When a developer of a building, or any project, is faced with a course of construction insurance loss, there are many things they may need to consider: how to properly mitigate and/or prevent any further damage to their property; notifying the insurance carrier of the loss; potential impacts on the timing of construction work remaining; etc. One step that is often overlooked, or only given minimal consideration, is how to efficiently track costs related specifically to the insurance event. This seemingly minor task, if not done properly, can cost management countless hours over the span of the project. It is also important to note that insurers routinely utilize forensic accountants, who require/demand substantial amounts of construction and project documents, and support for incurred costs. If the requested information is incomplete or inaccurate, it could seriously jeopardize an equitable and complete recovery for the insured. In this article, we will discuss some of the key things to consider when setting up cost codes and systems to properly track loss-related costs.
It is important to consider and understand the coverages afforded within the insurance policy, when a contractor or developer sets up systems to track costs. There are many types of builder’s risk policies that offer varying amounts and types of coverages. Consulting with an insurance coverage expert to determine the coverages your policy affords so you can make informed decisions based on accurate information is imperative. The type of coverage your policy provides will impact the types of systems you need to put in place to efficiently monitor and track these costs.
Builders Risk insurance policies typically provide coverage for two types of costs: Direct Costs for Physical Damage and Time Element Related Costs, often referred to as Soft Costs or Delay in Completion. Direct Costs typically would include: the cost to repair the physical damage, the cost to do any emergency/mitigation work to prevent any further damage from occurring, the cost to remove debris caused by the event, and the cost for additional professionals required to repair the physical damage. These costs are typically easier to identify and track. It is helpful to categorize these costs by similar type of work rather than by vendor. This allows you to track the types of costs against any potential policy sub-limits you may have within the policy. Tracking these costs efficiently allows decision makers the ability to properly allocate resources to attempt to mitigate any productivity loss.
Time Element Related Costs are typically more complex to measure. Some of the coverages commonly afforded in these types of policies include: rental income, increased financing costs, real estate taxes/ground rents, miscellaneous carrying costs, legal and accounting fees, contractors’ general conditions, marketing expenses, and insurance premiums. Since these costs are typically more difficult to measure, it is important to track these costs separately from one another, as there are almost always Sub-Limits applied to these insurance coverages. A large component of measuring these costs is the time period associated with these costs. It is essential while tracking these costs to properly identify the time period in which the cost is being incurred. For instance, if you track invoices solely on invoice dates, it may not represent the true time period the cost represents.
We hope this brief article is helpful when considering the most efficient way for tracking costs related to an insurance event. As we all know, every construction project is different and the mechanism and manner that costs are tracked will vary significantly. However, these simple points will allow a strong base for a system to properly track costs.
Article written by Rollins Senior Accountant, Zachary Weeden, CPA, CFF