I’ll assume if you’re reading this you are most likely a home builder. That being the case, you already know how much fun it has been dealing with inflation, rising materials costs, labor shortage, etc. When so many problems/challenges descend over a relatively short time, the entire industry can be upended. Regardless of the demand for housing, ever increasing costs must be dealt with in ever more innovative ways; but how? Just a casual Internet search of 2023 building trends for new homes tells us a lot. Here are a few of the things that new home buyers put on their “must have” lists:
- Less square footage and simpler designs
- Large living spaces
- Personalized home offices
- Outdoor entertainment areas
- Open-plan spaces with plenty of light
- Multi-functional uses
Some of these may seem a bit contradictory. Less square footage but large living spaces? Personalized offices with multi-functional uses? Add to this a growing trend among younger home buyers for “green” buildings and the custom builders among you have your work cut out for you. If you’re building spec homes, you have to keep the size down while making those smaller spaces more appealing. Nobody said this was going to be easy.
What’s all this got to do with your general liability (GL) and builder’s risk (BR) insurance? The premiums you pay for both of these “must have” coverages are based on costs. For GL it is your total cost of construction less your land and profit. For BR, the cost of your materials plus the square footage of the home you intend to build are nearly as important as the jobsite’s proximity to a fire department and the coast. While these are not the only factors that help determine the premium you will pay, it is important to provide your insurance company with the most accurate cost and square footage estimates available. Your GL policy will be audited at expiration and we never like to send you a bill for more premium. On the other hand, over-estimating your costs can increase your upfront premiums. No one has a crystal ball that can foretell your future actual costs, but there are some commonsense tips you can follow to avoid “audit shock.” Here’s a list* to consider:
- Make sure your subcontractors have each given you a current GL certificate of insurance (COI). The RWC Insurance Advantage (RIA) requires all major subs to carry GL limits at least equal to your $1 million occurrence limit. The “major” subs are:
- Foundation
- Framing
- Electrical
- Plumbing
- HVAC
- Roofing
- Lesser subcontractors may have limits less than $1 million as long as they have their own GL. If not, you can be charged for their insurance on a primary basis. This means your insurance costs could be much higher since ordinarily the subs’ GL would pay first.
- Have homes that were started before your GL with RIA is to go into effect? If so, ONLY include the cost to complete such homes during the term of your RIA policy.
- Projecting any new starts that WON’T be finished before your RIA policy expires? In that case, ONLY include your best estimate of the cost of construction up to that point.
- Materials. Lumber has been a volatile commodity with respect to costs. In the past, prices soared. Currently (late 2023) prices are far below the record highs reached during and immediately after COVID. However, be aware of pricing trends in lumber and all building materials and appliances for the immediate future and estimate accordingly.
- Availability and logistics. While these have improved dramatically, there are still shortages and delays that eat into already thin profit margins.
- Labor. A strong economy, high demand for new homes and difficulty attracting young people into the trades has led to a national labor shortage. This impacts your subs the most affecting the time it takes to build and adding to your costs. Estimating such increases is a challenge, but their potential impact on your GL premium can be significant.
- Less square footage. Offsetting rising labor and materials somewhat is the trend in smaller homes. In this respect, less really is more. That said, knowing all your costs is key so that the right dollar amount per square foot can be applied to the homes you build.
In the last few years, the US housing market has found it hard to catch a break. It seems as if for every two steps forward, there’s one step backward. The RWC Insurance Advantage insures only home builders. It’s all we do. We understand the challenges you face and we’ll ride out every storm with you. It is our hope that these tips can help you help us provide you with the best GL and BR quotes possible. For more information, call us at 866-454-2155 or visit us on the web at https://rwcinsuranceadvantage.com/contact-us/.
(*This is not a complete list of all things to be considered in determining your estimated costs. Individual circumstances vary. If you are unsure of what to include in your cost estimate, please contact us and ask to speak with a RWC Insurance Advantage underwriter.)