By Gary R. Semmer, Assured Partners
Great question! There has been a lot of debate over the years over how Change Orders (CO) affect your Insurance and Bonding programs.
Let’s examine some of the issues, but first let’s look at how ConsensusDocs® and AIA define “Change Orders” in their contract language:
ConsensusDocs 200 defines “Change Order” as “a written order signed by the Owner and the Constructor after execution of this Agreement, indicating changes in the scope of the Work, the Contract Price, or Contract.”
AIA Document A201 states that “a Change Order is a written instrument prepared by the Architect and signed by the Owner, Contractor and Architect, stating their agreement upon all of the following: 1) the change in the Work; 2) the amount of the adjustment, if any, in the Contract Sum; and 3) the extent of the adjustment, if any, in the Contract Time.”
The following Insurance and Bonding areas are most impacted by Change Orders as follows:
Property Insurance:
If you’re a GC or Prime Contractor and are responsible for providing Builders Risk (BR) property coverage a large CO will require increasing the BR Hard Costs limit to avoid “underinsurance” issues when a BR claim occurs. In addition, the BR increased premium needs to be accounted for in the project costs to protect the bottom line. Lastly, mid-term change orders can result in supply chain delays which can cause job-site scheduling challenges and the need to store materials off-site. The Subcontractors may be responsible for insuring the materials until delivered, incurring additional cost to their Insurance program.
Workers Compensation (WC) and General Liability (GL) Insurance:
Larger CO’s can increase labor hours causing your Payroll to go up which will increase both your WC & GL premiums. Again, you need to account for the increased premiums in your job costs. In addition, it’s important to account for payroll changes in Wrap-Up (OCIP & CCIP) programs to make sure the Insurance Credit (Bid Deduction) is calculated correctly.
Surety/Bonding:
It’s imperative that the CO document contain “authorized” Individual(s) language that “defines” who has authority to approve change order to assure that once the work is completed they will authorize the payment to avoid non-payment of the CO.
In addition, CO’s can cause Underbillings on your Financial Statements that can become a “red flag” for Surety/Bonding companies when they re-evaluate your Bonding capacity.
Lastly, most Surety/ Bonding companies may charge additional Bond Premiums when they close out the Performance/Payment Bonds which needs to be accounted for in your job costs.
In the end, it is important to review the CO’s and make sure your Insurance & Surety program aligns with the changes and that you have all of your costs covered.
About the Author
Gary Semmer, CIC CWCA is Executive Vice President and Construction Practice Leader with AssuredPartners. Gary specializes in providing Insurance & Risk Management solutions to the Construction and Real Estate industries. He has served as President of the Independent Insurance Agents of Illinois (IIAI) and Associated Risk Manager (ARM) of Illinois. AssuredPartners is the 10th largest Insurance Broker and Consultant in the country providing Commercial Insurance, Risk Management, Employee Benefits through consulting and services. For more information on AssuredPartners, please Gary by email at Gary.Semmer@assuredpartners.com or asa@assuredpartners.com
