Controlling Course-of-Construction Losses

The state and condition of a property under construction is always changing. Defining the pre-loss condition of the project can be more mercurial than defining other types of losses. Consequently, it is imperative to define where the project was at the time of the loss. What activities were completed, and what was the state of completion? Drawing this line in the sand early on allows the adjuster and the consultants to make a reasonable evaluation of what it will take to bring the project back to a pre-loss condition. It also will help in assessing the delays that restoration will cause to the remaining scope of work. Using a schedule expert as well as photography and video is suggested to help document conditions at the time of the loss.

If there are construction defects involved, two scopes should be developed. One should identify the physical loss and damage in relation to the loss, and a second should define the physical loss and damage in relation to the alleged defect. Experts, such as engineers, construction consultants, contractors, construction managers, clerks, or architects should be hired to define the extent of the damage, determine what is involved in the restoration, and to develop an estimate of how much the restoration should cost and how long it should take.

There are a number of methods to lessen further damage after the initial loss occurs. A focus on mitigation should prevent further damage to the building. If water or moisture is involved, a drying service could be contracted to remove moisture in the building as soon as possible in order to prevent further damage from material degradation and mold. A security service should be employed to protect the property from vandals and trespassers.

When water damage is involved, mold concerns make drying the building a top priority. Some recommend tearing out damaged wet drywall and shaft lining before mold growth begins, while others put more emphasis on determining the scope of the damage before tearing out materials. Regardless of the order, most experts recommend the following actions:

• Drying
• Scoping damage and determining footprint and extent related to the fire and water suppression
• Tearing out damaged wet materials that cannot be dried effectively
• Preserving and protecting undamaged property

Getting a handle on scope appears to be heavily dependent on the definition of coverage. Most participants agree that communication regarding coverage is paramount. The insured will want to understand what the coverage opinion is before making decisions about how to handle issues at the site. On large course-of-construction losses, in-house counsel, accountants, engineers, and environmental consultants should be utilized to assist the adjuster in defining scope and soft-cost issues that may be limited or excluded by the policy.

There is an obvious advantage to defining the scope and extent of the loss before restoration begins. It brings all of the parties to agreement on scope and not only eliminates misunderstandings in the future, but also establishes the adjuster's control and influence on the quantum of the loss. At the end of this step, one should try to bring the owner and other parties to agreement on the status of the project at the time of loss, as well as the scope of the physical property loss.

Monitor Construction Activities

Once the scope is defined, the parties then can follow through with documentation regarding the restoration efforts required. On a course-of-construction project, it is vitally important to separate the restoration work from the base contract work. Depending on the nature of the loss, these two work scopes can be highly interrelated. It is often advisable to have a clerk of the works on-site to monitor construction activities daily. The clerk is the eyes and ears of the adjuster's team of consultants. The clerk can work with the accountant, construction consultant, scheduler, and others to keep them informed of the progress, and he can independently verify the scope, physical restoration activities, and progress.

If the contractor or subcontractors do not cooperate with the monitoring effort, and if they do not differentiate between loss-related repairs and contractor work, the adjuster should bring these issues to the insured immediately. Communicate the process outlined above with the insured, contractors, and subcontractors, and discuss the implications their cooperation has on the due diligence review process and claim process. Support their work by setting up cost codes and assisting the contractor in coding labor, materials, and equipment usage. Document the discrepancies between the contractor's and clerk's records and discuss these with the insured. It is recommended that the adjuster not back down until the monitoring effort is fully developed and accepted on the site. Discrepancies after the work is completed can lead to costly disagreements later in the adjustment process.

Because the clerk is on-site daily, he also can recommend acceleration methods for mitigating delays throughout the restoration period. Furthermore, the clerk can track other concurrent issues that may impact the progress of work concurrent with the restoration.

Identify Delays

While hard costs are defined by the physical loss of damage, soft costs are more dependent upon the contractor's work plan, as well as the progress of restoration and base contract completion. A construction consultant who specializes in scheduling and construction management can work with the contractor or conduct an independent review of the project's progress to date, the restoration plan, and the base contract recovery schedules.

To define the impact of the loss, as well as any other concurrent delays that are unrelated to the loss, the construction consultant first should review the working schedule at the time of loss, referred to as the pre-loss schedule. It is common practice for a contractor to create a baseline schedule, which may be part of the contract between the owner and contractor. This is the plan of work before work commences on the project. It is often a contract requirement for the general contractor or construction manager to update this baseline schedule on a bi-weekly or monthly basis. These updates show the progress of work and minor changes to the activity sequence. If the project experiences delays or interruptions, the contractor will publish a revised schedule showing a new plan that may include major revisions in activity sequencing. The construction consultant should review the pre-loss schedule by verifying the following:

• Does the pre-loss schedule represent the status of work progress at the time of the loss? If not, the pre-loss schedule should be adjusted to reflect this status.
• Does the forecast represent a reasonable and achievable work plan for the balance of the project before the loss occurred?

Second, the contractors should prepare restoration and recovery schedules, which show how they plan to restore the project to pre-loss conditions, then complete the balance of the base contract work. The construction consultant should review this work plan and possibly work with the insured and the contractor to mitigate delays that result from the restoration efforts. A review similar to the pre-loss schedule takes place, in that the construction consultant verifies that the restoration and recovery schedule represents the status of the project to date as well as an accurate and achievable work plan going forward. For mitigation efforts, an analysis can be conducted whereby the costs of acceleration are weighed against the costs for delay.

Third, the clerk will use the restoration and recovery schedules to monitor construction progress and inform the adjuster about how the insured is meeting their work plan. The construction consultant can analyze the pre-loss and post-loss schedules to determine the delays associated with the loss, as well as other concurrent delays that may be present. The delay analysis can be substantiated with the clerk's monitoring records as well as other pre-loss construction documentation such as daily logs, photographers, and meeting minutes.

Separate Costs

Hard costs can be defined by the materials and labor required to restore the site to a pre-loss condition. Soft costs may include construction overhead, interest on construction loans, and business interruption. These soft costs are dependent upon the delay associated with the loss. The scope definition sets the stage for the hard-cost amounts, while the schedule analysis presents a basis for delay and soft costs. The clerk monitors site activities and provides a basis for both hard and soft costs, while the accountant reviews and audits the claim.

Adjustment figures on the building should be developed through daily clerking and use of an accountant to develop actual building restoration costs. It is helpful to arrive at tentative agreements prior to construction on labor rates and material costs. Additionally, soft costs should be identified early in the adjustment process and tentatively agreed upon.

It is recommended that demolition costs be kept separate from repair/replacement costs and to use construction consultants to develop bid prices for the restoration work in order to independently verify actual costs. Input from the insured, contractor, and clerk of the works is recommended as a verification of costs incurred.

The most important aspect of controlling loss adjustment is the development of a scope of physical loss and damage that relates to the fire and water suppression. Once the scope is defined, the insured can proceed on a time and materials basis, recording costs for each element of the scope. A clerk of the works can monitor restoration of physical damage on a daily basis until completion of the project.

Additionally, an expert on construction scheduling can develop the project's schedule status prior to the loss. With the use of the scope of damage and the construction consultant, a schedule should be developed for restoration work. Consideration should be given to any steps that can be taken to reduce the period of delay, and the adjuster and experts should communicate constantly and maintain a presence on the site. Daily site visitation and monitoring of all processes with the clerk of the works helps maintain a presence on-site over the course of the investigation and restoration.

Carrie Sturts Dossick is a professor of construction management at the University of Washington. She can be reached at cdossick@u.washington.edu.

Fred A. Frederick is a national general adjuster for AIG. He can be reached at 415-836-2778, fred.frederick@aig.com.