Getting the job. It’s a tough task where too much optimism can cost dearly, too little can cost receiving the bid. If too many low bids occur, who’s responsible to the stockholders?
Because the construction industry works by a bidding system rather than a negotiated contract, errors can be difficult to remedy. Leaving out the painting number on a half-million foot office building costs dearly.
Computerization of the bid process has helped and hurt. The program will not allow forgotten inputs, but people tend to believe a computer generated number.
Quality control for bids is essential for survival, both for the estimator and the executives. The estimator calculates the bid, but the executive signs the contract.
The decision to sign the contract drives the scrutiny if money is lost. Directors and officers insurance protects the executive financially when stockholders seek redress in response to a catastrophic contract.
Getting fired is the lesser issue to being sued for incompetence or fraud. The directors and officers exposure boils down to one unfortunate fact. The covered position must make decisions in real time ahead of perfect knowledge; the claimant has the benefit of hindsight.
You can protect yourself by knowing your duties as a director or officer:
1. You must act in good faith and give prudent care in your decisions.
2. You are required to be loyal to the business.
3. Disclosure: you must disclose material facts to regulators, other board members, officers, creditors,
bondholders, stockholders, and other potential investors.
Implement a policy of redundant checks on all contracts, bids, offerings, scopes of work, payments, or any other routine agreements which can lull people into complacency. Routine hides defective work well.
Spot check bid numbers against industry averages, or have this capacity in the computer program. If you’ve been in the industry awhile, check your gut instinct against the line items in the bid. If they don’t make sense, recheck. Consider every contract your responsibility, otherwise they may come back to haunt you.
Have you ever compared premium quotes only to discover the policies had different deductibles, limits, or even a different audit basis? Confusing, isn’t it?
Premiums do not compare easily, nor do they necessarily reflect costs of your risk profile. Lower premium is not always your best bet. If it were, going without any insurance would be every company’s default position. But, uncovered risk puts companies out of business every day. So, how do you know the right amount to budget for insurance? You don’t, so budget for risk, and from that, buy insurance.
As a business owner and entrepreneur, identify and assess your risks. Uncovered liability risks, like driving vehicles or manufacturing a product, can destroy your company. Running out of postage will probably not slow things down. You prioritize and decide what liabilities you want to assume and what liabilities you want to transfer.
For example: automobile physical damage. How large is your fleet, how predictable is this loss? If you have one executive new vehicle with financing, you’re going to buy insurance to cover it; just think deductible versus premium. If you have twenty similar vehicles, say panel trucks, and the fleet is paid for, you may consider not insuring the physical damage for collision or other perils. Why? Because you’re just paying a fee to bank the money while you do the claims legwork anyway. Your drivers can reduce your risk through defensive driving techniques and not drinking, texting or using cell phones. Keep the premium, accept the risk.
How about your products in transit? Is the value in one load big enough to ruin your company financially? Or do you ship relatively small amounts by common carriers. The former requires insurance, the latter, self-retain the loss.
Okay, you’ve thought through your process. Now, in plain English, tell the agents what you want covered. Employee safety and health, if my products cause harm, if my car hits someone, this type of list. Then, how much per incident are you willing to pay? First $1000 of any loss, that type of decision. Now, choose a number or some percentage of your annual gross and limit all claims to that amount; the most you’re willing to pay for all claims, including insurance premiums. Let the agents design around these parameters and compare these programs.
The best predictor of future behavior is the past. Maybe, but it’s at least helpful to review the past with an eye towards improvement.
Reviewing losses can be tricky. Insurance company analysis utilizes an “exposure unit”. Sometimes an exposure unit is one thousand dollars in sales, one hundred dollars in payroll, square feet of a building, one hundred dollars of value, or per person. The important idea is to compare relative risk and loss rather than absolute quantities.
Chart your losses, particularly insurable losses or claims made or paid. Now chart payroll, number of employees, sales, goods manufactured, units manufactured, or any other reasonable business data points.
Compare the trajectory of the charts. Does the pattern of losses mirror one of the other statistics? For example, does your workers compensation losses trend with payroll, sales, number of employees, or even square footage of your business?
Some claims history is explained by firing one employee, maybe a bad driver. Don’t ignore the fact that a bad driver got through your screening system. Make sure that leak has been plugged before thinking the problem is resolved.
Other claims may be reduced by a larger work area. Perhaps employees were just too crowded to work safely. That would indicate resolution, but think in terms of square foot per worker as a crowding issue in the future.
When you find your unexplained losses and the closest statistical trend, let’s assume claim dollars and gross sales, than forecast the business statistical trend and the claims amount.
This chart will also predict your insurance costs.
Use the same format to hindcast claims. Start now and project into the past. How much error is in this prediction? If it’s close year-to-year, it should be a good indicator of the future.
Start thinking about why these two data sets mirror. Do claims rise as you push to meet demand? Do you over-staff to meet demand and some employees lose focus? Are your claims about products not being quality checked at a certain volume? Once diagnosed, any loss control issue can be resolved, and pay you dividends. Ask your loss control service for help on these issues.