Worked Example: Workers Comp Premium Calculation for a Small Construction Business

Workers compensation insurance is one of the largest costs for blue-collar businesses. This walkthrough uses the workers comp calculator to calculate premiums for a small construction company with an experience MOD debit.

The Scenario

BuildRight Construction is a 20-person general contractor in Texas with the following profile:

• Total annual payroll: $1,200,000
• Class code: 5403 (Construction — General Contractor)
• Base rate: $7.20 per $100 of payroll (Texas NCCI rate)
• Experience MOD: 1.25 (25% debit due to two recent claims)
• Policy period: January 1, 2026 – December 31, 2026

Let's calculate the premium.

Step 1: Calculate the Base Premium (Manual Rate)

Workers comp premium is calculated per $100 of payroll:

Base premium = (Payroll / 100) × Class code rate Base premium = ($1,200,000 / 100) × $7.20 Base premium = 12,000 × $7.20 = $86,400 base premium

This is the "manual rate" — what the premium would be with a MOD of 1.00.

Step 2: Apply the Experience MOD

BuildRight has a MOD of 1.25 (25% debit), meaning their claims history is worse than industry average:

Modified premium = Base premium × MOD Modified premium = $86,400 × 1.25 = $108,000 modified premium

The MOD debit adds $21,600/year in premium — a significant cost.

Step 3: Calculate Monthly Premium

Monthly premium = $108,000 / 12 = $9,000/month

Step 4: Calculate Per-Employee Cost

Per-employee annual cost = $108,000 / 20 = $5,400/employee/year

Step 5: Understand the MOD Calculation

The experience MOD is calculated by NCCI using 3 years of claims data (excluding the most recent year):

• Expected losses: Industry-average losses for class code 5403 at BuildRight's payroll level
• Actual losses: BuildRight's actual claims over the 3-year lookback period
• MOD = (Actual losses + ballast) / (Expected losses + ballast)

A MOD of 1.25 means BuildRight's actual losses were 25% higher than expected.

Step 6: Project the 3-Year Cost of the MOD Debit

The MOD affects premium for 3 years (the most recent year's data isn't yet in the calculation). If BuildRight has zero new claims:

• Year 1 (2026): MOD = 1.25, additional cost = $21,600
• Year 2 (2027): MOD drops as old claims age out (assume 1.15), additional cost = $12,960
• Year 3 (2028): MOD drops further (assume 1.05), additional cost = $4,320
• 3-year total additional cost: $38,880

The two claims that caused this debit will cost BuildRight $38,880 over 3 years — far more than the original claim payouts.

Step 7: Calculate the Cost of Avoiding the MOD Debit

If BuildRight had a perfect safety record (MOD = 0.90, 10% credit):

Premium with MOD credit = $86,400 × 0.90 = $77,760 Annual savings: $108,000 − $77,760 = $30,240/year 3-year savings: $30,240 × 3 = $90,720

The difference between a 1.25 MOD and a 0.90 MOD is $90,720 over 3 years — enough to fund a full-time safety officer.

Step 8: Calculate the Audit True-Up

Workers comp premiums are estimates based on projected payroll. At policy end, the insurer audits actual payroll. If BuildRight's actual 2026 payroll was $1,400,000 (higher than estimated $1.2M due to growth):

Audited base premium = ($1,400,000 / 100) × $7.20 = $100,800 Audited modified premium = $100,800 × 1.25 = $126,000 True-up owed: $126,000 − $108,000 = $18,000 additional premium

Conversely, if actual payroll was $1,000,000 (lower than estimated):

Audited premium = ($1,000,000 / 100) × $7.20 × 1.25 = $90,000 Refund owed: $108,000 − $90,000 = $18,000 refund

Step 9: Calculate Per-Project Cost

BuildRight bids on commercial construction projects. To price workers comp into project bids:

Workers comp cost per labor dollar = $108,000 / $1,200,000 = 9% of payroll

For a project requiring $50,000 of labor:

Workers comp cost = $50,000 × 9% = $4,500

BuildRight must add $4,500 to the project bid just to cover workers comp.

Step 10: Try It Yourself

Enter BuildRight's numbers into the workers comp calculator:

• Total payroll: $1,200,000
• Class code rate: $7.20 per $100
• Experience MOD: 1.25

You should see:

• Annual premium: $108,000
• Monthly premium: $9,000
• Per-employee cost: $5,400/year

Step 11: Compare to Other Industries

Workers comp premiums vary dramatically by class code:

Industry	Class Code	Rate per $100	Annual Premium on $1M Payroll
Office clerical	8810	$0.15	$1,500
Restaurant	9079	$1.85	$18,500
Manufacturing	3632	$3.50	$35,000
Construction	5403	$7.20	$72,000
Roofing	5551	$18.50	$185,000
Tree trimming	0106	$25.00	$250,000

A roofing company with the same $1.2M payroll as BuildRight would pay $222,000/year in workers comp (vs. BuildRight's $108,000). Office workers cost only $1,800/year for the same payroll.

Common Workers Comp Mistakes

1. Misclassifying employees — putting a roofer in a clerical class code is fraud (and gets caught at audit)
2. Not tracking subcontractor certificates — if your subs don't have their own workers comp, YOU may be on the hook
3. Forgetting the experience MOD impact — small claims can cost 3x in long-term MOD debits
4. Underestimating payroll at policy start — leads to large true-up bills that strain cash flow
5. Not shopping the market — workers comp rates vary 20-30% between insurers for the same risk

Step 12: Strategies to Reduce Premium

1. Implement a Safety Program

Documented safety training, regular meetings, and an injury response protocol can earn 5-15% premium credits from most insurers. For BuildRight:

10% credit savings: $108,000 × 10% = $10,800/year

2. Self-Insure Small Claims

Claims under $1,000 typically cost more in long-term MOD impact than paying out-of-pocket. BuildRight could:

• Set a $500 self-insured retention for minor injuries
• Pay small clinic visits directly rather than filing a claim
• Save $15,000-$25,000/year in MOD debit avoided

3. Build a Return-to-Work Program

Light-duty jobs for injured workers reduce lost-time claim duration by 50-70%. For BuildRight:

Average lost-time claim duration: 6 weeks → 2.5 weeks with light duty Savings per claim: 3.5 weeks × $1,000/week = $3,500 2 claims/year × $3,500 = $7,000/year saved

4. Shop the Market Every 2-3 Years

Workers comp rates vary 20-30% between insurers. BuildRight could:

Current premium: $108,000 Potential savings (20%): $21,600/year

5. Request a Class Code Review

If BuildRight has added a clerical or sales function (lower-risk class codes):

Reclassify 20% of payroll at $0.15/$100 instead of $7.20/$100 Savings: $240,000 × ($7.20 − $0.15) / 100 × 1.25 = $21,135/year

Key Takeaways

• Workers comp is one of the largest costs for blue-collar businesses — 5-25% of payroll depending on industry
• The experience MOD has 3-year impact — small claims today cost premium for 3 years
• Class code assignment is the biggest lever — make sure payroll is correctly categorized
• Audit true-ups can strain cash flow — estimate payroll conservatively at policy start
• Safety investment has 5-10x ROI — $5k/year in safety programs can save $25k+/year in premium

Related Calculators

• Workers Comp Calculator — premium calculation
• Payroll Calculator — gross payroll calculation
• Employee Turnover Calculator — cost of attrition
• ROI Calculator — evaluate safety program ROI
• Overtime Calculator — overtime adds to workers comp basis