Top 25 Accounting and Construction Terms Homeowners Should Know During an Insurance Claims Process
Navigating the insurance claims process after damage to your home can be complex, especially when construction and repairs are involved. Understanding key accounting and construction terms can help you manage the process more effectively, communicate clearly with contractors, and ensure that your claim is handled smoothly.
This detailed guide will walk you through the top 25 accounting and construction terms that homeowners are likely to encounter during an insurance claims process.
1. Estimate / Quote
An Estimate or Quote is a preliminary calculation provided by a Contractor or construction company outlining the expected cost of a project. It includes materials, labor, and other expenses. During the claims process, your insurance company may require multiple estimates to determine the reasonable cost of repairs.
2. Invoice
An Invoice is a detailed bill issued by a contractor or service provider that lists the services rendered and the total amount due. Invoices are essential for the claims process, as they provide documentation of the work completed and the costs incurred, which your insurance company will review before issuing payment.
3. Receipt
A Receipt is a document that confirms payment for goods or services. Receipts are crucial for substantiating your expenses during the claims process. You’ll need to provide receipts for any repairs or purchases related to the damage covered by your insurance claim.
4. Change Order
A Change Order is a written agreement between the homeowner and the contractor that outlines modifications or additions to the original construction plan. Change orders may result in additional costs and are often necessary when unexpected issues arise during the repair process.
5. Net 30
Net 30 is a payment term indicating that the payment is due 30 days after the invoice date. Contractors may use terms like Net 30, Net 60, or Net 90 depending on the agreement. Understanding these terms helps ensure timely payments, which can affect the progress of your repairs.
6. Administration Fee
An Administration Fee is a charge for the administrative tasks associated with managing a project, such as paperwork, scheduling, and communication. Some contractors include an administration fee in their quotes, which should be accounted for in your budget and discussed with your insurance adjuster.
7. Contractor Fee
A Contractor Fee is the amount charged by the contractor for managing and executing the construction project. This fee typically includes overhead costs, profit, and compensation for the contractor’s expertise. It’s important to clarify what the contractor fee covers before signing a Contract.
8. Plan / Blueprint
A Plan or Blueprint is a detailed drawing or diagram that outlines the Specifications of the construction or repair project. These documents are essential for ensuring that repairs or rebuilding efforts meet the required standards and are often required by both the contractor and the insurance company.
9. Markup
Markup refers to the percentage added to the cost of materials and labor by the contractor to cover overhead and profit. Markup is a common practice in construction, and understanding it helps homeowners assess whether the costs in their estimate or invoice are reasonable.
10. Scope of Work
The Scope of Work is a detailed description of the tasks and responsibilities involved in a construction project. It outlines what will be done, how it will be done, and by whom. A clear scope of work is crucial for avoiding misunderstandings and ensuring that all aspects of the repair are covered by your insurance claim.
11. Depreciation
Depreciation refers to the decrease in the value of an asset over time due to wear and tear, age, or obsolescence. In the context of an insurance claim, depreciation can affect the payout amount, especially if the claim is settled on an Actual Cash Value (ACV) basis rather than Replacement Cost Value (RCV).
12. Lien Waiver
A Lien Waiver is a document signed by a contractor or Subcontractor that relinquishes their right to place a Lien on the property for unpaid work. Homeowners should obtain lien waivers before making final payments to ensure that all parties have been paid and that no liens can be placed on the property.
13. Retainage
Retainage is a portion of the contract payment withheld by the homeowner until the project is completed satisfactorily. This amount is usually a percentage of the total project cost and is released once the homeowner is satisfied with the work and all inspections have been passed.
14. Punch List
A Punch List is a list of minor tasks or corrections that need to be completed before the construction project is considered finished. It’s usually created during a walkthrough with the contractor near the end of the project. The insurance company may require the punch list to be completed before releasing final payments.
15. Contingency
Contingency is an amount set aside in the project budget to cover unexpected expenses or changes in scope. It’s important to include a contingency in your construction budget to ensure that you have the funds to cover any unforeseen issues that arise during the repair process.
16. Certificate of Insurance
A Certificate of Insurance is a document provided by the contractor that verifies they have insurance coverage, including general liability and workers’ compensation. Homeowners should request a certificate of insurance before work begins to ensure they are protected in case of accidents or damage.
17. Subcontractor
A Subcontractor is a specialist hired by the general contractor to perform specific tasks within a construction project, such as electrical work, Plumbing, or roofing. It’s important to know who the subcontractors are and ensure they are covered under the contractor’s insurance Policy.
18. Overhead and Profit (O&P)
Overhead and Profit (O&P) are the costs associated with the contractor’s general business expenses (overhead) and the profit margin they expect to earn from the project. These costs are often included as a percentage of the total project cost and should be factored into the estimate provided to the insurance company.
19. Draw Schedule
A Draw Schedule is a timeline that outlines when payments will be made to the contractor based on the completion of specific milestones in the construction project. It’s important to agree on a draw schedule that aligns with the progress of the work and the disbursement of insurance funds.
20. Final Inspection
A Final Inspection is the last inspection conducted by a building inspector or the homeowner to ensure that the construction or repair work meets all codes, standards, and contract specifications. The final inspection must be passed before the project is officially completed and final payments are released.
21. Hard Costs
Hard Costs refer to the direct costs associated with the physical construction of a project, including materials, labor, and equipment. These costs are typically the largest component of the construction budget and must be clearly itemized in the estimate and invoices.
22. Soft Costs
Soft Costs are indirect costs that are not directly tied to the physical construction of the project but are necessary for its completion. Examples include architectural fees, permits, insurance, and financing costs. Soft costs should be included in the overall project budget and discussed with your insurance adjuster.
23. Permit
A Permit is an official approval required by local government agencies before certain types of construction or repairs can begin. Permits ensure that the work meets local building codes and regulations. Homeowners should verify that all necessary permits have been obtained before work begins.
24. Builder’s Risk Insurance
Builder’s Risk Insurance is a type of insurance policy that covers a property during the course of construction or renovation. It protects against damage to the structure and materials, and is typically required by lenders or recommended for significant repair projects.
25. Certificate of Completion
A Certificate of Completion is a document issued by a building inspector or the contractor that confirms that the project has been completed in accordance with the contract, building codes, and safety standards. This certificate is often required by the insurance company before releasing the final payment.
Wrap-Up
Understanding these 25 accounting terms used in construction can really help you navigate the complexities of an insurance claim that involves construction or major repairs. By familiarizing yourself with these terms, you can communicate more effectively with contractors, avoid potential pitfalls, and ensure that your insurance claim is handled efficiently.
If you have any questions about how these terms apply to your specific situation or need assistance during the claims process, it’s advisable to consult with your contractor, CPA and of course us.