Outsourcing, Reengineering, Variable Workforce, you choose the term but they all represent the shift in employment from permanent employees to greater utilization of contract workers. Today in DuPont our contractors represent about 42 percent of our workforce population and this percentage has grown steadily over the last decade. This population shift also represents a significant shift in risk for owners. This paper will focus on the current financial risk associated with rising insurance costs to those companies that use significant amounts of contracted services. We'll then discuss ways that the impact of these costs can be mitigated.
Insurance is an important and necessary part of financial planning whether at home or at work. We've all experienced the impact of rising insurance costs and are looking for ways to lower those costs. Let's start by taking a look at the embedded or pass through costs of insurance that contractors typically include in their bids or prices to their clients. The estimates shown below represent a construction type service.
Total Contracted Services $1,500,000,000
Payroll $ 750,000,000
Workers' Compensation $ 82,500,000
General Liability $ 30,000,000
Total Pass Through Cost $ 112,500,000
These estimates are conservative but do represent the reality of today's environment. From the owner or consumer's point of view, 7.5 percent is a huge markup and on this scale, represents an enormous amount of money. Even a small percentage improvement can return a significant amount of money to the budget. A contractor that can deliver lower overall insurance costs will be viewed by the owner or client as a valued partner as well as a healthy insurance risk.
Now, let's take a look at the insurance environment from the perspective of the contract service provider who is trying to be profitable and competitive in a highly competitive, low-margin industry.
Three years ago, the top challenge for contractors was a shortage of trained help. Today, the top challenges are sources of future work and the cost of workers' compensation and liability insurance. (Source, Construction Financial Management Association)
Contractors experienced premium increases of between 20 and 25 percent at the low end and 200 to 500 percent at the high end. (Source, ENR/February 4, 2002)
Impact will be felt most by subcontractors whose rates could climb by as much as 80 percent. There will be a marked effect on their ability to perform work or even stay in business. (Source, ENR/September 20, 2002)
General insurance marketplace conditions are unlikely to improve until the health of the wider financial market takes a turn for the better. (Source, Willis Global Perspectives 2003)