Understanding Soft Cost Coverage - Are Your Clients Covered?

Two types of costs are widely used in the construction industry - hard costs and soft costs. While hard costs are tangible and easy to identify, defining soft costs is more complex, often causing confusion - and costly out-of-pocket expenses - for clients. 

What do they mean?

Hard costs are the tangible assets included in a construction project; quite simply, the costs of material and labor associated with a project e.g. physical materials and supplies required for the construction of a building and labor costs required for completion. 

Soft costs also known as delay in opening expenses or delay in completion, are costs indirectly related with the construction of a building or its development, including:

  • Architectural and design fees
  • Inspection fees
  • Land and real estate costs
  • Construction equipment, rental and tools
  • Loan interest and accounting fees
  • Project management
  • Construction insurance and professional dues
  • Local and state taxes
  • Advertising and public relations
  • Additional work and studies  

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Most builders risk policies do not include soft costs automatically as they are generally provided as an endorsement or extension. Without soft cost coverage in place, any costs aside from labor or materials that arise during a construction project would not be covered under a builders risk policy, and therefore the owner, contractor or developer would have to pay additional expenses. 

That's why it's crucial to carefully review builders risk policies with your clients and determine if such expenses are covered or not. Be sure to explain what soft costs are to your clients and work out the appropriate limits of soft cost coverage required to avoid potentially large and damaging uncovered claims, negative effects on coinsurance, as well as an increase to your own E&O risk.

You can accurately estimate your clients' soft cost exposure by completing a soft cost worksheet. Much like an accounting exercise, soft cost worksheets itemize various soft costs enabling you and your clients to forecast and accumulate potential costs in the event of a delay. Download a soft cost worksheet here.

Possessing knowledge of such a misunderstood area coupled with advising and offering this coverage to your clients, will not only provide them with necessary protection and serenity, but will position you as a trusted broker with distinguished expertise.

Contact our team at buildersrisk.us@victorinsurance.com to learn more about Victor's Builders Risk program.

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