The Number Most Firms Report Is Not the Number That Determines Their Premium

Walk into the average A/E firm at renewal time and ask the principal what their gross billings were last year. They can usually answer within minutes — the accounting system has a revenue total, and it's the number everyone refers to when discussing the firm's size and performance.

Ask them what their net professional fees were — gross billings minus subconsultant costs, organized by project type category — and the answer is almost always that it will take some time to pull together.

The premium is calculated on the second number, not the first.

E&O underwriters rate A/E professional liability on net professional fees — the firm's own professional services, with subconsultant pass-throughs removed. The reasoning is direct: the professional liability exposure the policy covers is the firm's own professional work — the drawings it sealed, the engineering it performed, the design decisions it made. Subconsultant work is covered by the subconsultants' own professional liability policies. The prime firm's exposure related to subconsultant work is real but different in character from its exposure for its own professional services.

A firm that bills $3 million gross but pays $1.2 million to engineering subconsultants has net professional fees of $1.8 million. The premium should be rated on $1.8 million, not $3 million. A firm that reports only gross billings — because that is the number it knows and the subconsultant separation requires additional work — may be paying a premium based on a revenue figure that overstates its own professional exposure by a third or more.

Understanding how underwriters use each revenue figure — and why the separation is worth producing accurately — is what makes the renewal application a financial management exercise rather than a clerical one.

→ Read: E&O Insurance Renewal for A/E Firms: The Complete Guide

Subconsultant Costs — What Gets Subtracted and Why

Subconsultant costs are the amounts the prime firm paid to subconsultants whose fees were included in client billings. These represent work performed by other licensed professionals — structural engineers, MEP engineers, civil engineers, geotechnical engineers, landscape architects, and others — who carry their own professional liability coverage.

Why subconsultant costs are subtracted

The prime firm's professional liability policy covers its professional work. When an architecture firm engages a structural engineer as a subconsultant, the structural engineer's professional liability policy covers the structural engineering. The architecture firm's E&O policy covers the architectural work.

There is overlap — the prime firm has some liability exposure for subconsultant coordination, scope management, and the integration of subconsultant work into the overall design. But the direct professional liability for the subconsultant's engineering calculations, seal, and deliverables rests with the subconsultant and is covered by the subconsultant's own professional liability policy.

Rating the prime firm's E&O premium on gross billings that include subconsultant fees would double-count coverage for work already covered by another policy. The subconsultant cost subtraction removes that double-counting from the premium base.

What qualifies as a subconsultant cost

For E&O renewal purposes, subconsultant costs are the fees paid to licensed professional consultants whose work was included in the prime firm's billing to the client — regardless of whether those fees were passed through at cost or billed with a markup.

If the architecture firm billed the client $150,000 for structural engineering services and paid the structural engineer $125,000 — either as a straight pass-through at cost or including a coordination markup — the subconsultant cost for that billing is $125,000. The net professional fee contribution from that portion of the invoice is the $25,000 markup retained by the prime firm, if a markup was applied.

The subconsultant cost is the amount paid to the subconsultant, not the amount billed to the client for the subconsultant's work. The difference — if a markup was applied — is part of the prime firm's net professional fee.

What does not qualify as a subconsultant cost

Reimbursable expenses — printing, travel, permit fees, specialty testing — are not subconsultant costs for E&O renewal purposes. They are direct project expenses that may or may not be billed to the client, but they do not represent professional services performed by a licensed subconsultant.

General contractors, construction managers, and trade contractors are not subconsultants for E&O renewal purposes. Their work is covered by general liability and builders' risk policies, not by professional liability policies.

Vendors and suppliers — software providers, equipment suppliers, specialty fabricators — are not subconsultants. Their work is not professional design services and is not covered by professional liability policies.

The subconsultant cost category for E&O renewal is specifically licensed design professionals whose professional services were engaged by the prime firm and included in the prime firm's billing to the client.

Net Professional Fees — The Number That Determines the Premium

Net professional fees are gross billings minus subconsultant costs. This is the figure that represents the prime firm's own professional services — the work it performed under its own professional seal, the design decisions it made, the deliverables it produced.

This is the premium base. The E&O rate — expressed as a percentage of net professional fees — is applied to this number to produce the premium for each project type category. Categories with higher risk profiles carry higher rates. The premium for a category with $400,000 in net professional fees and a 1.5% rate is $6,000. The premium for the same net figure in a lower-risk category at a 1.0% rate is $4,000.

The accuracy of the net professional fee figure — by category and for each reporting period — determines whether the premium is correct.

Billings vs. Income vs. Fees — which net figure to report

Net professional fees can be expressed in three ways, depending on which revenue measure is used as the starting point.

Net Fees uses contracted fee amounts as the gross figure. For multi-year projects, this approach distributes revenue based on the contract, not on when work was actually performed and invoiced. A project contracted at $600,000 and billed across three years may appear as $600,000 in year one if contracted fees are reported, overstating year one and understating the subsequent years.

Net Billings uses actual invoiced amounts as the gross figure. For multi-year projects, billings automatically capture the right portion of each year's work — only what was invoiced during the reporting period is included. Net Billings is the period-level measure most underwriters prefer because it accurately reflects the work performed and invoiced during the specific renewal period.

Net Income uses actual collected amounts as the gross figure. For firms with consistent collection performance, Net Income and Net Billings will be close. For firms with significant aged receivables or slow-paying clients, the difference can be meaningful.

Use Net Billings or Net Income unless the underwriter specifically requests contracted fees. The period-level accuracy of billings or income is what underwriters need to assess the firm's activity during a specific renewal period — particularly for multi-year projects that would be distorted by contracted fee reporting.

Producing the net figure by category — the core of the renewal report

The net professional fee figure must be produced separately for each project type category in the underwriter's classification list. Commercial net professional fees, Healthcare net professional fees, Residential net professional fees — each category's premium is calculated separately, at its own rate, based on its own net figure.

This is why the project categorization setup matters. Without a category tag on each project, gross billings and subconsultant costs cannot be automatically allocated to the correct category. The allocation must be made manually at renewal time, which is the source of the multi-day reconstruction exercise most firms face.

BaseBuilders summarizes the renewal report by the E&O Category field tagged on each project. For each category in the underwriter's list, the report shows gross billings for that category, subconsultant costs for that category, and net professional fees for that category — for any reporting period defined by the date range. The net figure the underwriter needs, by category, is the output of a single report run.

→ Read: Subconsultant Management for A/E Firms

→ Read: Cash Flow & AR for A/E Firms