Critical areas of analysis in construction risk management

Critical areas of analysis in construction risk management | Insurance Business

Critical areas of analysis in construction risk management

Delays in start-up, hailstorms and hurricanes, a skilled labor shortage, rising insurance premiums, social inflation and rising liability concerns, the overarching matter of a global pandemic - when faced with such a smorgasbord of challenges, it’s essential for general contractors and subcontractors in the construction industry to exercise strong risk management, especially when it comes to their supply chain.

Within every construction supply chain, there are commercial, design, logistical, quality and safety exposures for risk managers to identify and mitigate. Much of the supply chain health check comes down to mapping and transparency. It’s essential for construction risk managers to: understand all suppliers and subcontractors in terms of their financial stability, their business sustainability and their inventory; to track their materials and have contingency plans in place should a disruption arise; to understand core production and logistical exposures to natural catastrophes; and to have a detailed recording of any supply chain incidents and the measures taken to help prevent similar issues in the future.

 “The supply chain is a critical area of analysis for all industries. In construction, it’s critical to have a strong business continuity plan and to know your supply chain partners really well,” said Ben Beauvais (pictured), construction executive, distribution, for Liberty Mutual Global Risk Solutions (GRS). “One benefit in construction is that subcontractors are generally very resourceful. They’re good at addressing weak spots in the supply chain in advance, and if there are delays, they can often source from different vendors or access raw product from different geographies. But if they don’t have those contingency plans in place, it’s often a red flag from a project execution standpoint.”

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In recent years, many contractors have turned to building information management (BIM) and scheduling software to help them record and monitor their supply chain risks. Implementation of BIM technology depends on the complexity of their projects and supply chains, but the tools have certainly grown in popularity over the past few years. 

“The construction industry is looking to technology to help strengthen risk management, and boost productivity and profitability,” Beauvais told Insurance Business. “But technology can also bring some pretty big risks. Contractors have to approach technology with a systematic and strategic manner to minimize those risks and to maximize value. Taking a strategic approach to identifying, reviewing, testing and implementing new technology, and working with your insurance brokers and your attorneys when you get to that contract stage is very important in order to understand the potential risk implications of each new technology. BIM, for example, has the potential for undisciplined adoption. If not all contractors are on the BIM platform, a project can easily fall out of sequence even though it has been well mapped out and documented.”

“Contractual analysis is another very important risk management practice in the construction sector, according to Britt Sellers (pictured directly above), Greater Atlanta Area - ‎regional vice president, US E&S Primary GL, Ironshore Insurance. “From a project execution standpoint, fundamental analysis of a contract would include an in-depth assessment of counterparty risk, and confirmation of clear delineations of responsibilities, as well as clear outlines of potential delays and partnering contingency plans. Contract reviews are particularly important in light of the COVID-19 pandemic because there may be opportunities for project owners and contractors to add contractual contingencies to meet the pandemic's potential impact on pricing, schedules and so on.”

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Sellers explained: “In contracts built during the pandemic, risk managers can identify opportunities to add contingencies. For example, they might have a subcontractor that doesn’t have the same insurance coverages they had in the past because their insurance carrier has tightened up on coverages and limitations because of the pandemic [or the ongoing hard market conditions]. In that scenario, they can require by contract that the subcontractor addresses that coverage gap, otherwise they might go with a different subcontractor.

“One thing to note before entering into any contract is that every construction project is unique. The end occupancy, the local conditions, and even such micro inputs as the climate, the soil, the topography, and project complexity can vary, so contractors need to evaluate lots of considerations before embarking on any project. Again, it ties back to that contractual discussion so that design, scheduling, quality assurance, safety, and supply chain contingencies are clearly understood and agreed upon by all parties.”  

“Underpinning all effective risk management strategies in the construction sector is strong communication,” according to Dominic Corigliano (pictured directly above), vice president at IronPro®, the professional lines division of Ironshore. “Not only will this help with supply chain and project management, but it will also help project owners, contractors and subcontractors to mitigate their professional risks, especially as it relates to directors and officers liability, employment practices liability, fiduciary liability and fidelity insurance.”

“Whether the COVID-19 pandemic has caused delays in starting construction projects, or whether it has caused cancellations, what we’re looking at is how it might cause financial stress in the industry,” Corigliano told Insurance Business. “To mitigate that stress, companies can extend out their credit maturities or seek out additional lines of credit to see them through the crisis. Whatever they decide, one thing that is crucially important is communication. In professional lines, communication to shareholders, other key stakeholders and employees is absolutely essential. Companies need to share what protocols and procedures they’re putting in place in order to protect their employees and their shareholders.”