Builders risk claims often include numerous complex issues. Delay–of-completion claims add a layer of complexity with General Conditions and Construction Loan Interest. Each can involve significant claim dollars, and each can be a source of dispute and confusion. Part One of this series will focus on General Conditions measurement deficiencies and considerations within delay-of-completion claims. Part Two of this series will focus on Construction Loan Interest.
Part 1: Builders Risk Delay-in-Completion Claims - General Conditions
“General Conditions” is a construction term, typically understood to be a catchall for construction overhead and other project expenses that are not trade specific. Because the term is often perceived as vague and all-encompassing, it provides occasion for the potential overstatement of claimed and measured amounts.
General Conditions, depending on the wording of the construction contract, may involve either on-site or off-site expenses for some or all of the parties engaged in the project (owner/developer, general contractor, construction manager, design builder, etc.). These expenses are typically not trade-specific, like carpentry work or plumbing would be, but they are still costs required to complete the project.
On-site general conditions can include construction trailer rental, cell phone bills, site lighting, portable toilets, snow removal, job office rental, site utilities, temporary heat and power, superintendent's salary, rubbish removal, and site security. Off-site conditions can include home office rent, salaries of project manager or accountant, and cost of hiring consultants, including testing labs, surveyor, engineers, and others. The contractor typically invoices the costs on a monthly basis, with a detailed list of all charges for the previous period.
Questions to Ask
To ascertain which General Conditions are claim related, key information is necessary. Some information may present coverage or adjusting issues for the underwriters and adjusters to address.
- If the General Conditions costs are claimed as a soft cost resulting from a delay, are they incurred during the delay period?
- Are the claimed General Conditions costs consistent with what was charged during the pre-loss or pre-delay periods?
- Are the General Conditions expenses additional, or would these expenses have been incurred, absent the loss?
- Are the General Conditions expenses necessary to repair the damage resulting from the loss?
- Are the General Condition costs being charged consistent with the base contract?
- Is there a dollar limit or percentage of General Conditions that is permissible in the underlying construction contract?
- Does the contract specify how General Conditions for extra work are to be dealt with?
- Are any General Conditions expenses that are not consistent with the pre-loss period a direct result of the loss and potentially part of the property damage claim?
- Is the identification of certain costs as General Conditions in the claim an attempt to circumvent other sub-limits?
- Are any of the General Conditions related to extra work that is not loss related or outside the scope of the initial contract?
Asking some mix of these questions should allow the measurement to be prepared accurately, subject to the coverage advice of the underwriter or adjuster. However, problematic issues or potential areas of dispute may still arise, as demonstrated in the following examples.
Examples of General Conditions Claim Issues:
1. Relationship Between the Project Fee and General Conditions
The general contractor / insured and insurer agree that there is a delay as a result of a covered peril. The loss results in a 4-month delay, and the insured parties assert a claim for $25,000 per month based on the historical average General Conditions. The General Conditions have yet to be incurred, but the estimate includes costs as follows:
- trailer rentals - $5,000
- home office rent - $10,000
- project manager time - $4,000
- superintendent time – $6,000
Prior to the loss, only trailer rentals and project manager time were included in the General Conditions. Moreover, the prime contract specifically delineates what costs are allowable v. excluded. Home office rent is specifically excluded and superintendent time is included in the fixed fee that the general contractor is charging on the time and materials of the job.
The corrected claim for general conditions costs is $9,000 per month during the delay period.
2. Labor Allocated to Multiple Jobs
The insured makes a claim for project management time of $7,000 under the General Conditions component of its costs. The insured sustains a bona fide delay of 4 months. However, the project manager is seen at multiple other construction sites prior to the loss, during the reconstruction and the resulting delay period. Timesheets support that the project manager is actively involved in three different construction projects. The question of what the insured is owed may become more complicated than simply allowing 1/3 of the incurred costs attributable to the loss site during the delay period.
3. Duplication of Claimed General Conditions
General Conditions per the prime contract are charged as 4.5% of the overall time and material costs for the project. The insured submits a claim for the repair costs resulting from the loss event of $1,000,000 plus the 4.5% General Conditions allocation. The insured separately submits a General Conditions claim as a soft cost during the delay period. Depending on how the insured is incurring the General Conditions costs, this scenario may result in a potential duplication of the claimed amounts in both the property damage claim and the soft cost claim.
General Conditions as part of builders risk delay-in-completion claims are often a source of complexity, misunderstanding and overstatement. Asking the right questions will help avoid common measurement deficiencies and result in more accurate claims.
Part Two of this series focuses on Construction Loan Interest, often the most significant part of a delay-in-completion claim. Click here to read.