Managing Risk in Development, Design and Construction

Introduction

Risk Management is an inherent part of any business, but it is especially important when you work in the “Built Environment” which includes Development Services, Architectural and Engineering Design and Construction. It was less than 25 years ago that deaths on a job site were not unusual. On the Hoover Dam project, 96 people died on the job site during construction and that barely merited press coverage. Construction was a lot like going to war and some losses were “inevitable”.

That attitude has changed completely in the last 25 years and today any injury—any near miss- is considered a significant problem. Each incident is investigated and a formal report is filed showing steps being taken to avoid the incident in the future. Job-Site safety programs are enforced rigorously and are critical to a contractor’s long term business.

Job site safety is only one of the areas of risk in a typical project, and the majority of project risk management discussions fall into four categories; 1- Job site management and safety; 2- Loss Control throughout the design and construction phase from a range of issues; 3- Contracts and Contract Management; 4- Insurance and insurable risks. Note, while project risk management is defined at the project level, there is an additional layer, the business risk . For example, a typical employee benefits package is even considered to be one part of a comprehensive business loss control program.

The Impact of Change

Throughout the Posts that have been written for Gordian Views, we have defined a significant level of change driven by new technologies in jobsite methods and procedures; in design technology, in use of manufactured products in lieu of traditional vendors– and much more.

These technological changes have also induced other changes in indemnification, Insurance policy coverages, Worker’s Compensation strategies and the management and control of the project start to finish. One of the most well respected Insurance agencies in the development business is re-focusing in the area of comprehensive Risk Management and even preparing detailed checklists for their clients to use as they review the new and more routine risks they are subject to.

It is quite likely that the changes driven by technology—while good for productivity and product quality on the job site and during design- may actually introduce a level of new risk exposure that the project team and corporate partners are not even aware of.

Some Basics

In this Post we are going to discuss some of the basics to be considered as you prepare your Risk Management Program for a new project. This is not meant to be comprehensive look —just a good starting point.

First- have you researched the jurisdiction where the project is going to be placed? For example, the construction defects laws in Colorado, Nevada, Arizona and California are considered some of the toughest in the US. Worldwide, Japan, Germany and Malaysia are considered to have more comprehensive construction defects laws. Incidentally, an International project introduces a new layer of complexity, and requires substantially more research before proceeding –even during the design phase. Do you understand the permitting process, and any specific requirements that need to be met as a part of holding a building permit? Do you understand the licensing requirements of the jurisdiction? Beyond the requirements, has your insurer researched any expectations that may not be codified?

Second, have you researched the tax requirements, indemnification requirements, laws related to wrap-up insurance policies or specific safety requirements within the jurisdiction? These obligations can be that specific. For example, if you are using a multi-trade, prefabrication process, how do the tax requirements vary between the jurisdiction where the product is manufactured and the jurisdiction where the product is installed? You could easily end up with being double-taxed.

Third – as construction projects begin to morph into more of a manufacturing environment—again thru the extensive use of prefabrication– do you understand the implications on Worker’s Comp, warranties, product liabilities, etc.? For example, on a construction project it is not unusual to have a wide range of worker compensation classifications. A mechanical trades-person might be classified as a plumber for part of a work day and then a laborer for another part of the day depending on the work he performs. In a manufacturing environment, the Labor Department may determine the work to be focused to a single product and require you to define a “Governing Class” for the entire workforce. That could change the way the labor is billed to a project quite dramatically. Most concerning is that this reclassification may occur after the work is complete and during an Audit Dispute. It also changes the Insurance policy you need for adequate coverage of the project.

If you are using a prefabricated system, are you subject to Product based liability or is the work covered by the sub-contractor’s warranty—and ultimately the General Contractor’s warranty? If it is a “product” where does it fit within a Wrap-up insurance policy, if that is what you have for coverage. Currently products and completed operations coverage is included in many construction companies general liability coverage—but it would be wise to know for certain.

Fourth- How have you defined “ownership” of materials as they arrive at the site and move from the truck to the project? In an earlier Post, an example of a successful multi -trade, prefabricated product was a Hospital Headwall, which was built off-site and delivered and installed as a finished product. That raised a number of risk related questions;
-Who was the manufacturer?
-Was it covered by construction defects insurance or product liability?
-When did ownership transfer from the “manufacturer” to the project? When it was loaded on the truck? When it was placed and connected? When it was placed into service (similar to an HVAC unit)?
-Had they been “lifted” from the truck by a crane and taken to an upper floor, whose jurisdiction (read insurance) was the Headwall in while it was “on the hook”?
The subtleties are that precise, as we move to more manufactured products on a typical project.

There are an equal number of issues during design. For example, If the product is designed and delivered to the project as a system (think VRF from an earlier Post), who has the Errors and Omissions obligations; The Manufacturer? The Engineer or the Architect? The General Contractor?

The answers may determine cost re-imbursement to the contractor, taxation by the local jurisdiction, warranty cost and coverage, etc. Most importantly, what is your customer/ client’s expectation?

Insurance and Insurable Risks—how to proceed?

As change moves into the development industry the risk we all face will evolve. The first, and most important recommendation is to engage a reputable and knowledgeable insurance consultant/ agent as you start each project and as you go thru your annual planning. Limits of coverage, costs, exclusions and inclusions and the definitions of what is an insurable risk are changing constantly, especially as new technology is brought on board. In the past, insurance has been slow to change, and the Insurance companies followed the course of any significant litigation. After a court case was settled—then coverages would change. As noted in an earlier Post, the increase in Alternative Dispute Resolution has minimized the number of court cases, so precedent in the application of new products or processes may not exist. A pro-active approach by your consultant or agent is a must. As a Construction Professional that I have worked with for the past 14 years so succinctly noted, “if every developer, architect and contractor does not have a qualified insurance agent/advisor as a business partner, there is a high probability of them having uninsured risk exposures that could materially impact their operation.”

The Impact of technology on the Development industry is just being recognized. The implications for a project are still not clearly defined, rather they are evolving. It is likely the Insurable risks will still fall with in the categories of General Liability, Worker Compensation, product liability (as applicable), Construction Defects, Professional Liability (as applicable) and any excess or unusual coverage. However, it will be important to know exactly where on that spectrum they will fall and where coverages are changing.

It will be equally important to understand where Errors and Omissions – standard of care– level of insurance is required. For example, if the Construction site is being managed by a General Superintendent that has an Engineering Undergraduate and/or Graduate Degree should he or she have E&O Insurance Coverage? Is there a point in the process, if any,that will require a layer of Errors and Omissions type of insurance coverage for that Individual and the company? That extends to the subcontractor’s on-site management as well?

Conclusions and Areas of Further Discussion

This Post was not meant to be a comprehensive review of project risks and risk management strategies. Rather, the objective has been to raise the awareness that the risks have changed and will to continue to change at an increasing speed. The Design and Construction Industry’s approach to insurance requirements has been, essentially, the same for a very long time and change occurred mostly as court cases were settled, or individual businesses grew, merged or closed. It is now very different.

Today, designers and contractors are embracing new methods and systems to complete their work and stay competitive; the Development Manager is taking on more of the project work thru direct contracts for project services; the Owner has a different, more complicated, role if the delivery method is design-build, design-bid-build or one of the many variations; the manufacturer of prefabricated systems has a larger range of obligations for the operation of their systems; and each project is becoming more complicated in almost every possible way. It is important that each member of the project team, the ownership, the financing institutions, and all related project participants have an understanding of their evolving liabilities and exposures and that the risk management program for a project be comprehensive, and managed professionally.

At the end of the day, there are no excusable accidents, injuries or deaths on a project. Every member of the project team has the rightful expectation that their workplace will be safe, and that the finished project will be built to meet the owner’s requirements. Those should be the collective focus of the entire project team. That is a given.

In the same vein, there should be a very limited tolerance for any loss or error during any part of the project. In the very limited instances that a loss occurs, a comprehensive, current, risk management program should minimize the associated impacts.

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