Construction companies are ordering critical equipment earlier to protect projects from supply chain disruption, but the strategy is shifting more risk into warehouses and other off-site locations before work has progressed.
The move away from "just in time" procurement has implications for theft, fire, natural catastrophe exposure, equipment maintenance and the accumulation of high-value materials. Arch Insurance International said underwriters will increasingly expect brokers to address those risks while projects are still being designed.
The insurer's inaugural Construction Risk Report surveyed 44 property owners, developers and contractors worldwide. It found that 78% had experienced greater volatility in material sourcing and procurement, while 52% named supply chain disruption among their leading risks. Almost one-third had reconsidered or relocated projects because of geopolitical concerns.
Because the survey is global and the commentary comes from Arch's international construction team, the findings describe project business written across multiple markets rather than US-specific conditions.
Tim Chapman (pictured on the right), head of construction at Arch, said buying materials earlier was a positive step for mitigating supply chain disruption and had become "the norm rather than the exception" as clients try to protect project schedules.
"As part of the assessment of this risk, insurers will look closely at security arrangements, off-site storage locations, CAT exposures and the build-up of value over time," he said.
Specialist components may remain in storage for months, introducing maintenance requirements that would not arise under a traditional procurement schedule. Some equipment also needs specific preservation measures if it is not installed and commissioned within its expected timeframe.
"These procedures from clients must become an area of increasing focus for insurers as early delivery becomes standard practice," Chapman said.
This means the placement discussion may need to cover where equipment will be stored, the fire and security protections at each location, natural catastrophe exposure, maintenance arrangements and how values will accumulate throughout the policy period. The quality of storage facilities is also likely to become particularly important when procurement plans change after a project has begun.
"When off-site storage hasn't been arranged in advance, and suddenly becomes necessary, finding warehouses with the required level of fire protection and security can prove difficult," said Kevin Lumiste (pictured on the left), senior construction underwriter at Arch.
"In addition," Lumiste said, "the value of materials and equipment held in storage may increase over time. These two factors [storage quality and rising stored values] may cause insurers to reassess their terms and conditions to ensure risks are priced adequately."
Delays can also affect equipment warranties. A significant delay may push a project past the expiry date of equipment warranties, Lumiste said, leaving the client to pay an original equipment manufacturer for an extension before the machinery has entered service.
"Extending these warranties often comes with additional fees from Original Equipment Manufacturers, adding a further cost for the client on top of the delay itself," he said.
The underlying delay exposure is becoming one of the construction market's most difficult risks, according to Stephen Convery (pictured in the middle), senior construction underwriter at Arch.
"Clients are taking positive steps to mitigate their exposures by reviewing their supply chains and building in redundancy," he said. "However, not all supply chain risk can be mitigated through planning and insurance alone, so the contractual allocation of risk between clients and contractors needs constant scrutiny."
Geopolitical disruption has yet to generate a substantial wave of direct construction claims. Arch expects it to have a greater effect by aggravating existing and future Delay in Start-Up claims as components take longer to reach sites.
Convery said a sudden accumulation of direct losses remained unlikely because war exclusions are standard in Construction All Risks and Engineering All Risks policies, while strike, riot and civil commotion, political violence and terrorism coverage typically carries tight limits.
Two-thirds of respondents increased their insurance and risk management expenditure, although Arch said higher spending did not necessarily indicate that clients were paying more for unchanged protection. Some buyers have purchased larger limits or additional products, while rising construction costs have increased contract values in fast-growing sectors such as power and data centres.
Climate exposure is also receiving closer pricing scrutiny, particularly within higher layers: more than three-quarters of respondents told Arch their exposure to weather and climate-related events had increased over the past five years.
Chapman said brokers can improve the placement by providing due diligence reports, risk registers, technology readiness levels and clear evidence of how identified exposures are being controlled.
"The more information and data shared, for example due diligence reports, risk registers and technology readiness levels, the more informed the underwriting decisions will be and ultimately the more appropriate the coverage will be for clients," he said.
Convery encouraged brokers and clients to meet underwriters in person while projects remain in the planning or design stage.
By the time a placement reaches the market, many of the decisions that shape the risk — procurement timing, storage locations, and how delay exposure is allocated between client and contractor — have already been made.
