When a contractor buys a general liability or workers' compensation policy, the premium is calculated on estimated figures: projected payroll, projected revenue, projected subcontractor costs. The carrier accepts a deposit premium based on those estimates. At the end of the policy year, the carrier conducts a premium audit — they compare the actual numbers to the estimates and collect additional premium if you grew, or credit you if you shrank.
Most contractors understand this in theory. What catches them off guard is the mechanics: what the auditor actually counts, how subcontractor payments get treated, how a busy year or a misclassified employee turns a modest policy into a five-figure year-end bill. This guide explains exactly how audits work for Texas contractors, what records you need to maintain, and how to avoid the surprises that trip up most people going through their first audit.
Why Policies Are Auditable in the First Place
Insurance premiums are exposure-based. The more payroll you run, the more people are potentially at risk, and the more premium should be collected. The more revenue you generate from construction work, the more potential liability exposure you carry. Because the carrier can't know your final numbers when the policy is issued — you might land a $2 million job that wasn't on the horizon at policy inception — the industry uses an estimated premium collected up front, with a final reconciliation at year end.
This is different from most insurance products. Your auto policy doesn't audit your mileage. Your homeowner's policy doesn't audit how many parties you threw. But GL and workers' comp for contractors are designed this way because the exposure genuinely scales with business activity, and collecting a fixed premium on an estimate that might be significantly wrong creates material pricing risk for both sides.
What Gets Audited: General Liability
GL audits for contractors are typically based on gross receipts or payroll, depending on the classification code. Most construction trade classifications use gross receipts — the total revenue from construction operations during the policy year.
What counts as gross receipts
Gross receipts in a GL audit context typically includes all revenue from the operations covered by the policy — material and labor billed to customers, project management fees, and markup. It generally excludes sales tax and insurance proceeds.
Where contractors often get surprised: change orders and subcontractor invoices billed through the GC. If you're a GC and you billed your customer $1.2 million but $700,000 of that was subcontractor work, some carriers include the full $1.2 million in gross receipts, while others allow you to subtract documented sub costs. The policy language and the carrier's audit rules determine which applies. Know your policy's treatment before the audit.
The subcontractor cost question
How subcontractor costs are treated in a GL audit is one of the most consequential audit variables for contractors. There are three common treatments:
- Sub costs excluded from receipts: The most favorable for the insured. If you paid $700,000 to insured subs and can document it, that amount is subtracted from gross receipts for audit purposes. You only pay GL premium on your own operations.
- Sub costs included at full receipts rate: Less favorable but occurs when subs are uninsured or when the policy doesn't allow the exclusion. In this case, the full revenue you billed flows through to the audit base, including the work done by subs.
- Sub costs included at a reduced rate: Some carriers apply a lower rate to documented sub costs rather than excluding them entirely. Still better than full rate, but not as clean as full exclusion.
The key requirement for excluding sub costs: the subcontractor must have carried their own insurance. If a sub was uninsured and you paid them $200,000, that $200,000 will be included in your auditable receipts at the full rate — because the carrier is effectively picking up the exposure your uninsured sub should have been carrying. Documenting sub certificates of insurance isn't just a compliance requirement — it directly affects your year-end audit result.
Collect and retain sub certificates before and during the job, not just at the start. An auditor will ask for certificates covering the period when sub work was performed. A certificate from March that expired in June doesn't cover sub work done in September. Track expiration dates and collect renewals mid-project — the audit will.
What Gets Audited: Workers' Compensation
Workers' comp audits are based on payroll — total compensation paid to employees, classified by job function. The audit determines whether your actual payroll matched the estimates you provided at policy inception, and whether employees were correctly classified.
How payroll is defined for WC audits
Workers' comp payroll includes: gross wages, salaries, overtime (at time-and-a-half, but the excess half is typically excluded), bonuses, commissions, and the value of housing or vehicle allowances if provided. It generally excludes expense reimbursements, tips (in most states), and the cost of employer-paid benefits.
One nuance for Texas contractors: there are payroll caps per employee for WC purposes. As of 2026, the NCCI payroll limitation for Texas caps the auditable payroll per employee per week at a capped figure tied to the state average weekly wage — your broker can give you the current number. This cap benefits contractors with highly paid employees; the cap limits how much premium exposure attaches per individual.
Employee classification codes
Workers' comp premium depends not just on total payroll but on how that payroll is classified. Every type of work has a class code — codes that group similar exposures and carry different rates. For a roofing contractor, for example:
- Roofers working on roofs (Code 5551): rated high because the injury frequency and severity are high
- Clerical staff working in the office (Code 8810): rated very low — desk workers have far fewer and less severe claims
- Sales staff who don't enter construction sites (Code 8742): rated low
If an auditor finds that payroll was assigned to the wrong code — particularly if it was assigned to a lower-rated code when the work was actually higher-hazard — they will reclassify it and the additional premium follows. Misclassification in the GC's favor is common (sometimes inadvertent, sometimes not), and carriers look for it specifically.
The 1099 subcontractor problem
If you pay 1099 subcontractors without requiring them to carry their own workers' comp, the carrier may treat them as employees for audit purposes — particularly if the relationship looks like employment (you direct their work, they work exclusively for you, you provide tools). In Texas, the distinction between employee and independent contractor for workers' comp purposes involves a multi-factor test that WC auditors understand well.
Even if the 1099 classification is legitimate, uninsured 1099 workers get included in the audit base. If you paid an uninsured sub $80,000 in labor, some portion of that may be added to your WC payroll at their trade's class code rate. The remedy is the same as for GL: collect certificates from your subs and retain them for the audit. See our guide on 1099 subcontractor misclassification and insurance for the full analysis.
The Audit Process in Practice
Most audits for smaller contractors are conducted via mail or phone — the auditor sends a questionnaire asking for payroll records, revenue figures, sub certificates, and 1099s. Larger accounts often involve a field audit where the auditor visits your office and reviews your books directly.
What the auditor typically requests
- Payroll records (typically quarterly 941 federal tax deposits or payroll journals, by employee name and classification)
- 1099 forms for subcontractors paid during the policy year
- Certificates of insurance for subcontractors (to document insured sub costs that can be excluded)
- General ledger or income statement showing gross revenues by work type
- Job cost reports or contracts for large projects (particularly if you want to separate out sub costs)
Timeline
The carrier typically initiates the audit within 60 to 90 days after policy expiration. They'll give you a deadline for submitting records — usually 30 to 45 days. If you don't respond, the carrier may conduct a "pessimistic audit" — estimating your exposure on the high end — and issuing a bill based on that. Pessimistic audits are almost always worse than the actual numbers. Responding promptly with organized records protects you.
After submitting records, expect 2 to 4 weeks for the auditor to process them and issue an audit billing statement. You'll receive a final audit premium statement showing the estimated premium, the actual premium, and the difference owed or credited.
Understanding the Additional Premium Bill
If your actual exposure exceeded the estimate — you ran more payroll, generated more revenue, or used more uninsured subs than projected — you owe additional premium. The bill can be significant:
- A contractor who estimated $500,000 in receipts but actually billed $900,000 pays additional GL premium on the $400,000 difference, at the policy's rate for their classification
- A contractor who estimated 10 employees but ran payroll for 17 pays additional WC premium on the incremental payroll
- A contractor who used $200,000 of uninsured subs and excluded them from the estimate pays additional premium on that $200,000 at the full GL rate
The most common reaction to a large audit bill is surprise — but the math is straightforward once you understand the mechanics. The additional premium was always owed; it's just now being calculated with actual data instead of estimates.
Budget for audit premium as part of project profitability. If your GL rate is, say, $8 per $1,000 of receipts, and you land a $500,000 job that wasn't in your original estimate, that job carries approximately $4,000 in additional GL premium at audit time. Build insurance cost into your project estimates — not just the deposit premium, but the marginal audit cost of each incremental job. Some contractors run tight margins on mid-year wins and then absorb a painful audit bill that retroactively shrinks those margins.
How to Avoid Audit Surprises
Report payroll and revenue changes mid-year
Most policies allow you to submit updated estimates mid-term, adjusting the deposit premium accordingly. If you land significantly more work than projected in the first quarter, report it to your broker and adjust the estimated premium. This spreads the cost across the policy year rather than concentrating it in a year-end bill. It also avoids the cash flow problem of owing six or twelve months of additional premium in a single payment.
Document subcontractor insurance every time, not just at onboarding
Collect certificates from every subcontractor before they start work, verify the policy dates cover the work period, and file them by job. When the auditor asks for sub certificates, you want to be able to produce them organized by year and project, not digging through a pile of mixed paperwork. The value of this documentation is directly quantifiable: each dollar of sub costs you can document as insured is a dollar excluded from your auditable base.
Verify employee classifications at policy inception
Make sure every employee role is correctly classified at the time the policy is written. If you have field superintendents who sometimes swing hammers, their classification may be a field trade code rather than a lower-rated supervisor code. Get it right at inception — it's easier than disputing a reclassification after an audit is complete.
Maintain monthly payroll records that can be audited
The auditor will want payroll broken down by employee and by time period. Quarterly 941s are sufficient for most audits, but if the auditor wants monthly detail and your records only support quarterly figures, you're in a weaker position. Keep payroll journals or run monthly payroll reports from your payroll processor and retain them for at least three years.
Disputing an Audit
If you receive an audit billing statement you believe is wrong, you have the right to dispute it. Common legitimate grounds for dispute:
- Receipts or payroll included that belong to a different legal entity or a different policy year
- Sub costs included at the full rate when you have certificates showing the subs were insured
- Employee payroll classified at a higher rate when the actual work performed warrants a lower code
- Revenue included from non-construction activities (equipment sales, real estate, etc.) that aren't covered under the policy
The dispute process: notify your broker in writing within 30 to 60 days of receiving the audit statement (check your policy for the deadline). Your broker submits a dispute letter with supporting documentation. The carrier's audit department reviews it. This is not adversarial — carriers make mistakes, and auditors can misclassify items or miss documented exclusions. A well-documented dispute can result in a material reduction in the audit bill.
What doesn't work as a dispute: arguing that the audit methodology is unfair, or that your actual losses were low so the additional premium is disproportionate. Audits are mathematical — they apply the policy rate to actual exposure. If the audit math is correct and the documentation supports it, the bill is what it is.
Frequently Asked Questions
How far back can a carrier audit?
Standard policies allow the carrier to audit for up to three years after policy expiration for final premium determination. In practice, most carriers conduct the audit within the first year post-expiration. If you don't hear from them within 18 months, the audit may have been waived — but check with your broker; it's not automatic.
What happens if I don't respond to the audit?
The carrier will conduct a pessimistic (estimated) audit, typically applying a multiplier to the deposit premium. This almost always produces a higher audit bill than actual records would. It can also result in non-renewal or cancellation for non-cooperation. Respond within the stated deadline.
Can I request a copy of the audit report?
Yes. Request the completed audit worksheets from your broker. Review how the auditor classified each payroll item and revenue figure. This is the fastest way to identify errors worth disputing.
Does the audit affect my experience modification rate?
Yes, indirectly. Your experience mod is calculated using audited payroll data from prior years — the larger the audited payroll base, the more your actual loss history is weighted. Accurate payroll reporting and good loss history together keep your mod favorable. See our guide on how claims history affects your premium for the full experience mod explanation.
For more on how subcontractor classification interacts with insurance audits, see our guide on 1099 subcontractor misclassification. For the broader context of what contractors need for their first policy, see New Contractor's First Insurance Policy in Texas.