Upon audit, your insurance carrier is only going to apply the classification code rates to the labor cost provided by the uninsured sub. The rates are not applied to the cost of materials provided by the sub. Therefore, when deducting from the uninsured sub, you should only base your deductions on the sub’s labor charge.
Hopefully, the sub’s invoice will break out labor vs materials and this will simplify the process. If not, you should ask for a revised invoice that breaks out labor vs materials.
If you can’t get a revised invoice, your auditor has wide descretion in estimating the labor percentage. There are two rules of thumb that are commonly followed when there is no break out on the invoice and when the sub provides all materials. The first is that it’s assumed that the labor charge will be for 50% or more of the invoice total. The second is in the case when the sub uses heavy equipment such as for land clearing or excavation, most auditors will assume that only 33.3% of he invoice is allocated to labor.