WrapUp Policy Used To Manage Grand Center Risk

June 5, 2002
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GRAND RAPIDS — The risk for the biggest construction project the city has likely ever seen will be managed by the contractor instead of the owner, a move that hopefully will benefit both and get more minority-owned subcontracting firms involved with the project.

Erhardt-Hunt, a joint venture between Grand Rapids-based Erhardt Construction Co. and The Hunt Group of Indianapolis, is managing the renovation and expansion of the Grand Center, the city's convention facility.

The project is worth an estimated $219.5 million, nearly three times what was spent to build the Van Andel Arena in 1996.

To manage the risk for the four-year construction period, Erhardt-Hunt negotiated an insurance policy with the New York-based American International Group, better known as AIG, for $2.06 million — a figure that includes expenses. The policy, known as contractor-controlled wrap-up insurance, provides $77 million worth of general liability and workers' compensation coverage.

In choosing AIG, one of the world's largest commercial insurers, Erhardt-Hunt used an administrator to solicit bids. In all, eight firms responded and AIG was selected because it offered the most cost-effective policy.

But the building owner, the Convention and Arena Authority, also is managing a portion of the project's uncertainty with a builder's risk policy — which, for all practical purposes, is catastrophe insurance. The policy covers damage to the project that could occur from a weather-related incident, like a tornado, or to materials for the project, like an accident in the shipping process.

"I want to make certain that we are very adequately covered and, in fact, err on the side of too much coverage rather than too little. But I didn't want to spend a bunch of money that we didn't have to," said CAA Chairman Steve Heacock.

"So that's the fine line that I asked Dick (Wendt) and others to pursue and I'm convinced that what they've come up with covers that."

That pursuit led to Erhardt-Hunt purchasing a wrap-up policy, which differs from the standard contractor-controlled policy in at least three ways.

First, the wrap-up feature means that subcontractors who work on the project do not have to provide their own insurance, which they normally do. So the wrap-up lowers the subcontractor's cost to Erhardt-Hunt because their premium cost is missing.

This means that smaller and minority-owned subcontracting firms can submit lower bids than usual, as these companies generally have to pay higher premiums because insurance is more expensive to them than it is for larger firms.

"I wanted to have the program in place so that it would allow small contractors to come forward even if they couldn't get insurance. It really is an effort to try to make it easier for companies, particularly those owned by people of color, to participate," said Heacock.

"It's not a matter of being politically correct, or anything," he said of the board's effort to include minority subcontractors in the project. "We're spending nearly $220 million in the local community and I really think there ought to be a chunk for people like James Taylor, the local electrician that runs his own business. There just ought to be something there for folks like him."

Second, having lower bids come in from subcontractors means that the project's overall price tag to Erhardt-Hunt should be lower. If the project comes in under its estimate, Erhardt-Hunt gets to keep all the savings generated from the work — figured at $475,000. Initially, savings from the work was to have been equally divided between the owner and the contractor.

"But the maximum loss that could be incurred is about $800,000," said Dick Wendt, CAA general counsel and a partner at Dickinson Wright. "The Authority decided that they didn't want the risk on the loss side. So we ended up with Erhardt-Hunt providing the insurance. But we don't share savings. But we don't bear any risk of a loss, either."

Third, by having the wrap-up feature the CAA didn't have to purchase an owner's protection policy. If the Authority had bought $10 million worth of coverage, it would have cost the board about $350,000.

"With the wrap-up policy, the Authority didn't have to buy this separate bonus protective policy because they're covered as a co-insurer. That is, in effect, a real savings," said Wendt.

The wrap-up feature of the policy includes certain expenses above the premium costs. In this case, about $900,000 worth that is dedicated to job safety.

"To do one of these you have to have a safety officer on the job site all the time, whenever there is any work going on," said Wendt.

"About $420,000 of that total is to pay salary and fringe benefits for the safety person and $480,000 of that is to pay administrative costs for administrating this program," he added. "The rate is based on the labor that they pay. Those premiums were based on time and the number of wages that will be paid."

The work is expected to take most of four years and be worth $29.7 million in wages. Wendt explained that without the wrap-up the risk-management policy would have cost closer to $3.4 million instead of the $2.06 million.

The wrap-up, however, has up to $1.77 million worth of deductibles across a number of occurrences, which are the responsibility of Erhardt-Hunt. When the total deductible is added to the overall premium, the wrap-up exceeds the $3.4 million of the standard contractor-controlled policy. If the project is accident-free, then the contractor makes out.

"With the contractors handling the insurance, the Authority has no risk for paying deductibles," said Wendt.

A wrap-up policy is normally only issued to projects that are valued at a minimum of $100 million. For projects costing less than that, like the $60 million county courthouse project, the contractor and subs provide their own insurance.

Wendt said that he was impressed with how the CAA and Erhardt-Hunt worked together on managing the project's risk. And Heacock told the Business Journal that the policy met the trio of goals the CAA established.

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