What Is Construction Project Loss Insurance?

Construction contractors face potential losses with each project they take on. To mitigate the financial consequences of catastrophic project losses, businesses use construction project loss insurance (PLI).

This policy is designed to protect contractors and construction managers from unexpected increased costs when working on a project. It can also help contractors manage cash flow during a loss.

This article discusses project loss insurance — how it works, how much it usually costs and what alternatives are available for construction contractors.

What is project loss insurance?

PLI covers a contractor’s financial losses caused by situations that are typically difficult to insure and aren’t covered under other policies. It’s a type of builder’s risk insurance.

Some of the events that are covered under a PLI policy include:

• Price escalations
• Subcontractor default
• Estimate mistakes
• Delay costs
• Low productivity
• Material delivery delays
• Unforeseen site conditions
• Bad weather

PLI is intended to help contractors overcome catastrophic losses that might otherwise lead to bankruptcy. It doesn’t cover small losses or minor project setbacks that are unlikely to have major financial consequences. 

Catastrophic losses may include: 

• Bad estimates
• Poor production
• Subcontractor default/failure
• Delays due to damages
• Price escalations
• Manufacturer/supplier failure
• Extensive rework

How Project Loss Insurance Works

For a project to be covered under PLI, the policyholder must enroll each project individually. Here are the steps a contractor should follow to get their project insured:

• The contractor provides financial statements and a work in progress (WIP) report.
• The insurer determines the project’s financial stability and reviews estimating and project management strategies.
• The insurer offers advice for mitigating construction risks and project losses.

If a loss occurs that will impact the project and cause serious financial loss, the contractor can file a claim with their insurance company. The general steps for filing a PLI claim are:

• The contractor submits a detailed proof of loss with supporting documents.
• A claim professional investigates the loss and determines if it’s covered under the policy.
• If the claim is covered, the insured receives a payout for its losses, minus the deductible.

How much does project loss insurance cost?

The cost of PLI depends on the amount of revenue a contractor receives on each enrolled project.

The rate is calculated as 0.1% to 0.3% of the contract value and is usually billed quarterly. Commercial project rates may range from $1 to $2.50 per $1,000, and $2 to $3 per $1,000 for large civil projects. 

It’s important to note that PLI doesn’t provide total cost reimbursement. The contractor is expected to pay for some of the loss (approximately 25%) through a deductible and insurance copays. There’s also a maximum payout, which is usually based on project value.

Project Loss Insurance: The Pros and Cons

Alternatives to Project Loss Insurance

While PLI can provide valuable financial protection for many construction contractors, it’s not the right option for every business. For example, PLI might be too expensive for smaller contractors. 

Here are a few PLI alternatives that can protect contractors from a catastrophic project loss.

Performance Bonds

Performance bonds protect owners and contractors from the costs of a lower-tier contractor defaulting on the project. They can be purchased by the general contractor (GC) to protect the project owner, or subcontractors can purchase them to protect GCs.

Bonds are cost-effective and cover all the project expenses caused by default.

Business Interruption Insurance

If a covered peril forces a business to temporarily shut down, business interruption insurance will cover its losses. For example, this policy would cover a contractor’s rent, utilities and lost earnings if a fire damaged their office building. 

However, business interruption insurance doesn’t cover direct project losses. It’s only meant to replace business income and fixed expenses until the company can operate at full capacity again. 

Subcontractor Default Insurance

Subcontractor default insurance (SDI) protects GCs and project owners from financial risk when a subcontractor defaults on a project. It helps GCs cover the expenses incurred when a sub fails to perform according to their contract. 

Because SDI is expensive and requires a high volume of work (a minimum of $200 million), it’s only available to large contractors. Like with PLI, contractors are expected to cover some of the expenses through a deductible and copays.

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Safeguarding Contractors from Catastrophic Financial Setbacks

By covering catastrophic losses, project loss insurance policies help contractors safeguard the financial stability of their business. Partnering with risk management professionals to weigh the pros and cons when deciding on selecting either a PLI policy, or other alternatives can help lower a contractor’s exposure to risks that could tank their company and allow them to remain focused on streamlining their projects. 

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