Construction Industry Addresses Risks

 
 

construction risk management

The commercial building industry is expected to continue surging through the end of the year, with many independent forecasters predicting growth into 2018. ConstructConnect forecasted a 6.3% increase in total construction growth over 2016 and a 7.2% rise in construction spending this year, for example. The leading recipients of this investment are expected to be office at 12.9%, health care at 12.6% and lodging at 12.4%.

Another industry consultant, Oldcastle Building Solutions, has predicted a likely growth of 7% for total construction in 2017. This includes a year-to-year growth of 6% in commercial spending and a 7% rise in institutional investments.

Amid this activity, the construction industry has also made tremendous strides in quality management through the use of better technology, training and more efficient project delivery methods. Building information modeling, for example, has enabled real-time changes to building designs that enhance the entire structure.

Non-destructive testing, water detection and real-time monitoring technologies have also advanced over the past decade. In addition, young, well-educated professionals have entered the workforce with a better understanding about the value of analytical data than previous generations.

Additionally, while not widely used, collaborative project delivery methods such as integrated project delivery have resulted in better industry cooperation and less finger-pointing when things go wrong. This is especially true as the gray areas keep growing regarding who is responsible for what. Construction firms increasingly offer design opinions on value engineering, while design firms are consistently consulted on constructability options or take a greater role in the actual work. This even impacts traditional design-bid-build project delivery methods.

With all of the advances made, critical management failures and mistakes in design still happen. No matter the delivery method, the responsibilities of contractors and design professionals are continually blurring at the outset of projects, with the expectations of owners becoming ever more stringent. This includes the demands for LEED and other eco-friendly certification guarantees, which have also added another layer of liability.

Another issue is the highly competitive nature of the industry itself. Many professionals have felt compelled to take on projects beyond their expertise, or risk losing their standing in the new design-build construction order. While these collaborative approaches have reaped many benefits related to quicker and earlier identification and resolution of problems, the ongoing intertwining of skills and labor have made it difficult to determine responsibility. When things go wrong, whom does the owner blame? Who is responsible for fixing the problem? From which partner does financial restitution come? Where does one insurance policy’s coverage end and another begin? These are the issues that now regularly plague the modern construction industry.

Talent—or rather, the lack of skilled labor—is also a problem. The dearth of high-quality talent remains the most prevalent, underlying cause of nearly every major construction defect or professional liability claim over the past few years. Structures have been subcontracted to outsourced firms that did not sufficiently double-check their work, resulting in errors that led to catastrophic losses. Projects have been managed by teams committed to short completion timeframes that then work double shifts and do not perform key oversight responsibilities. In certain states, transient workers are known to be there one day and gone the next based on the promise of higher compensation elsewhere.

The professional liability industry has responded to this dilemma with a variety of new policies and enhanced coverage forms as well as advanced approaches to claims resolution. These include more collaborative approaches to exposures offered through insurance, such as mitigation-of-damages and rectification coverages.

Typically purchased with professional liability insurance or on a project-specific basis, mitigation/rectification coverage insures against first-party damages incurred from defective designs identified during the construction cycle. If these are not corrected, it also protects the insured from third-party professional liability claims filed by project owners or other contractors. The money advanced through these policies before the liability picture is fully assessed can come in handy if the project comes in on time and within reasonable budget expectations.

Another recent advance by the insurance industry is the introduction of claims management and forensics techniques designed to replace costly, time-consuming litigation with the funding for corrective actions prior to the construction’s completion. Oversight and detailed documentation of processes have played a major role in reducing construction defect claims.

These technologies and investigative techniques have been coupled with the early identification of problems and pinpointing of responsibilities to quickly resolve potential claims. Some insurers now even fund the correction of the work to further minimize delay of claims and keep the project on schedule. In such instances, litigation has become a “non-option” as projects keep moving while the responsible parties are pursued to recover damages.

In the end, the underlying motivation for any new project should be customer satisfaction. Despite the best efforts and intentions, problems do occur. When they do, it is in everyone’s best interest to resolve the issue with diligence and in the shortest possible amount of time—with major construction projects, even the slightest delay can cost millions.

But construction firms should not be deterred by risk. In recent years, the insurance industry has not only become acutely aware of the unique liability issues that plague today’s construction projects, but has taken the steps necessary to insure against those risks. Further, new methods are being implemented to mitigate exposures and keep projects moving as problems arise. The real key is planning and thoroughly understanding what options are available.

 

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About the Author

Raymond F.H. Bustamante is executive vice president of Berkley Construction Professional Underwriters.

 
 
 

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