builder's risk expenses
Understanding soft costs
Buildings under construction, renovation or repair can face unpredictable risks, including fires, theft, vandalism, water damage and more. That鈥檚 why planning for the worst-case scenario is critical for construction projects鈥攁nd that starts with ensuring your clients鈥� insurance solutions include protection for all the costs they would incur if a project took longer to complete because of the damage. Without the right soft costs coverage and limits in place, a delay due to damage could lead to significant out-of-pocket expenses for your clients.
What's the difference between hard and soft costs?
There are two different type of construction costs that can be incurred: hard and soft. Hard costs are associated with the physical property and tangible assets of a project. Builder's risk base policies typically cover these losses due to severe weather, fire, vandalism or theft. Soft costs, also known as delay in completion expenses, are related to additional expenses incurred due to delays in the project as a result of a covered loss. Coverage for these costs requires an endorsement to a builder鈥檚 risk policy.
Hard costs can include:
- Materials
- Labor
- Contingency
- Site management
- Material handling
- Preconstruction
- Project organization
Soft costs can include:
- Professional fees for accountants, attorneys, consultants, engineers, architects
- Insurance premiums
- Project administration
- Rentals, equipment and tools
- Project financing
- Construction management
- Advertising, marketing or public relations
- Real estate taxes
- Temporary facilities and officies
A hard look at soft costs
华体会's Jason Muise, Chief Underwriting Officer, Marine, Jim Wood, Assistant Vice President, Marine Claims, and Amy Panagiotou, Assistant Vice President, Marine, talk about the importance of having the right soft costs limits on your clients' builder's risk policies and offer insight into how soft costs are assessed.
Factors to consider when evaluating a builder's risk policy
It often takes longer than expected to get a project back on track after a covered loss occurs. It is crucial to build in high enough limits to offset expedited costs or account for the additional expenses incurred during a delay, which could be driven by:
Inflation
Inflation has contributed to an increase in cost of construction materials and labor, and for long-tailed projects, cost of materials will be significantly different than they were when a project began.
Lead times
The global supply chain remains fragile, leading to higher-than-average lead times on materials, adding complexity and uncertainty to construction projects.
Build America, Buy America Act
Part of the Infrastructure Investment and Jobs Act enacted in November of 2021, the requires that construction materials used in covered infastructure projects are produced in the United States. These requirements can restrict supply and drive up costs.
Help protect against coverage gaps
Because individual builder's risk policy terms ultimately define coverages and limits, it is important for agents and brokers to assist clients in considering all potential expenses that should be included based on the unique aspects of the project. Educating your customers on soft costs can help them understand what is at risk if they're not adequately protected.
Look at the operational budget. Go through the operational budget of the project to evaluate the exposure and understand what is at risk.
Tailor coverage to the project. Ensure that coverage is tailored to the unique project with the appropriate limits and exclusions.
Recommend delay in completion and soft costs coverage. Ensure your client understands what this coverage protects against and the intangible expenses that are associated with soft costs.
Establish appropriate limits. Understand what soft costs your client could incur if a devastating loss happened before construction was complete and set limits accordingly.
Soft costs calculator
华体会鈥檚 soft costs calculator helps make it easier to guide your coverage conversations with your customers.
Soft costs coverage in action
This example can help illustrate the value of a soft cost endorsement.
Project: The project is a new construction of a mixed use 10-story apartment building. The building will have 100 rental units and retail space on the ground level that will be leased to tenants.
Coverage: The policy carries a $30M project limit and $10M soft costs limit, as well as a $2M limit for loss of rents.
Loss: When the project is 95% complete, a sprinkler head bursts on the 10th floor, causing severe water damage. The cost to repair the damage is $2.5M. As a result of the damage, there is a 3-month delay in completion of the project. $1.5M of additional engineering costs, insurance premiums and fees are claimed under the soft cost endorsement.
$4M claim breakdown
$2.5M hard costs
- Electrical
- Plumbing
- Interior finishes
$700K extended general conditions
- Utilities
- Job site trailer
- Fencing
- Project manager
- Jobsite security
- Temporary office and facilities
$800K soft costs
- Loan fees
- Loan interest
- Engineer and architect fees
- Insurance premium
- Expenses for advertising new opening
- Fees for building inspectors to re-inspect building
- Real estate taxes
Builder's risk resources
Resources for your agency
Explore our builder's risk offering
Quote, bind and issue online
TAP Sales allows you to issue builder's risk policies quickly and easily.
Resources for your customers
Hanover Risk Solutions has assembled a range of resources, partner offerings, and education and training to help clients address their marine risks.
Understanding soft costs
Buildings under construction, renovation or repair can face unpredictable risks, including fires, theft, vandalism, water damage and more. That鈥檚 why planning for the worst-case scenario is critical for construction projects鈥攁nd that starts with ensuring your clients鈥� insurance solutions include protection for all the costs they would incur if a project took longer to complete because of the damage. Without the right soft costs coverage and limits in place, a delay due to damage could lead to significant out-of-pocket expenses for your clients.
What's the difference between hard and soft costs?
There are two different type of construction costs that can be incurred: hard and soft. Hard costs are associated with the physical property and tangible assets of a project. Builder's risk base policies typically cover these losses due to severe weather, fire, vandalism or theft. Soft costs, also known as delay in completion expenses, are related to additional expenses incurred due to delays in the project as a result of a covered loss. Coverage for these costs requires an endorsement to a builder鈥檚 risk policy.
Hard costs can include:
- Materials
- Labor
- Contingency
- Site management
- Material handling
- Preconstruction
- Project organization
Soft costs can include:
- Professional fees for accountants, attorneys, consultants, engineers, architects
- Insurance premiums
- Project administration
- Rentals, equipment and tools
- Project financing
- Construction management
- Advertising, marketing or public relations
- Real estate taxes
- Temporary facilities and officies
A hard look at soft costs
华体会's Jason Muise, Chief Underwriting Officer, Marine, Jim Wood, Assistant Vice President, Marine Claims, and Amy Panagiotou, Assistant Vice President, Marine, talk about the importance of having the right soft costs limits on your clients' builder's risk policies and offer insight into how soft costs are assessed.
Factors to consider when evaluating a builder's risk policy
It often takes longer than expected to get a project back on track after a covered loss occurs. It is crucial to build in high enough limits to offset expedited costs or account for the additional expenses incurred during a delay, which could be driven by:
Inflation
Inflation has contributed to an increase in cost of construction materials and labor, and for long-tailed projects, cost of materials will be significantly different than they were when a project began.
Lead times
The global supply chain remains fragile, leading to higher-than-average lead times on materials, adding complexity and uncertainty to construction projects.
Build America, Buy America Act
Part of the Infrastructure Investment and Jobs Act enacted in November of 2021, the requires that construction materials used in covered infastructure projects are produced in the United States. These requirements can restrict supply and drive up costs.
Help protect against coverage gaps
Because individual builder's risk policy terms ultimately define coverages and limits, it is important for agents and brokers to assist clients in considering all potential expenses that should be included based on the unique aspects of the project. Educating your customers on soft costs can help them understand what is at risk if they're not adequately protected.
Look at the operational budget. Go through the operational budget of the project to evaluate the exposure and understand what is at risk.
Tailor coverage to the project. Ensure that coverage is tailored to the unique project with the appropriate limits and exclusions.
Recommend delay in completion and soft costs coverage. Ensure your client understands what this coverage protects against and the intangible expenses that are associated with soft costs.
Establish appropriate limits. Understand what soft costs your client could incur if a devastating loss happened before construction was complete and set limits accordingly.
Soft costs calculator
华体会鈥檚 soft costs calculator helps make it easier to guide your coverage conversations with your customers.
Soft costs coverage in action
This example can help illustrate the value of a soft cost endorsement.
Project: The project is a new construction of a mixed use 10-story apartment building. The building will have 100 rental units and retail space on the ground level that will be leased to tenants.
Coverage: The policy carries a $30M project limit and $10M soft costs limit, as well as a $2M limit for loss of rents.
Loss: When the project is 95% complete, a sprinkler head bursts on the 10th floor, causing severe water damage. The cost to repair the damage is $2.5M. As a result of the damage, there is a 3-month delay in completion of the project. $1.5M of additional engineering costs, insurance premiums and fees are claimed under the soft cost endorsement.
$4M claim breakdown
$2.5M hard costs
- Electrical
- Plumbing
- Interior finishes
$700K extended general conditions
- Utilities
- Job site trailer
- Fencing
- Project manager
- Jobsite security
- Temporary office and facilities
$800K soft costs
- Loan fees
- Loan interest
- Engineer and architect fees
- Insurance premium
- Expenses for advertising new opening
- Fees for building inspectors to re-inspect building
- Real estate taxes
Builder's risk resources
Resources for your agency
Explore our builder's risk offering
Quote, bind and issue online
TAP Sales allows you to issue builder's risk policies quickly and easily.
Resources for your customers
Hanover Risk Solutions has assembled a range of resources, partner offerings, and education and training to help clients address their marine risks.