5 Questions to Demystify Soft Costs
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As you may know, there are two key coverage parts under a builder’s risk policy – hard costs and soft costs. The physical building, materials, labor…etc. are all examples of hard costs; whereas expenses due to a delay in completion is a soft cost. This includes expenses that are re-incurred as a result of the covered physical damage loss.
Below are five common questions we receive pertaining to soft costs and their corresponding answers:
Question #1: What constitutes a delay?
Many carriers define this as the period of time between the expected completion date and the actual date in which use or occupancy can begin.
Question #2: Does it matter what causes the delay?
Yes, it does. The delay in completion must be a result of physical damage due to a covered cause of loss. Common covered causes of loss include fire and wind damage. On the flip side, there are many situations that may result in a delay in completion, but are not considered a covered cause of loss. For example, delays resulting from labor and material shortages or design changes would not be covered under a builder’s risk policy.
Question #3: Which expenses are considered soft costs?
These expenses include pre-opening expenses, additional design or engineering fees, marketing expenses, financing costs, insurance costs such as additional workers’ compensation premiums, additional project administration costs, fees related to testing & inspection, permit fees and additional legal & accounting fees. This is not an exhaustive list, but addresses many of the common expenses covered under soft costs.
Question #4: Is there an additional soft cost exposure for a property owner?
Yes, there is. The property owner’s future revenue stream is dependent on the project being completed by the agreed upon completion date. Thus a delay in completion could result in a loss of income for the project owner.
To illustrate, let’s say a general contractor is building a 20-story apartment building. As of 4/1/16, the building is 50% complete and the units on floors 2-10 have been rented out effective 5/1/16. A fire occurs on 4/15/16 resulting in a total loss and the building in uninhabitable. The resulting loss of rental income would be considered a time dependent soft cost. It’s important to note that for the loss of rental income to be covered, the builder’s risk policy needs to be in the name of the property owner/developer.
Question #5: In the event of a loss, when will coverage for delay begin?
With respect to soft costs, there’s typically a time element deductible or waiting period that applies. For large construction projects, you may see a 30 or 60 day waiting period, whereas you may see a shorter waiting period for smaller projects. Coverage for delay in completion/soft costs would begin after the waiting period ceases.
Now that we’ve gone over some of the fundamentals of soft costs, I’d like to emphasize the importance of this coverage. Expenses and losses in revenue resulting from a delay in completion can be very costly. It’s highly advisable to work hand-in-hand with your broker to fully assess your soft cost exposure in order to ensure that you have adequate coverage and limits in place.
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