When it comes to construction projects, one thing is almost certain: plans will change. Changing our minds on things is just human nature, after all.
The challenge is, changes to the original construction plan, whether relatively minor changes or a major shift in the design scheme, are not automatically covered under builders risk insurance policies. So, while your client may have purchased insurance to provide coverage against losses, changing to more expensive or additional materials without the use of a change order endorsement can mean their investments are not as well-protected as they might think.
In addition to the potential risk that can arise from uninsured losses, change orders can mean big risks for contractors in other ways, too. For example, if a contractor is not deliberate about managing the change order process, they run the risk of not being paid for their work by the property owners or developers.
Here are five ways you can help your contractor clients manage change orders on their construction projects:
1. Understand the contractual terms. Encourage your clients to become familiar with the construction contract and what it covers at the outset. Just as your contractor clients should never start a construction project without having a signed agreement with the property owner or developer, neither should they perform work that changes the terms of the original contract without having a signed change order in hand.
2. Have a process for collecting payments. Your contractor clients likely have a process in place for collecting payment outlined in the original contract, but change orders can complicate that process. Without formalizing steps and being persistent about collecting payment, contractors find themselves frustrated by unpaid change orders.
3. Understand the interplay between change orders and revenue. Contractors should wait to record change orders as revenue until after the change orders have been signed, creating a contractual obligation for the property owner or developer to pay the contractor.
4. Update builders risk policies. Because change orders impact the estimated completed value for the structure insured under a builders risk policy, unreported change orders can mean that insurance coverage under the policy is no longer adequate. In the event of a loss, being under-insured due to change orders can have significant financial consequences.
5. Add change order coverage to builders risk policies. Talk to your construction clients about adding optional coverage to their builders risk policies to provide insurance coverage for change orders in the event they were not properly reported.
Contractors understand that their customers will likely make changes to the materials or scope of the original construction contract. By sharing the above tips with your contractor clients, you can help them avoid the risks that can come with change orders.
To learn more about change order coverage and other optional endorsements that can help your clients protect their new construction or remodeling projects, watch our free 10-minute webinar: Best Practices for Insuring New Construction. This is intended as a general description of certain types of insurance and services available to qualified customers. Your policy is the contract that specifically and fully describes your coverage. The description of the policy provisions gives a broad overview of coverages and does not revise or amend the policy.