7 Ways Construction Might Go Wrong (and how you’re covered)

Builder’s Risk Insurance 102

We never want something to go wrong with your construction project.  But if it does, we want you to know how you’re covered.  Below are 7 examples of things that might go wrong, and which insurance it falls under:

1. I’m building out the 7th floor of an 8-story building. There was a fire on the 8th story and I sustained water damage due to putting the fire out.  Is this a Builder’s Risk claim?
   (A) Yes, for the damage on the 7th floor. 

2. I’m building out the 7th floor of an 8-story building. My HVAC subcontractor crossed wires which started a fire and caused damage both to our project and the 8th floor of the building.  Is this a Builder’s Risk claim?
   (A) This would be a Builder’s Risk claim (for the 7th floor only) and a General Liability claim.

3. I’m building out the 7th floor of an 8-story building and all of my copper wiring stored on site has been stolen. Is this a Builder’s Risk claim?
   (A) Yes, provided the area was kept locked and reasonably secure. However, you need to check the limits and sub-limits on the Builder’s Risk policy to know how much would be covered and what the deductible would be.

4. I’m building out the 7th floor of an 8-story building and all of my copper wiring stored in a storage unit off site has been stolen. Is this a Builder’s Risk claim?
   (A) Yes, but there must be proof with accounting invoices that the copper was slated for this project to be claimed on this Builder’s Risk policy. 

5. I’m building out the 7th floor of an 8-story building and the workmanship of one of the subcontractors is shoddy and needs to be replaced. Is this a Builder’s Risk claim?
   (A) No.  Workmanship issues would come under a Performance Bond.  Or it may fall under “Rip & Tear” coverage of a General Liability policy, but only if it was written into the insurance policy (the coverage doesn’t come standard).  The workmanship problem would have to be failing to meet specifications and/or industry standards to qualify and cannot just be purely cosmetic issues.

6. I’m building out half of the 7th floor of an 8-story building and a fire occurred in the side of the 7th floor that is not under construction. Is this a Builder’s Risk claim?
   (A) This depends on how the policy was set up at the beginning of constru
   ction, and why it is so important to set up the insurances properly so there won’t be any gaps in coverage.  Sometimes an Owner may ask that the Builder’s Risk policy covers adjacent areas to the project, in which case you would have to look into limits and sub-limits.  However, sometimes the Owner will have these areas covered by property insurance instead and the Builder’s Risk will cover only the work being done.  

7. I’m building out the 7th floor of an 8-story building and received substantial completion yesterday. However, I still have some minor materials stored for punch list items, which have been stolen.  Is this a Builder’s Risk claim?
   (A) It’s possible.  At times the Owner/Contractor agreements are written so that the insurance passes over to the Owner at the end of substantial completion, which means this could now be under the Owner’s Property Insurance policy.  However, if there are a significant amount of materials still on site, a good Contractor would still carry their Builder’s Risk insurance on those punch list materials until they are in place.  Some Owner/Contractor agreements state that insurance will be covered until final payment for the work (the default language in the AIA A201-2007 Article 11), which would not have happened with outstanding punch list items, so check your contracts for this one.

 

Previously: Builder’s Risk Insurance 101.

Special thanks to Cory, Tucker, & Larrowe, Inc. for helping us learn about insurance.

Builder’s Risk Insurance 101

Builder’s Risk Insurance is an insurance policy that either a Contractor or Owner takes out for the duration of construction to cover loss of anything built or materials for building under that construction contract.  It would cover losses due to theft, wind damage, hail damage, lightning, or other acts of God.  It may cover fire damage if the fire was caused by something other than negligence.  It also covers whether the materials are on site, in storage, or in transit – but it does not cover “soft costs” (costs which are not considered direct construction costs, such as financing, legal fees, interest, etc.).

This differs from a Contractor’s General Liability Insurance policy in a few ways.  General Liability would be used for any accident or damage due to negligence on the part of the contractor or subcontractors.  General Liability also follows the Contractor from job to job and does not “end” when a project ends.  Builder’s Risk ends when the project is substantially complete, and the building is officially handed over to the Owner.

What does this mean?

It means several things.  When the project is substantially complete, an Owner has to be ready to take over insurance of the building or improvement on their property insurance in order to maintain continuous coverage.  It also might mean that if the property insurance has “improvement” listed in its policy before construction, that you may not need Builder’s Risk to begin with.  Or if the construction project is cosmetic only (finishes and furniture) then Builder’s Risk generally is not needed either.

However, if the project is not covered by property insurance, but is a renovation located in a larger structure, it is important to figure out if everything is covered between both policies.  The last thing anyone wants is to have damage to a building during an ongoing renovation and find out that neither insurance will cover the loss because of gaps between the policies.

As with most things, transparency between entities before a project is bid or before construction begins can save money and hassles down the line.

Other things to keep in mind:

• The Owner always wants to be listed as additionally insured on Builder’s Risk if the Contractor takes out the policy.
• Sometimes the Owner can get Builder’s Risk cheaper than the Contractor. The only way to know is to have both priced out!  However, this is generally not recommended because the responsibility of the Contractor’s materials should generally be placed on the Contractor and not the Owner.
• The Architect needs to know, prior to bidding, what insurances are required of the Contractor and what they need to cover (or not cover) so the bids will be comparable and the specifications and contract are written properly.

Next in this series: Illustrative examples of how Builder’s Risk works.

Special thanks to Cory, Tucker, & Larrowe, Inc. for helping us learn about insurances.

Financial Benefits of Strategic Facility Planning

Using the Strategic Facilities Planning (SFP) system for management can help you improve both time to market and work processes so that you can realize a financial benefit of 13% or more.  Our goal is to assist you in making fact-based facility decisions that enhance both short and long-term shareholder value.

To do list for SFP

• Make sure you’re using existing facilities to their fullest potential
• Precisely identify your future facility needs and the best “facilities future” for your organization
• Improve  Operating Cost
• Get experienced pre-project architectural planning services
• Manage implementation
• Decrease the operating cost of you real estate portfolio
• Implement financial tactics like accelerated depreciation

Decisions that Pass the Test of Time

The Leaning Tower of Pisa: Built to 500 years ago and still standing, albeit a little sideways.  Will your building stand the test of time?

Once you make a decision, you are headed down a road that locks in your future construction, operating, or lease costs. Your facility decisions may even unknowingly shape your organization’s culture and time to market.

Our value proposition is that a systematic approach to facilities management can reduce or control operating cost and that use of the right planning tools and system can control or reduce capital expenditures.

We’d like to get you headed down the right road.

What is Strategic Facility Planning?

A Strategic Facilities Plan is the link between business strategies and real estate strategies.  A recent study in the Journal of Corporate Real Estate indicates that even the best real estate databases do not support high-level portfolio decision making.  Developing a knowledge management system for a real estate portfolio that is integrated with management decision-making starts with the development of a Strategic Facilities Plan.

Strategic Facilities Plans assist enterprises in determining when to buy, sell, renovate or lease facilities and are a key element in avoiding future unneeded occupancy and construction cost. This coordinated approach to management adds value to the enterprise by aligning a forward-looking facilities infrastructure with the needs of the core business.

Strategic Facilities Planning is founded on the principle that management of a group of buildings versus individual facility management can yield improvements in the real estate’s contribution to productivity, financial performance and strategic performance of the enterprise.

Strategic Facility Planning provides a product – a plan – but it is also a system for:

• Managing change

• Controlling operating cost

• Critically re-evaluating capital expenditures required to support the organization

• Anticipating organizational needs

• Providing an infrastructure for business

• Knowledge management

Why you Need to Survey Your Parking Lots Today and Tomorrow (January 4th & 5th)

Years ago, we were involved in a very interesting process – “Daily Parking Lot Surveys.”  What we found was that on the first two working days of the year, parking lots were 100% occupied and there was 100% attendance at work.

This is important because parking lot capacity is the true barometer of a facility’s occupancy capacity.  What you will find is that there may be more cars than your approved headcount due to contract workers, vendors, temporary workers, and so on.  In 2016, Capacity Planning will start to re-emerge as a facility-related issue as companies start to gear up for significant hiring after an 8-year hiatus.

We will post some blogs and white papers on capacity planning during the coming month. Hopefully, you will be able to pick up some more pointers, so keep an eye out!

White Paper: Restart Your Facility Planning Process

We’ve been on the road talking to people and would like to share some of our observations about the state of Strategic Facilities Planning for the primary markets that Labarre Associates serves: Private Sector Business, Credit Unions, Banks, Local Government, Universities, and Educational Institutions.  All of our findings about what’s going on in the United States are in the white paper at the link below.

Labarre has found and explains in “Restart Your Facility Planning Process Now!” the numerous reasons why it’s the perfect time to restart master planning or strategic facility planning.  You can either start own your own now, get consulting help to start now, or wait to see what everyone else is doing and not be in the forefront of the market.  The paper also outlines various issues that may stand in the way of such planning, and ways to overcome the hurdles.

As always, if you need help doing a facility assessment prior to planning or if you need consulting for your facility plan or master plan, call us.  Our expertise in planning has continued throughout the economic downturn.

Click here to download the white paper!  Good luck and happy planning.

Strategic Facility Planning Process

After you complete your strategic planning session, you might want to consider a Strategic Facilities Plan as it provides research, facility capital and operating cost details and consulting advice on how to implement your plan. 

WHERE YOU’VE BEEN – In order to help you make sound decisions, you need a facility information system for your existing buildings as a starting point.  By analyzing your current facility costs and space usage versus benchmarks, you will learn how efficiently your current facilities are performing and what “lessons learned” can be applied in the planning of new facilities.

WHERE YOU’RE HEADED – Multiple staff (and consequently space) projection methods are used to reinforce the point that future office space needs will be within a range and that the final plan should adequately address both the high and low end of the projection range.  Building upon a range of office and Branch space and cost projections, the Labarre team populates a financial analysis model that projects the Income Statement, Balance Statement and key ratios across a 15-year time period.  By analyzing different scenarios, or different approaches to construction, we can incorporate your team’s feedback about how to adjust spending, timing or project scope, so that you can achieve financial objectives.

HOW TO GET THERE – We’ve set up the Strategic Facility Planning process to allow you the maximum learning and testing potential.   In each of the project phases, we integrate your performance data in a white paper that explains the background and “ins-and-outs” of a particular planning subject.  Some have commented that going through the Strategic Facilities Planning Process is like taking a graduate level classes in Facility Planning, Real Estate Location Analysis and Financial Forecasting.   We take the comment as a complement.  Since you may be spending tens of millions of dollars over the next 15 years, we feel you would like your team to have a thorough knowledge of each subject.

DECISION SUPPORT – OUR APPROACH – Strategic Facility Planning is unique in that it requires the disciplines of Architecture, Construction, Real Estate and Business Planning to work together in an interactive feedback loop environment.  After your team has digested your numbers and the supporting background information, we meet with your team to discuss each topic, answer questions and incorporate your feedback and recommendations into the plan.  We provide information, expertise and analysis necessary for you to make the investment decisions that are crucial to your long term success.   As the process concludes, we work with you in developing appropriate presentations for the Board and other review groups, including auditors.

While the Strategic Facility Planning team at Labarre draws expertise from the company’s four divisions (Architecture, Construction, Real Estate and Facilities), Strategic Facility Planning services are stand alone; that is, if there are any future Real Estate, Architecture, Construction or Facility projects, we expect to compete for those jobs based on qualifications and experience.

Facilities Operating Cost Cutting Conundrum

Conundrum:  (Oxford Dictionary): a confusing and difficult problem or question
                          (American Heritage Dictionary): a paradoxical, insoluble or difficult
                          problem; a dilemma

Cost management is the process of planning and controlling the budget of a business – in this case the budget for facilities-related capital and operating expenses.  The key understanding why there should be an emphasis on managing, rather than reducing facility-related expenditures, lies in the nature of the cost structure.

The Facilities Operating Cost Conundrum: If you set out to cut Facilities Costs 10% by using a line item budget approach, you will only end up with a 2% reduction.

Here’s why:

Of the eight cost categories developed  by the Building Owners and Managers Association (BOMA), three are typically not under the direct control of the Facilities organization, and reductions in two other categories could result in damage to the physical property or occupants.  That leaves three out of eight categories for line item budget cost cutting – and arbitrary cuts in these areas can hurt your business and drive future cost increases.

For example:

When targeting facility costs for an overall 10% reduction in a 4,500 sq. ft. branch bank, items highlighted in yellow actually increase or remain the same because they are not under the control of the Facilities Department (Property Tax, Insurance and Depreciation), because the rates increase (Utilities), or because the cost is a pro-rated portion of a multi-site, bare-bones contract (Security).

For the three line items that can be reduced consider the following:

• When Cleaning cost reductions result in increased periods between trash collection, insects and rodents may appear – resulting in additional pest control costs. In the case of rodents, damage to the building, and possibly damage to your reputation can result when customers spot insects or rodents in the lobby of your financial institution.
• Cuts in Maintenance, like ignoring a leaking gutter, can result in water damage to the building and possibly a mold remediation bill – both payable at a future, unknown date as an emergency expenditure.
• Cuts in Administrative staff are only possible by reducing your in-house staff’s salary or laying off employees. These are the people thinking up ways to save money or avoid future costs.  Effective cost management strategies don’t materialize out of thin air – unless you are one of the folks with a line item mentality.

What should the prudent executive do?

Reconsidering the Branch: Retail Branch Case Study: Pelican State Credit Union – Pineville Branch

Location: Pineville, LA
Type: Retail Branch / Teller Pods
Owner: Pelican State Credit Union
Architect: Labarre Architects, APAC
Contractor: Labarre Associates, Inc.
Completion Date: 2014

Pelican State Credit Union has committed through an extensive launch of their new prototype branch to the retail type branch with teller pods and cash recycler type bank equipment.

Challenge: The previous branches for Pelican State CU were not as welcoming to members.  Pelican wished to have their branch reflect their company’s culture as an open, friendly place to do business.

Solutions: The main solution to this problem was to get rid of the traditional teller line.  The teller lines created a physical and psychological barrier between the employees of the credit union and their members.  In addition to this, several other pieces were added to the branch program, such as open coffee bars and tech centers, so that employees and members could interact in several different ways.  MSRs are in open air cubicles instead of behind glass, but offices still exist for private consultations if necessary.

While the design initially does not seem to present itself toward a smaller branch, the openness of the MSRs, meeting areas, waiting areas, and teller pods lends itself toward having a smaller space not appear tiny or cramped.  Instead of removing program space to accommodate a smaller footprint, support spaces such as corridors are eliminated and circulation is shared between all public portions of the building.

The Pineville Branch houses a work room, through wall ATM, 2 teller pods that hold 2 tellers each, a waiting area, coffee bar, tech table, consultation area, 2 MSR cubicles, 3 closed offices, a conference room, and break area within just under 3,000 square feet.  It is a renovated lease area within a strip mall.

The other key to a successful retail style branch is branding.  Every branch must feel like it is part of the same company and the same space in order to keep the space in the member’s mind as a place to go “into” instead of “drive through”.  If the user feels that they could be in any place, then they have no reason to want to be in your place.

The upfront cost for specialized bank equipment, training, and renovation of branches is less expensive than the tellerless model, and the teller pod model also has very little risk involved.  If the teller pods do not work out for any particular branch for whatever reason, a traditional teller line could be accommodated with very little renovation.

Previously: Reconsidering the Branch: Retail Branch, Reconsidering the Branch: Tellerless Branch and the Tellerless Branch Case Study

Additional Link:

https://www.pelicanstatecu.com/