Why Do You Belong to the STA?

Insurance Costs are a Direct Cost in Change Order Calculations

By Henry L. Goldberg, Esq., STA General Counsel and Robert J. Fryman, Esq

Henry L. Goldberg

Special Counsel for Infrastructure and
Private Sector Construction
Morritt, Hock & Hamroff

Robert J. Fryman, Esq
Partner and Chair of the
Construction Practice Group
Morritt, Hock & Hamroff

How often have we campaigned against unfair contract practices on these pages? As the saying goes, “It’s cold out there,” and without outside support, contractors of all sizes and shapes have, and will continue to be, taken advantage of by public owners and private developers.

It is the STA’s mission to step up and protect the rights of subs and suppliers and, in turn, the interests of all service-supplying parties in the construction industry. Currently, Randy Rifelli, of United Iron Inc., and a long-time Board Member of the STA, is spearheading an STA effort to stop an abuse by DASNY of attempting to exclude CGL insurance costs from change order calculations. With insurance costs in New York virtually out of control (see: “Scaffold Law”), this is very problematic, but it is nothing new. It is adverse issues such as this that the STA regularly battles on your behalf.

Wrongful Exclusion of CGL and Workers Comp Insurance As Direct Costs

This “abuse du jour” is not new. We have been fighting it for years. If you are currently encountering this problem with other public owners or private developers, please let us know about it. We can help. You don’t need to “reinvent the wheel.” There is much legal support for the proposition that insurance costs, such as CGL and Workers Comp, are direct costs of a project to be paid for in change orders as direct costs, and not co-mingled in some general company overhead markup of 10%.

In fact, certain public contracts already expressly provide for CGL costs to be a direct cost compensable in change order work (e.g. New York State DOT Contract at §109-05B.1.d, see also Federal Acquisition Regulations, CHAPTER 1 – PART 31 – CONTRACT COST PRINCIPLES AND PROCEDURES, 48 CFR § 31.205-19).

Nonetheless, some public contracts, such as NYC’s “Standard Form Construction Contract” still wrongfully attempt to circumvent this basic accounting (cost allocation) principle. Instead, NYC contractually provides that CGL costs be deemed part of a general company overhead markup (New York City Standard Form of Construction Contract March 2017, §26.2.11) and not reimbursable as a direct cost in change orders.

Significantly, DASNY’s own general conditions already recognize that increased CGL costs resulting from changes in the work are reserved and, therefore, may be addressed at substantial completion on a DASNY project. (See DASNY General Conditions, §701(H)). Thus, CGL costs are clearly direct costs to be included as such on DASNY projects, and not as part of general company overhead. Put differently, if a change order did not occur, the extra insurance costs it created would not have been incurred.

Moreover, Generally Accepted Accounting Principles (“GAAP”) also deem project specific costs as project costs, requiring their inclusion in change orders as a cost. (FASB ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), at 340-40-25-7).

This mischaracterization of CGL and other job-specific insurance costs as included in a general company “overhead” markup by public owners needs to be firmly rebutted. Historically, this abuse sneaks back into the “system” periodically. Efforts such as that of the STA help to “keep ‘em honest”. This misnomer by agency management, that all insurance can readily be “folded into” general company overhead is plain wrong and demonstrably so.

The foregoing authority makes clear that CGL, as well as Workers Comp insurance, are both direct job costs.

MHH Commentary

It’s frustrating to have to regularly confront this issue, again and again, over the years. Public owners know what is right, but cynically persist in coming up with this “bright new idea” to enhance public budgets. NYC’s Standard Form Contract, of course, is a large part of the problem. It provides a plainly wrong example for all other public owners. But, as shown above, we have the ammunition to confront it. It’s here for you to use and we can add valuable counsel as well. The STA is your essential resource – that’s why you belong.