healthy employees work more effectively and have less downtime. With some OCIPs, owners even provide financial incentives for contractors who meet or surpass safety goals.
From the contractor’s perspective
High-quality, reputable contractors appreciate OCIPs because they provide evidence that the owner shares their desire for safety and quality. In addition, these contractors can benefit by having the opportunity to obtain broader insurance coverage with higher liability limits, gaining coordinated claims handling and management services, and not having to worry about coverage disputes and subrogation between contractors and insurers.
However, contractors that have not worked with an OCIP may discover that bidding on such projects may involve a learning curve. The bids make take more time to prepare. In addition, if bids between two contractors are close, the contractor with a better safety record may actually be at a disadvantage to a competitor without an effective safety program, particularly if the OCIP does not use experience modifiers in its pre-qualification process.
Because the payroll associated with the OCIP may be removed from the contractor’s handling, the contractor’s insurance company may reduce premium credits. In addition, dividends from workers compensation on an OCIP project will probably be awarded to the project owner, rather than to the contractors. These drawbacks do not overshadow the benefits of participating in an OCIP, but contractors need to consider them as they review the financial aspects of their bids.
Whether an OCIP is the right choice for a project depends largely on the owner’s willingness to take on the additional responsibilities associated with administering a program. If the owner lacks in-house expertise, they can outsource the management of the OCIP to a safety consulting firm that has experience with the approach. That way, they can take advantage of the benefits of the approach while keeping their own time and efforts focused on their core business.
Despite any perceived drawbacks, OCIPs offer a viable option for owners undertaking large construction projects. They provide safer work environments for contractors while limiting liability associated with other contractors on the site who may be underinsured. In addition, OCIPs allow contractors to benefit from comprehensive safety programs and reduce losses associated with workplace injuries.