Risk in Construction

Transcription

1 Risk in Construction Market Research prepared for June 2014 In association with the Chartered Institution of Civil Engineering Surveyors, The Institution of Civil Engineers and the UK s leading Design and Build, Structural Engineering and Architecture companies.

2 Contents Introduction p.3 Objectives p.3 Analysis of responses from full sample p.4 - Do you think the sector faces an increasing level of risk? - If yes, why? - What methods are being used to identify risk? - What is being done to reduce exposure / risk? - Is insurance cover a reliable safety net if things go wrong? - How are uninsurable risks being dealt with? - What trends are likely to be seen in the future in dealing with risk? - Do you have any system for ensuring that your contractual trading conditions do not conflict with the provisions of your insurance contracts? - Do you review periodically how your business has evolved and how that is reflected in your contractual agreements and insurance coverage? - Does your insurance broker provide you with advice upon risk and review your contractual and insurance arrangements? - Are you gearing up for the introduction of Building Information Modelling - (BIM) - and are you aware of its insurance implications? Sample profile and survey method p.12 About Weightmans LLP p.12 2

3 Introduction In March and April 2014, Weightmans instructed twentyfour7 to conduct an opinion survey focused on risk in the construction sector. The survey comprised 210 interviews / questionnaires with: - Leading companies, by project value in the following sectors: Design and Build, Structural Engineers and Architects. The individuals selected for the interviews were the most senior people responsible for risk assessment and risk management. - Members of the Chartered Institution of Civil Engineering Surveyors. - Members of the Institution of Civil Engineers. All respondents took part in the survey on the basis they would not be named or referred to in this report. Objectives The objectives of the survey were: - To determine if there is a perceived increase in the level of risk facing the construction sector. - If so, to identify why risk is increasing. - To identify which methods are used to identify risks. - To identify what is being done to reduce exposure / risk. - To ascertain whether insurance is considered a reliable safety net if things go wrong. - To determine how uninsurable risks are being dealt with. - To identify the trends likely to be seen in the future to deal with risk. - To discover if systems are in place for ensuring contractual trading conditions do not conflict with the provisions of insurance contracts. - To see if insurance brokers are providing advice on risk and reviewing contractual and insurance obligations. - To gauge awareness of the insurance implications of Business Information Modelling (BIM). The interviews were carried out in March and April 2014 via . 3

4 Analysis of responses from full sample - The vast majority (82%) of respondents believe risk is increasing. - There are a number of reasons why risk is increasing. The two main reasons are contractual obligations becoming increasingly onerous and increasing demands for speed and / or unrealistic budgets from clients. - The majority of respondents (65%) do not believe insurance is a reliable safety net if things go wrong. - Uninsurable risks are being most commonly dealt with by building contingency funds into contracts. - Almost half (48%) of respondents do not have systems place for ensuring that their contractual trading conditions do not conflict with the provisions of their insurance contracts. - Nearly half (47%) of respondents are not gearing up for the introduction of BIM and are unaware of its insurance implications. - The majority (72%) of respondents have procedures or systems in place to ensure that staff are aware of what their insurance covers. 1. Do you think the sector faces an increasing level of risk? A) YES 82% B) NO 18% 82% of respondents believe risk is increasing. 2. If yes, is this due to any of the following? (Respondents were asked to tick all that apply) A) Contractual obligations becoming increasingly onerous and complex 82% B) Reducing profit margins leading to reducing level of resource 61% C) Increasing demands for speed and/or unrealistic budgets from clients 73% D) Reduction in the levels of PI insurance cover available in the market since Sept 11 th 17% E) Other (please state) 6% Sample Comments for Other 4

5 Having suitable staff level of experience - lack of required skills. As a consequence added risk from no fulfillment of contract obligations. Flawed tender review processes and bad quality documentation produced by Employer/Consultant in particular with regards to design liability. Individuals and companies offloading their responsibilities and obligations to others, eg inappropriate scope of works, design risk take by contractors, protection of works including security as allowed by vague contract terms and imprecise scope. Market competition more serious. Owing to the nature of the industry and tight profit margins there is a requirement to venture into new procurement strategies, and the potential not to be able to pass risk down the supply chain through back 2 back contracts. Lack of skills in translating interim solutions and associated risks in terms of short and long terms goals and aims when faced with difficulties. Clients are increasing passing the risk to Contractors that they traditionally took. Examples of this are ground conditions risk. This would normally prove counterproductive as each contractor would price it in and the situation means the Client picks up on it every time. This was the situation with GC Works 1 before the Client caught on he was paying for it every time. However in today s climate Contractors increasingly take the risk themselves. In the long term this is actually against the public interest when statutory bodies or government departments do this. The "someone is to blame" culture. Reducing profit/operating margins encourages a cutting - corners mentality. There are a number of reasons why risk is increasing. The two main reasons are contractual obligations becoming increasingly onerous and increasing demands for speed and / or unrealistic budgets from clients. Main Contractors increasingly becoming project managers and losing an appreciation for the design process and knowledge of actual construction. This leads to an unrealistic view of design risk at contract tender stage and a tendency to equate any post tender amendment as an error. This leads to unjustified claims. Lack of client/developer support once the contractor is appointed and the consultant team have been novated over. In particular time pressure in D&B scenarios where the co-ordination that occurs in Stage E is truncated. D&B contractors changing designs & expecting redraws without further fees! D& B contractors expecting more information than necessary & ignoring the interdependencies on other trades & specialist input. Solicitors lumping all the risk on the other party to the clients' contracts, some of which cannot be insured such as indemnities. 5

6 Reduced levels of capability / skills within the marketplace. Increased risk of price inflation as the market begins to improve. 3. What methods are used to identify risk faced in this sector? (Respondents were asked to tick all that apply) A) Regular review of contracts and agreements to identify inappropriate allocation of responsibility/risk 82% B) Appointment of risk managers or adoption of risk assessment processes to assess exposure 62% C) Review of completed projects to identify what went wrong and how to avoid it next time 69% D) Advice from their insurers 36% E) Other (please state) 4% Regular review of contracts is the main way respondents are identifying risk. 4. What is being done to reduce exposure/risk? (Respondents were asked to tick all that apply) A) A tough stance adopted in negotiations/financial caps on liability 72% B) Projects of a particular type being avoided 37% Adopting a tough stance in negations / financial caps on liability is the most frequently used way to reduce exposure / risk. 5. If you have answered B for Q4 what kinds of projects are being avoided? Sample comments for B Working for unknown clients with insufficient financial security. Heavily amended contract with the tender identifying that it is pass/fail on acceptance of the contract. Unrealistic tender period to provide detailed price. Low margin GMP Clients that have a commercial aggressive stance. Wind farms. Non specific work for developers who are notorious at passing down risk. Bad employers. Where design is incomplete contract conditions project constraints unreasonable. Highly specialist projects. 6

7 Non-specialist design & build schemes. Complex projects, ones with new technologies, those with low margins. Design and Build. Certain projects where there is a risk of third party claims for any reason and no contractual protection would be avoided, as would projects on which the client was unwilling to agree an appropriate balance or risk, and exclusions and limitations of liability. Temporary Works. Where clients are risk transferring disproportionate amounts of risk on lump sum fixed price contracts. Those clients/developers who will not negotiate with contractors where some of their requirements are so onerous taking these on would leave us exposed. High risk with all risk passed to contractor. Lower-value, single-stage appointments in particular sectors and/or clients - e.g. residential, certain retail clients. 6. Is insurance cover a reliable safety net if things go wrong? A) YES - 35% B) NO - 65% The majority of respondents do not believe insurance cover is a reliable safety net if things go wrong. Sample comments for Yes My experience of insurance so far has resulted in fair settlements from the insurance companies. This particularly refers to CAR claims. There has, however, been large excesses attached to each claim. It does give some comfort but the best defence is rigorous project reviews. In the end you pay for your claims experience. It has to be - otherwise there would be no point to having insurance cover. Provided it is adequate. Risk needs to be managed throughout the project lifetime and insurance should be a last resort. You require some form of liability insurance 7

8 Only to a certain extent and dependent on how good of cover is in place with no hidden gaps in cover. a regular review of insurance coverage is needed It will cover some situations but many events are not covered if you read the small print Our insurance cover is our safety net but as the term suggests it is not the first or only risk control mechanism used. We strive to get it right by using detailed project reviews at appropriate stages in the design process. Insurance is there to cover genuine mistakes but not for anyone to think they can finance their own mistakes by blaming you. Clients often try to impose risks which are uninsurable or impact on our PI. A take it or leave it attitude especially when in times of economic decline and when litigation is rife. But, given the claims made nature of PII, (i.e the policy in force in any current year is the one that responds to any claim) only if one is certain that clauses negotiated at the outset will still be covered in the future. Sample comments for no This should be a secondary cover, it is essential to set up the contract correctly in the first place. Insurance is becoming harder to renew with coverage being reduced in areas where repeated claims have been made in the past. Because insurances have excess which are not covered and general insurance obligations within the industry do not necessarily cover all scenarios i.e. costs of delay. The damage to reputation when (for my company) we have a single client is more damaging than financial remedies under the contract (LDs etc). High excesses, reluctance to use insurance due to subsequent premium increase. A key problem with relying on insurance in case things go wrong is that, since insurers are typically in the business to make money rather than pay claims, recovery, if at all, is inevitably delayed. Better that risks are avoided or at least managed, rather than expecting "someone else' (i.e. the insurer) to compensate losses. Insurance can only provide financial protection, not replace life or valuable objects. Insurance cannot protect one's name and reputation. Excesses are increasing and poor claims history is significantly effecting premiums. Production time lost - everyone remembers a negative - both individual and industry level. Insurance cover now comes with limitations to liability thereby still leaving an element of exposure. 8

9 Risk should always be assessed prior to project start. Risk should be proactively assessed throughout the project cycle, rather than acted upon reactively. There shouldn t be a reliance on insurance as this will result in further increases in premiums and reductions in available cover. A cash payment is not a solution to loss of life or serious injury. Very high excess value being payable. Unreasonable amounts of indemnity being demanded by clients. Insurance doesn't cover commercial losses or uninsurable risks. Due to the level of our own self insured retention. Clients demanding uninsurable risks as part of the job. Clients & contractors insist on uninsurable risks being taken by design teams. Not if clients adopt a take it or leave it attitude which is not uncommon especially in an economic downturn. Detailed review of every contract is carried out including PQQ's. We liaise very closely with our insurers. We have legal in house checks & our Mutual Insurance company have a legal team who vet for insurance cover & negotiate standard contracts. Thorough review of all contracts. Tough approach of not signing if not insured, subject to understanding commercial reality of actual risk. Regular communication with insurance broker. Insurance will only cover some of the risk transfer contained within contracts. Costs and time associated with the claim, defensive nature of insurers. Because most of the risk issues we face are to do with scope and programme which are not insurable. Over reliance on insurance will result in increased premiums and/or future unavailability of insurance. Damage to business and reputation cannot be covered. 7. Have you any procedures or systems in place to ensure staff are aware of what your insurance does or does not cover or even what the level of insurance is, what is covered and what isn't? 9

10 A) YES 72% B) NO 28% The majority of respondents have procedures or systems in place to ensure staff are aware of what insurance covers. 8. How are uninsurable risks being dealt with? (Respondents were asked to tick all that apply) A) Contingency funds are built into contracts 72% B) Internal insurance type funds are set aside to deal with claims 30% C) Ignoring them 36% Building contingency funds into contracts is the most commonly used way for respondents to deal with uninsurable risk. 9. What trends are likely to be seen in the future in dealing with risk? (Respondents were asked to tick all that apply) A) More companies going bust as the risks escalate causing casualties 42% B) Increasing attention to risk management issues with the development of specific strategies 78% C) Carry on regardless of risk - "it will be alright on the night" mentality to prevail 26% Respondents believe there will be increasing attention to risk management issues with the development of specific strategies in the future. 10. Do you have any system for ensuring that your contractual trading conditions do not conflict with the provisions of your insurance contracts? A) YES 52% B) NO 48% Over half (52%) of respondents do not have systems place for ensuring that their contractual trading conditions do not conflict with the provisions of their insurance contracts. 11. Do you review periodically how your business has evolved and how that is reflected in your contractual agreements and insurance coverage? A) YES 80% B) NO 20% 10

11 The majority of respondents periodically review how their business has evolved and how that is reflected in their contractual agreements and insurance coverage. 12. Does your insurance broker provide you with advice upon risk and review your contractual and insurance arrangements? A) YES- 72% B) NO 28% The majority of brokers are providing advice on risk and reviewing contractual and insurance arrangements. 13. Are you gearing up for the introduction of Building Information Modelling - (BIM) - and are you aware of its insurance implications? A) YES 53% B) NO - 47% Nearly half (47%) of respondents are not gearing up for the introduction of BIM and are unaware of its insurance implications. 11

12 Sample profile and survey method The survey comprised 210 interviews / questionnaires with: - Leading companies, by project value in the following sectors: Design and Build, Structural Engineers and Architects. The individuals selected for the interviews were the most senior people responsible for risk assessment and risk management. - Members of the Chartered Institution of Civil Engineering Surveyors. - Members of the Institution of Civil Engineers. About Weightmans LLP Weightmans is a top 50 law firm with over 1,300 people across offices in Birmingham, Dartford, Glasgow, Knutsford, Leicester, Liverpool, London and Manchester. 12