Soft Costs and Delay in Completion Coverage

The most reliable way to size soft cost coverage is to start from the development budget the lender approved and ask, for each soft-cost line, how much more would be spent if completion slipped by the length of a realistic rebuild. Interest is usually the largest item: the outstanding loan balance at the likely time of loss multiplied by the rate for the added months. Many developers model the loss at the point of peak exposure, often late in construction when the loan is nearly fully drawn.

Other lines follow the same logic. Architect and engineer fees for redesign and added construction administration, legal and accounting fees, extended permit and inspection costs, added builders risk and liability premiums, real estate taxes during the delay and renewed leasing and marketing expenses all belong in the worksheet if they are real. Some insurers write soft costs on a scheduled basis, listing each item with its own amount, while others write a blanket limit. A scheduled form can limit recovery on a line that turns out larger than estimated, so ask whether amounts can shift between lines.

Keep the worksheet. It supports the limit at underwriting, and it is the starting point for proving the loss after a claim.

• Additional construction loan interest and fees
• Added architect, engineer, legal and accounting fees
• Real estate taxes and insurance premiums during the delay
• Permit, inspection and leasing or marketing expense
• Rents, revenue or gross earnings lost during the delay

Delay in completion coverage, sometimes written as loss of rents or loss of gross earnings, responds to income the project would have produced had it been completed on schedule. For a rental property, that is usually net rent based on the lease-up plan. For a hotel, it may be gross operating income less non-continuing expenses. For an owner-occupied facility, it may be the added cost of staying in temporary space.

Most delay forms measure the loss from the scheduled date of completion stated in the policy or the underwriting submission. If that date is optimistic and the project was already running late before the loss, the insurer will typically argue that part of the delay was not caused by the loss. Give the underwriter a realistic date, update it if the schedule moves materially and keep the current critical path schedule in the project file.

The AIA exhibit also lists loss of use, business interruption and delay in completion as an owner-selected coverage for loss of use or inability to conduct normal operations due to a covered cause of loss. Whether a given form follows that broad description or a narrower definition depends on the wording, which is why the definition of the insured loss is worth reading before the limit.

The waiting period is a deductible stated in days. Delay losses incurred during the first stretch of delay are not paid, and coverage starts once that period has passed. Some forms apply the waiting period from the scheduled completion date; others from the date of the physical loss. A short delay on a project with a long waiting period may produce no recovery at all, which is often the right trade if it lowers cost, but it should be a decision rather than a surprise.

The indemnity period caps how long delay losses are paid. If the realistic rebuild for a destroyed building is 10 months, including redesign, permitting, procurement of long-lead equipment and reconstruction, a six-month indemnity period leaves the last four months with the developer. Long-lead items such as switchgear, elevators or custom curtain wall can stretch a rebuild well past the original framing duration.

Ask how the waiting period interacts with the soft cost limit. On some forms it applies only to rents and revenue; on others it applies to every soft cost item as well.

Several builders risk extensions sit next to soft costs and affect how long a delay lasts. Expediting expense can pay for overtime, express freight and temporary repairs to speed the permanent fix. Extra expense can pay the added costs of continuing the project during restoration. Ordinance or law can pay the cost of meeting current code during the rebuild, including demolition of undamaged portions the building official requires. Civil authority and ingress and egress extensions can respond when access to the site is blocked by an order or physical damage nearby.

Each has its own sublimit and conditions, and some forms require the underlying physical loss to be covered before they respond. Ask which of these are included, at what sublimit and whether money spent on expediting reduces the delay claim in a way the insurer will credit.

Delay coverage is not schedule insurance. Most forms respond only when the delay is caused by direct physical loss or damage that the builders risk policy insures. A delay from a supply shortage, a labor dispute, a permit hold, a lender funding issue, a design change or a contractor's default generally falls outside it, even if the financial effect looks identical. Delays caused by excluded perils, such as flood or earthquake where those are excluded, are treated the same way unless the peril is added back.

Contractors face a related question. A GC's extended general conditions and its exposure to liquidated damages after a covered loss are not the owner's soft costs, and they may or may not be insured depending on whose interest the extension protects. If the GC wants protection for its own delay costs, that needs to be negotiated explicitly with the insurer and reflected in the contract.

Delay claims are often decided by documents. The insurer will compare the as-planned schedule at the time of loss with the actual recovery schedule and ask how much of the slip the loss caused. It will want loan statements showing interest accrued, invoices for added fees, tax bills, leasing reports and the pro forma rent roll. Some insurers retain their own scheduling consultant, so developers with large exposures may want one too.

Record keeping before a loss helps. Keep monthly schedule updates, the approved budget with change history and the lender's draw records. Name the lender as loss payee where the loan requires it, and confirm whether delay proceeds are paid to the owner, the lender or both. Clear documents rarely guarantee a result, but they usually shorten the argument.