John has a great article published this month in Construction Executive magazine called, Common Errors that Kill a Soft Cost Claim.

If you’re a long-time subscriber to our blog, you may not realize that you can sort through all of our postings using the links in the footer area and the side bar of this site.  For example, if you’re a contractor looking for information on business interruption issues related to construction sites, click the construction link at the bottom of this page. Or, in the side bar, click the words soft cost.  It’s a way to sort through all of our posts and find information fast.

When a construction project is delayed due to an insured incident, there is an enormous amount of information that must be tracked immediately. Some of the bigger ticket items are interest expenses, refinancing costs, and property taxes. One often overlooked item is advertising.

I have worked on several apartment and condominium properties that created a significant amount of printed marketing collateral related to a specific opening date for a property. The marketing collateral included mailers with open house dates, brochures with pricing information, and fliers with current interest rates.

So, what happens when a construction project suffers a delay and the marketing materials are no longer current? High-quality marketing collateral for the purpose of selling property is complex and expensive to print, so contractors and project owners should be sure to check if these reprinting costs are covered when submitting a construction delay in completion insurance claim.

If the policy has coverage for soft costs, specifically advertising, some or all of the costs incurred to reprint these items may be recoverable. Owners should be prepared to show the insurance company the original cost of the material and the cost for reprinting the items. In addition, if the policy allows policy holders to claim loss of rental income, or gross earnings, the insurance broker may be able to effectively argue that these expenses mitigated the loss of income.

In the wake of a major accident or delay on a construction project, don’t start pinching pennies when it comes to the graphics needed to submit a soft cost insurance claim. Every soft cost insurance claim should contain two critical graphics.

The first is the “Extent of Damage” graphic.  This graphic is a general schematic of the project, for example a building with several floors, that is color coded to visually show the extent and cause of damage.  A normal color coding example would be red = severe fire damage, yellow = moderate fire damage, gray = smoke damage, dark blue = severe water damage, light blue = moderate water damage, and so on.  An “Extent of Damage” graphic provides a powerful visual tool to help the adjuster, who may not be a construction expert, understand the extent and causes of damage. If this graphic is provided to the adjuster as soon as possible after the event, the graphic can help to prevent future disputes regarding the scope of damage and associated repairs.

The second necessary graphic is a timeline of the events.  The timeline should show the anticipated completion date, the date of the event that triggered the loss, and the actual completion date of the project.  If there are other factors that affected the completion date, a hypothetical date of when the project would have been completed “but for” these additional events should be shown.

Graphics like these can help the claims process go more smoothly and help you achieve winning results when submitting a construction soft cost or delay in completion insurance claim.

When you are the developer of a commercial property, a lot is riding on your general contractor, and never more so than when you must submit a construction delay in completion insurance claim.  The general contractor is the person in charge of building the project, making sure all of the subcontractors get paid, and keeping records related to the job.

One of the most important documents maintained by the general contractor are the CPM (Critical Path Management) schedules.  CPM schedules are a detailed estimate of  the time remaining to complete the project.  Because CPM schedules are usually updated regularly, and if they are kept with integrity, they can be an excellent tool to estimate the impact on a delay in completion or soft cost claim.

Theoretically, one can see the estimated completion immediately before the incident and then see the impact on the completion date after the schedule is updated following the incident.  Here’s the fly in the ointment:  If the general contractor could have potential liability, because his actions (or inaction) caused the loss event, he may not want to show the delay in the schedules.

I have seen situations where the contractor showed absolutely no effect to the CPM schedules until six months after the incident because the developer had threatened to sue the contractor for the damages.  Alternatively, I’ve seen situations where the contractor fabricates and exaggerates reasons to change the schedule so that, ultimately, no delays are related to the incident caused by the contractor. Either way, the flawed records will cause significant challenges in quantifying the delay in completion or soft cost claim, and defending the valuation during the insurance company review.

To avoid this potential pitfall, I suggest that the developer retain two experts immediately following the incident that triggered the delay.  First, retain a forensic engineer/planner.  This expert will document the damage, create a scope of repairs, create an estimated timeline for  repairs, ensure that CPM schedules are updated correctly and account for the incident, and be available to report on the final delay in time due to the incident.

Second, retain your forensic accountant.  The accountant will set up a specific record keeping system to ensure that all material, labor, and resources are accounted for in a manner that will withstand the audit of the insurance company’s accounting expert.  If these steps are not taken, the developers financial future may be left in the hands of the general contractor.

The Flip video recorder is easy to use, inexpensive, and has video and audio.

When a major construction project experiences a loss, a contractor is suddenly faced with the daunting task of documentation for the insurance claim.  To document a construction soft cost or delay in completion insurance claim, the insured party should video tape the damage, recovery, and general project progress on a weekly basis.

If you’re the “Clerk of the Work” in charge of documenting everything for a soft cost or delay in completion insurance claim, you can make what can be an overwhelming task a little bit easier.  Consider using the Flip video camera to help you with the documentation job.  While you walk the project, talk out loud to draw attention to different aspects of the project and describe in detail what you’re recording in the shot.

The reason this little camera does a great job capturing documentation is because it’s easy to use, compact, and inexpensive.  For $200 or less (depending on the model), you can get a lot of use out of this little device, and if it ends up broken on a job site, you won’t be crushed by the cost to replace it.  Just make sure that you download your videos right away and always make it a habit to backup videos, photos, and other documents you’re using to compile the evidence for your insurance claim.

It’s true that the quality of the video it captures is not high end.  But it does do an adequate job, and when you’re documenting a construction soft cost or delay in completion insurance claim, the content of the video is more important than the quality of the video.

Do you have a question about preparing or documenting a construction soft cost or delay in completion insurance claim?  Ask me below, in the Comments section.

After your business suffers a loss, you’ll meet the insurance adjuster and his accountant.  During this first meeting, or soon after, here’s what you’re likely to be told:

• The adjuster and accountant will work together to ensure that you’re paid what you’re owed.
• The accountant is not an insurance company employee, but an independent CPA with decades of experience in this field.

Here’s the rest of the story:

• The insurance company’s accountant may earn almost all of his fees by representing insurance companies and their attorneys.
• When the insurance company’s accountant makes draft schedules related to your business interruption loss, those schedules will be used internally by only the accountant and the adjuster—you will not be invited to review them.

The fact of the matter is that the insurance company’s accountant is there to calculate the loss based on instructions from the adjuster.  The accountant is there to assist the adjuster and make sure that the adjuster does not overpay the claim, which is reasonable. The problems start because the ‘independent’ accountant is not tasked with making sure that you, the insured party, are receiving a fair settlement.

The insurance adjuster you’re dealing with may be very personable. You may even like him or her. Heck, I even like some of them. But make no mistake about it:  When the adjuster and the adjuster’s accountant make assumptions or estimations in their calculations, those assumptions will favor their client–and their client is the insurance company.  That’s why you need your own expert.

My glass of water is usually half full.

It’s my nature to be optimistic. For better or for worse, my glass is usually half full. I’m usually the person on an even keel, making others around me laugh and “lighten up.”  However, I’ve found that there are times when being overly optimistic can be downright perilous…particularly if you’re the risk manager or owner of a business that has just suffered a loss.

Let me set the scene:  It’s 11:30 pm. As camera crews set up, a factory burns in the background and firemen drag hoses, shouting to one another. Snap! Camera lights expose the chaos of flames and water, and a news reporter shoves the microphone in front of a tousled, unshaven business manager.   The manager tells the reporter, “It really looks much worse than it is.  We’ll be able to fulfill all orders through our related companies and we will be back up to full production within two weeks.” (Smiles confidently.)  The reporter says, “Back to you in the studios.”

Now cut to me in my living room, watching the same news cast in my jammies, and you will witness a crazy person, shouting “Nooooooooooo!” at the TV screen.  Why, in this case, should a risk manager or owner be less-than-optimistic when talking to reporters?

Because the next morning someone from the factory will call the insurance company. When an adjuster is assigned the file, he will watch the same news clip on the internet–and save a copy of it to his computer. Then, three months later, when the company has lost sales and is still not fully back into production, the adjuster will want to know why the business didn’t get back to production within two weeks, as the manager so confidently told a reporter during the interview.

Hey, I didn’t just tell you a far-fetched bedtime story. I’ve seen different versions of this situation play out many times. It’s not always television: it could be newspapers, trade journals, or even just early conversations with insurance company representatives. Here’s the take away: when it comes to submitting a business interruption insurance claim, overly optimistic statements can come back and bite a business in the rear.

The best course of action, following an event like this, is to talk like a professional athlete. Talk for 30-45 seconds, but don’t actually say anything. Say something like, “This is a very unfortunate event and we’re not exactly sure of the extent of the operational impacts at this point. We have a team of dedicated experts on our staff that will do everything in their power to ensure that we recover from this incident and continue to be leaders in our market. Thank you.”

When speaking with the insurance company, clearly state what you plan to do to aid in your own recovery, but be guarded in your estimates of how effective any of your efforts may, or may not, be. Tell the insurance company you can guarantee efforts, but not results.

So…have you ever been burned because you were overly optimistic?  I’d love to hear from you–leave a comment below.

Immediately following the incident.  A seasoned expert can help you put your records in order for an advance request, discuss mitigating efforts, assist with setting up record keeping protocols that make sure no information is overlooked, and just act as an incentive for the insurance companies’ experts to play a little more fairly, because they know that they will be closely scrutinized.

Mistakes that will be very costly, in the business interruption portion of the claim, are made early in the claim process.  For example, simple documentation processes are overlooked while everyone focuses on the physical recovery.

Recently I had a manufacturing client that made an extra expense claim.  I was brought in immediately after the loss and insisted on daily payroll records being kept that detailed the physical activities of all of their employees following the loss.  They didn’t think it was a great idea and grumbled the whole time.  At the settlement meeting, over one year later, the insurance company’s accountant argued that there was minimal extra labor expense based on a historical trend analysis.  We pulled out the boxes of detailed payroll records and our summary schedules of the data.  Had we been called later in the process, we would not have had these records to work with.

End result: The insurance company’s accountant estimated the extra labor to be $6,000 but we settled for $320,000.  Again, the answer to the question of when to engage a forensic accountant is immediately after the loss.  For more examples, of how a forensic accountant can add value (not to mention relieving the pain of dealing with the insurance company yourself) to your claim, check out these examples.

Developers often run into trouble when they make claims for delay in completion or soft cost claims.  These claims are triggered when damage to the construction causes a delay in the planned completion date.  Many of the problems associated with proving these claims can be minimized by meticulously documenting the damage and recovery efforts beginning immediately after the incident.

Pictures, journals, & schedules

Here’s a list of things you should be doing to document and support a construction delay in completion or soft cost claim:

1. Photograph and/or video all of the damaged areas on a regular basis.  (Daily if possible.) Keep all of the files on a computer in folders with a folder labeled for each day.  Attempt to show damage, restoration progress, and how the delay affects other parts of the project as well.  Try to think in terms of how the delay affects undamaged areas, and then document those effects as you note them.
2. Give every person on the job site a pocket sized spiral notebook and pencil.  Instruct workers to track their daily time and exactly what their daily tasks were, how long they took, and the area of the building in which they were working.  Instruct managers to note overall progress, identify any delays, note decisions made regarding subcontractors, delivery of orders, and changes in work schedule.  No item is too small to document if it catches the manager’s eye.
3. CPM schedules can be your best friend or worst enemy.  Immediately bring in an outside forensic engineer (with qualifications in scheduling) to oversee all changes to the CPM schedule from this point forward.  The immediate involvement of a forensic engineer is critical because if your general contractor may have any liability related to the incident that caused the loss, it is in his best interest NOT to reflect project delays in the CPM schedule as attributable to the incident.  General contractors may try to tie delays to other issues or simply not adjust the milestones or completion dates.  Failure to adjust CPM schedules can result in faulty foundation for a delay in completion claim because the claim will be built upon inaccurate construction schedules that can fall like a house of cards at settlement time.

If you’re a manager, owner, or “clerk of the work” on a construction site, let me know if you have questions.  Or better yet, share some of your tips for record-keeping for insurance claims, below, in the Comments section.  I’d really like to hear from you.

Cash is King. This is always true and never more so than when a company is losing production and/or sales due to a disruption.  As a general rule, the smaller the business, the more critical the need for cash following a disaster.

So how is a business supposed to operate and replace assets while its cash flow is short?  Request regular advance payments from the insurance adjuster.

There are two main sources to seek advance payments.  The first is related to physical property lost in the disaster.  Ask the adjuster to provide a payment of the actual cash value (ACV – depreciated value if the asset were to be sold on the open market at the date of loss) of all assets until the assets are actually replaced.  Second, if the adjuster is absolutely certain that a significant amount of lost sales cannot be made up at a later date, they may give a very conservative advance related to the estimated lost business income.  This is usually not a huge percentage of the estimated loss, but should be enough to significantly help with continuing (fixed) expenses during the down time.