Builder's Risk policies--Who pays?

Does the contract or RFP make the contractor responsible for risk and loss and for protection of the work and property until accepted by the government? If so, by what clause or other prescription?

Are you negotiating the contract with the government? If the answer is yes to both questions, then yes, include it in your proposal. It is a reasonable cost, not prohibited by Part 28 or FAR 31.205-19 , when the contractor will bear the risk of loss of the materials or work prior to acceptance by the government. 

I am assuming that this will be firm fixed- price contract.

No, I'm negotiating for the government.  The basic IDIQ (FFP construction) includes, of course, FAR 52.228-5 and 52.236-7.  This is a task order against it.

kathilou said:

No, I'm negotiating for the government.  The basic IDIQ (FFP construction) includes, of course, FAR 52.228-5 and 52.236-7.  This is a task order against it.

It is commonly purchased when the contractor will be responsible for protection and loss of materials and the work. The insurance required by 52.228-5 is for the benefit of both government and contractor.

B.R. Is a reasonable expense for protection of the contractor, thus also the government for theft or if a storm or fire, etc. damages the work.

https://www.irmi.com/articles/expert-commentary/is-builders-risk-insurance-necessary

you may want to discuss the coverage to make sure that it is appropriate...

Bob, I suggest moving this thread to the Contract Pricing category.

Thank you!  Yes, you're right, I didn't pick the right topic...

No problem . Just easier to catalog and search for later.

joel hoffman said:

https://www.irmi.com/articles/expert-commentary/is-builders-risk-insurance-necessary

you may want to discuss the coverage to make sure that it is appropriate...

Joel, I'm being told by another source that the we (the government) do not pay for "any contingency at all," and that is how he views builder's risk.  Why aren't these things more black and white?

That’s Nonsense. 

The government is making the contractor assume the risk of any loss due to theft, fire, severe weather, etc. - things that are mostly beyond the contractor’s control. 

To me, an unallowable “contingency” would be where the contractor includes the cost to cover actual losses or damages for each possible risk in its proposal. 

If builders risk insurance is a “contingency”, why does the government require liability and automobile insurance if the government doesn’t cover ANY “contingency” at all?

Why does the government require and pay for performance and payment bonds if the government doesn’t cover ANY “contingency”  at all?

The government estimates (peer reviewed at Army, DoD and outside Oversight groups) for a  program that I worked on to build plants to deconstruct our nation’s stockpile of chemical weapons at numerous Arsenals included allowances for certain  “risks”. The risks were identified with possible costs and severity and likelihood of occurrence in a Monte Carlo Simulation**. The result was that some “risk” costs were added to the estimates. They did not total all risk costs but rather a percentage factor for the chance or likelihood of some of them occurring . The factor was applied to the labor productivity for various activities. They were also applied to the overall programmatic schedules and time related costs required to permit, design and build each plant.

**See Monte Carlo Simulation:  https://www.investopedia.com/terms/m/montecarlosimulation.asp

Government estimates and contractor cost proposals also include factors for such things as expected labor productivity adjustments for complexity of the job, material wastage, small tools loss/breakage, etc. 

Builders risk insurance is both necessary and reasonable when the government allocates to the contractor the risks of damage or loss to the materials and work prior to government acceptance of the work.

Insurance premiums are based on risk shared over all policies and policy holders.

Purchase of Builders Risk Insurance l, when the government allocates such risk to the contractor,  should clearly be reasonable and allowable under FAR 31.205-19.

How much is the insurance premium? 

Compare the cost to additional loss prevention costs, such as full time security (night watchmen, fire watch at night or overtime to make end of every day full site inspections), a standby fire truck and crew, etc. 

If it can’t be paid for the cost of Builders Risk Insurance, how would a contractor cover itself for the possibility of severe weather or other damage? Increase the profit factor by several percent?

Buying insurance is not contingency.  The standard construction clauses make the contractor responsible for protecting the worksite and the property on the worksite from vandalism and so forth.  Insurance is a lot cheaper than a night watchman.  Of course, a prudent contractor might want both.

My builders risk argument covers FFP contracts. The government would normally assume the risk in a cost reimbursement contract or direct the contractor to purchase the appropriate insurance .

joel hoffman said:

My arguments cover FFP contracts. The government would normally assume the risk in a cost reimbursement contract or direct the contractor to purchase the appropriate insurance .

I partly agree, but not completely.  If a windstorm blew down some framing in a cost-reimbursement construction contract with the normal clauses, and the contractor wanted to direct charge the Government 100% of the cost for replacement labor and materials, wouldn’t a prudent contracting officer tell the contractor that it should have carried the customary insurance protections?  Buying risk insurance is a customary practice in the construction industry.

ji20874 said:

I partly agree, but not completely.  If a windstorm blew down some framing in a cost-reimbursement construction contract with the normal clauses, and the contractor wanted to direct charge the Government 100% of the cost for replacement labor and materials, wouldn’t a prudent contracting officer tell the contractor that it should have carried the customary insurance protections?  Buying risk insurance is a customary practice in the construction industry.

ji, you are correct. Of the contract clauses prescribed in FAR 36.5, the Permits and Responsibility clause at 52.236-7 is the only one that is prescribed for both FFP or CR construction contracts. See the prescription at 36.507. 

It then makes perfect sense that the cost for Builders Risk insurance policies is an allowable cost for both FFP and cost reimbursement contracts.

You learn something almost every day here at WIFCON! 

EDIT: The clause at 52.236-5 Material and Workmanship (See prescription at  36.505) is also applicable to both FFP and cost reimbursement construction contracts.

This some great information for me, thank you.  Now to convince my boss...

Kathilou, 

Will the contractor accept the task order without reimbursement for Builders Risk insurance? 

If not, is your your organization authorized to accept those risks now covered by the (required) Permits and Responsibility clause? 

Do you have enough funding to cover the cost of replacement of up to the entire cost of the work in the event of fire, tornado, etc. the day before project acceptance?  To cover replacement of materials in the event of a break-in and theft?

Those might be good questions to ask the boss. 😃

good luck.

We don't have a price yet for the builder's risk, the contractor had only asked if we require them to carry it and to what limits.  I replied that there is no language in the regs that address builder's risk, and that we require that they comply with FAR 52.228-5 regarding insurance.  I wanted to get them a response without opening a can of worms until I researched it more.

After the massive damage caused by Hurricane Michael here, I can certainly understand why a contractor would want to purchase this coverage.

Thanks again for your help.  My boss will be reading all of this on Monday when he returns to the office.  Please enjoy your weekend!

In any case, contingencies are not unallowable in all circumstances. Read 31.205-7. In many cases, contingencies must be priced into contracts.

Quote

c) In connection with estimates of future costs, contingencies fall into two categories:

1. (1) Those that may arise from presently known and existing conditions, the effects of which are foreseeable within reasonable limits of accuracy; _e.g.,_anticipated costs of rejects and defective work. Contingencies of this category are to be included in the estimates of future costs so as to provide the best estimate of performance cost.

(Emphasis added.)

here_2_help said:

In any case, contingencies are not unallowable in all circumstances. Read 31.205-7. In many cases, contingencies must be priced into contracts.

(Emphasis added.)

Agreed. Good point

kathilou said:

We don't have a price yet for the builder's risk, the contractor had only asked if we require them to carry it and to what limits.  I replied that there is no language in the regs that address builder's risk, and that we require that they comply with FAR 52.228-5 regarding insurance.  I wanted to get them a response without opening a can of worms until I researched it more.

After the massive damage caused by Hurricane Michael here, I can certainly understand why a contractor would want to purchase this coverage.

Thanks again for your help.  My boss will be reading all of this on Monday when he returns to the office.  Please enjoy your weekend!

Thanks and Happy Easter! 

P.S. I realize that you don’t wanna open Pandora’s box but I would ask the contractor how he would handle the Permits and Responsibilities clause. 🤠

“...the contractor had only asked if we require them to carry it [builder’s risk insurance] and to what limits...”

The contractor should consider purchasing this coverage for its own protection and to meet its own contractual obligations.  Maybe the real question isn’t whether the construction contractor should purchase the coverage, but whether it should be treated as a direct or indirect charge?

Whether Direct or indirect wasn’t part of  the actual question.

Must the contractor purchase it and is it allowable were the OP’s expressed concerns in the thread.

Builders Risk Insurance is not specifically required and is not unallowable.  It provides a means to partially cover the Permits and Responsibility clause and  perhaps Materials and Workmanship clause in the contract.

Whether Direct or indirect  cost doesn’t necessarily affect the allowability of Builders Risk coverage.

 An examination or audit of the indirect cost pool would reveal Builders Risk if that is how the contractor normally accounts for such insurance. As long as consistently applied may determine how it may be properly allocated to an instant contract. 

The background for the question covered more than the specific question by the contractor concerning a govt requirement to purchase BR insurance.  She said that her boss said that it is an unallowable contingency. Not so.

joel hoffman said:

Whether Direct or indirect wasn’t part of  the actual question.

Must the contractor purchase it and is it allowable were the OP’s expressed concerns in the thread.

Builders Risk Insurance is not specifically required and is not unallowable.  It provides a means to partially cover the Permits and Responsibility clause and  perhaps Materials and Workmanship clause in the contract.

Whether Direct or indirect  cost doesn’t necessarily affect the allowability of Builders Risk coverage.

 An examination or audit of the indirect cost pool would reveal Builders Risk if that is how the contractor normally accounts for such insurance. As long as consistently applied may determine how it may be properly allocated to an instant contract. 

The background for the question covered more than the specific question by the contractor concerning a govt requirement to purchase BR insurance.  She said that her boss said that it is an unallowable contingency. Not so.

Thank you, again--especially for actually reading the original question.   Now, this almost circles back to the question I asked yesterday about the Hurricane Michael effect on labor and material prices.

joel hoffman said:

Whether Direct or indirect wasn’t part of  the actual question.

Must the contractor purchase it and is it allowable were the OP’s expressed concerns in the thread.

Not so.  Please re-read the original posting at the very top of this thread.  The question was expressly whether builder's risk insurance can be a direct cost -- here's the quote:  "can it be considered a direct cost on their proposal?"

Not having gotten a direct answer from the Government, I can easily see a contractor shifting to ask, "Does the Government require...?"  But really, that is a question in disguise, because if the Government answers YES, the contractor will use that as a basis for a direct charge.

kathilou said:

Thank you, again--especially for actually reading the original question.   Now, this almost circles back to the question I asked yesterday about the Hurricane Michael effect on labor and material prices.

Hope they purchased BR coverage and that it applies to damage to the ongoing work.  Been a long time since I researched coverage terms.

ji20874 said:

Not so.  Please re-read the original posting at the very top of this thread.  The question was expressly whether builder's risk insurance can be a direct cost -- here's the quote:  "can it be considered a direct cost on their proposal?"

Not having gotten a direct answer from the Government, I can easily see a contractor shifting to ask, "Does the Government require...?"  But really, that is a question in disguise, because if the Government answers YES, the contractor will use that as a basis for a direct charge.

If it’s allowable it could be direct or indirect as long as it isn’t inconsistently  duplicative. In other words, don’t include it as a normal cost in indirect pools then direct charge it, too.

kathilou said:

Now, this almost circles back to the question I asked yesterday about the Hurricane Michael effect on labor and material prices.

So, the other posting from yesterday was about a construction contract?

The standard FAR clauses for construction contracts do not envision an increase in the contract price to cover a contractor's increased costs because of an unusually severe weather happening -- they do provide for additional time (well, they bar T4D because of not meeting the end date, which effectively is a grant of additional time), but not additional money.  This has been tested many times and the rule holds true.

But if the contractor had purchased builder's risk insurance, and that insurance covered hurricanes, then the insurance company would cover the contractor's additional costs.  That is fair.  If the contractor didn't buy the insurance, or didn't buy a solid policy, then any cost impact remains with the contractor.  That is fair.

joel hoffman said:

If it’s allowable it could be direct or indirect as long as it isn’t inconsistently  duplicative. In other words, don’t include it as a normal cost in indirect pools then direct charge it, too.

That's true -- I agree.

Standard BR doesn’t normally cover cost impacts  and (as alluded to by ji) doesn’t cover Hurricane Damage to the ongoing work unless specifically provided for in the policy. 

https://en.m.wikipedia.org/wiki/Builder's_risk_insurance

What if the builder's risk contains unallowable costs such as advertising and marketing, claim preparation costs, fine arts, etc.  I understand that it possibly be in the interest of the Government to pay for builders risk for natural disasters but what about those unallowable costs covered under their builder's risk or the costs of vandalism caused by their own employees, negligence by the contractor?  The permits and responsibility clause states that Govt shall not pay for contractor fault or negligence.