We need to talk about risk and construction procurement
15 November 2016
A desire to transfer risk has always featured prominently when it comes to construction procurement. A reasonable objective, but a lot of the time one that translates into clients forcing risk down the supply chain. Here’s the problem – more often than not, it doesn’t work. It is no more than an attempt to dump risk and actually proves counterproductive, driving up project costs and increasing exposures for all parties, including the end client.
If we go back to the first principles of risk management, we know that effective risk transfer requires the other party to have:
- the ability to control the risk; and/or,
- the financial capacity to absorb the loss or transfer the risk.
Equally, the party best placed to manage risk may not be the best party to fund it.
This has particular relevance in the case of construction professionals. As Professional Indemnity (PI) insurance brokers reviewing over 8,000 contracts per year on behalf of our clients, Griffiths & Armour regularly see consulting engineers, architects and other professionals being asked to accept responsibility for matters over which they have very little or no control. We also know that their asset base is largely intellectual as opposed to financial so they are almost entirely dependent upon their PI insurance as a means to absorb risks. As the majority of PI policies are not designed to cover the kind of liabilities being imposed by some clients, the risk of uninsured claims is very real and that creates problems for everyone.
Unprecedented claims activity of recent years
For the consulting engineer and other consultants, the consequences are fairly obvious. It is essential to know what you are signing up to under contract and how that compares with the cover afforded under your PI insurance. Firms are often unaware of the gap that exists and in many cases it is a gap that is growing, due to increased pressure for onerous contracts and a tightening of policy coverage in the wake of the unprecedented claims activity of recent years. Whilst the insurance market is recovering and capacity would be expected to increase, insurers seem to have learned from past experience. Those insurers underwriting PI insurance are largely doing so on their terms, are unwilling to once again become a dumping ground for construction risk and are applying noticeable risk selection criteria. Have you had a claim settled recently? Do you have current or recent projects which have been notified as potential claims? Do you work in what are seen to be ‘unattractive’ sectors?
For those procuring construction consultancy services, it is about recognising gaps that might exist, how that is influenced by developments in the PI market and the exposures created through an over-reliance on third parties and their insurances. Risk transfer through the imposition of onerous contracts won’t work if the parties can’t control the risk, they are no longer around when claims arise or their insurances fail to respond for whatever reason. In those circumstances, the risk remains with the client; it is still very much ‘their problem’.
The experience of the last few years has demonstrated these issues and has highlighted the inefficiencies of a system that relies upon litigation to achieve restitution. That came into sharp focus in discussions surrounding the Building Control Amendment Regulations (BCAR) and it seems to defy logic that more time and money is spent on finding someone responsible for the problems that occur, than is actually invested in fixing the problems themselves. Not to mention the costs associated with multiple parties having to separately maintain high levels of insurance.
But perhaps the greatest cost is the impact on relationships. Increasingly, there is talk about the advantages of greater collaboration within construction but we seem to have a procurement and contractual regime that simply doesn’t support that, it is more about creating dynamic tensions than collective engagement. Traditional procurement practices have often promoted an adversarial culture based on onerous contracts and the imposition of liability. Even the threat of litigation has an adverse effect on relationships and when problems do arise the primary goal is often self-protection, and in extremes, self-preservation. That has real consequences, not only in terms of getting problems solved but also the impact on innovation and the ability to share lessons learned. Many of the problems that we’ve seen over the years are the result of the same mistakes being made again and again and that’s frustrating for all involved.
The issues that arose around BCAR and the renewed focus on solutions such as Latent Defects insurance have been positive but what about all the other risks within construction? What about achieving a fair balance between risk and reward, the distorting impact of joint and several liability, the huge sums spent on litigation or the implications surrounding uncapped liability as just a few examples? It feels like the time is right for a much broader conversation. A conversation about how we best manage construction risk, how we improve efficiency and what structures we need to support greater collaboration and the development of BIM.
Issues with the current system
None of this is new but arguably we are now in a very different environment and our experience of the last few years has provided real evidence of what’s wrong with the current system. Whilst there are those that seem content to follow the well-worn path of onerous contracts and increasing insurance demands, more informed clients now recognise the problem with dumping risk onto parties who are the least able to control or bear it. They are also more aware of the potential pit-falls in relying upon third party insurance to cover their risk. That’s leading to a search for alternative solutions. In the UK, trials are underway with alternative procurement processes, including the Integrated Project Insurance (IPI) model and a move to integrated teams operating in a ‘blame-free’ environment using BIM and project bank accounts. There is recognition that traditional procurement models are unlikely to support future working practices, or at least the practices we’d all like to see, and there is genuine engagement around insurance solutions focused on project risk rather than liability.
Are we ready to have a similar debate in Ireland? Operating in a ‘blame-free’ environment may be a step too far. Things won’t change over-night but many clients, consultants and contractors are now reflecting upon the journey of the last few years – questioning who the current system actually works for and whether there might be a different approach? All too often procurement has been about dumping risk and driving down fees, the classic race to the bottom – the problem is that it’s a race where nobody wins. Consultants have probably known that for some time but it feels like some of those procuring construction are beginning to recognise that too.
Author: Graeme Tinney is a director of Griffiths & Armour Professional Risks, specialist professional indemnity insurance brokers and risk management advisers.
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